UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




(Mark
One)


 ̈
            Quarterly
      Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
      1934





For the
quarterly period ended:September 30,
2009





Or




 ̈
            Transition
      Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
      1934





For the
transition period from ______________ to _______________





Commission
File Number: 000-53155




VLOV
INC.





(Exact
name of registrant as specified in its charter)




Nevada
                  
                  20-8658254(State
      or other jurisdiction of incorporation of origination)
                  
                  (I.R.S.
      Employer Identification
Number)





No
      1749-1751 Xiangjiang Road
                Shishi
      City, Fujian Province
                People’s
      Republic of China
              
              N/A(Address
      of principal executive offices)
              
              (Zip
      code)





(86595)
88554555





(Registrant’s
telephone number, including area code)









(Former
name, former address and former fiscal year, if changed since last
report)




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





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





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





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





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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each issuer’s classes of common stock, as of
the latest practicable date: 16,014,421 shares issued and outstanding as of
November 10, 2009.








TABLE
OF CONTENTS




TO
QUARTERLY REPORT ON FORM 10-Q


FOR
QUARTER ENDED SEPTEMBER 30, 2009





PagePART
      I
              
              FINANCIAL
      INFORMATION
              
              4Item
      1.
              
              Financial
      Statements
              
              4Consolidated
      Balance Sheets as of September 30, 2009 (unaudited) and December 31,
      2008
              
              4Consolidated
      Statements of Income and Comprehensive Income for the three months and
      nine months ended September 30, 2009 and 2008 (unaudited)
              
              5Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2009 and
      2008 (unaudited)
              
              6Notes
      to the Consolidated Financial Statements
              
              7Item
      2.
              
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              16Item
      3.
              
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              22Item
      4.
              
              Controls
      and Procedures
              
              22PART
      II
              
              OTHER
      INFORMATIONItem
      1.
              
              Legal
      Proceedings
              
              23Item
      1A.
              
              Risk
      Factors
              
              23Item
      2.
              
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              23Item
      3.
              
              Defaults
      Upon Senior Securities
              
              23Item
      4.
              
              Submission
      of Matters to a Vote of Security Holders
              
              23Item
      5.
              
              Other
      Information
              
              23Item
      6.
              
              Exhibits
              
              23Signatures
              
              25





CAUTION
REGARDING FORWARD-LOOKING INFORMATION





All
statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q”) for
VLOV Inc., other than statements of historical facts, that address future
activities, events or developments are forward-looking statements, including,
but not limited to, statements containing the words “believe,” “anticipate,”
“expect” and words of similar import.  These statements are based on
certain assumptions and analyses made by us in light of our experience and our
assessment of historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate under the
circumstances.  However, whether actual results will conform to the
expectations and predictions of management is subject to a number of risks and
uncertainties that may cause actual results to differ materially.





Such
risks include, among others, the following: national and local general economic
and market conditions; our ability to sustain, manage or forecast our growth;
raw material costs and availability; new product development and introduction;
existing government regulations and changes in, or the failure to comply with,
government regulations; adverse publicity; competition; the loss of significant
customers or suppliers; fluctuations and difficulty in forecasting operating
results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other factors referenced in this and previous
filings.





Consequently,
all of the forward-looking statements made in this Form 10-Q are qualified by
these cautionary statements and there can be no assurance that the actual
results anticipated by management will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on our
business operations.





PART
I - FINANCIAL INFORMATION





Item
      1.
            Financial
      Statements




VLOV,
INC.


CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands)


September
      30,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008(unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                      
                                      $
                                      9,328
                                      
                                      
                                      $
                                      2,863Pledged
      bank deposits
                                      
                                      
                                      -
                                      
                                      
                                      
                                      88Accounts
      receivable
                                      
                                      
                                      7,333
                                      
                                      
                                      
                                      7,843Inventories
                                      
                                      
                                      790
                                      
                                      
                                      
                                      514Prepaid
      expenses
                                      
                                      
                                      7
                                      
                                      
                                      
                                      -Total
      current assets
                                      
                                      
                                      17,458
                                      
                                      
                                      
                                      11,308Property,
      plant and equipment, net
                                      
                                      
                                      1,003
                                      
                                      
                                      
                                      1,067Land
      use rights
                                      
                                      
                                      265
                                      
                                      
                                      
                                      272TOTAL
      ASSETS
                                      
                                      $
                                      18,726
                                      
                                      
                                      $
                                      12,647LIABILITIES
      AND EQUITYCurrent
      Liabilities:Accounts
      payable
                                      
                                      $
                                      5,049
                                      
                                      
                                      $
                                      2,040Accrued
      expenses and other payables
                                      
                                      
                                      252
                                      
                                      
                                      
                                      543Amount
      due to a director
                                      
                                      
                                      1
                                      
                                      
                                      
                                      2Bills
      payable
                                      
                                      
                                      -
                                      
                                      
                                      
                                      293Short-term
      bank loans
                                      
                                      
                                      734
                                      
                                      
                                      
                                      587Income
      taxes payable
                                      
                                      
                                      1,429
                                      
                                      
                                      
                                      1,613Total
      liabilities
                                      
                                      
                                      7,465
                                      
                                      
                                      
                                      5,078Commitments
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Equity:Common
      stock, $0.00001 par value, 100,000,000 shares authorized, 16,000,000 and
      14,560,000 shares issued and outstanding as of September 30, 2009 and
      December 31, 2008, respectively
                                      
                                      
                                      160
                                      
                                      
                                      
                                      146Additional
      paid-up capital
                                      
                                      
                                      1,078
                                      
                                      
                                      
                                      1,091Statutory
      reserve
                                      
                                      
                                      913
                                      
                                      
                                      
                                      913Retained
      earnings
                                      
                                      
                                      8,553
                                      
                                      
                                      
                                      4,876Accumulated
      other comprehensive income
                                      
                                      
                                      557
                                      
                                      
                                      
                                      543Total
      stockholders' equity
                                      
                                      
                                      11,261
                                      
                                      
                                      
                                      7,569TOTAL
      LIABILITIES AND  STOCKHOLDERS' EQUITY
                                      
                                      $
                                      18,726
                                      
                                      
                                      $
                                      12,647





See
accompanying notes to consolidated financial statements


4


VLOV,
INC.


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


(Amounts
in thousands, except per share data)




(Unaudited)




Three Months Ended September
      30,
                                              
                                              
                                              Nine Months Ended September
    30,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2009
                                              
                                              
                                              2008(unaudited)
                                              
                                              
                                              (unaudited)
                                              
                                              
                                              (unaudited)
                                              
                                              
                                              (unaudited)Net
      sales
                                              
                                              $
                                              13,882
                                              
                                              
                                              $
                                              9,309
                                              
                                              
                                              $
                                              45,823
                                              
                                              
                                              $
                                              40,013Cost
      of sales
                                              
                                              
                                              8,850
                                              
                                              
                                              
                                              6,276
                                              
                                              
                                              
                                              29,316
                                              
                                              
                                              
                                              25,620Gross
      profit
                                              
                                              
                                              5,032
                                              
                                              
                                              
                                              3,033
                                              
                                              
                                              
                                              16,507
                                              
                                              
                                              
                                              14,393Operating
      expenses:Selling
      expenses
                                              
                                              
                                              841
                                              
                                              
                                              
                                              1,315
                                              
                                              
                                              
                                              2,900
                                              
                                              
                                              
                                              2,965General
      and administrative expenses
                                              
                                              
                                              520
                                              
                                              
                                              
                                              632
                                              
                                              
                                              
                                              1,573
                                              
                                              
                                              
                                              2,076Other
      operating expenses
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              21,361
                                              
                                              
                                              
                                              1,947
                                              
                                              
                                              
                                              4,473
                                              
                                              
                                              
                                              5,043Income
      from operations
                                              
                                              
                                              3,671
                                              
                                              
                                              
                                              1,086
                                              
                                              
                                              
                                              12,034
                                              
                                              
                                              
                                              9,350Other
      income (expenses):Interest
      income
                                              
                                              
                                              3
                                              
                                              
                                              
                                              5
                                              
                                              
                                              
                                              14
                                              
                                              
                                              
                                              13Interest
      expense
                                              
                                              
                                              (15
                                              )
                                              
                                              
                                              (19
                                              )
                                              
                                              
                                              (43
                                              )
                                              
                                              
                                              (50
                                              )(12
                                              )
                                              
                                              
                                              (14
                                              )
                                              
                                              
                                              (29
                                              )
                                              
                                              
                                              (37
                                              )Income
      before provision for income taxes
                                              
                                              
                                              3,659
                                              
                                              
                                              
                                              1,072
                                              
                                              
                                              
                                              12,005
                                              
                                              
                                              
                                              9,313Provision
      for income taxes
                                              
                                              
                                              922
                                              
                                              
                                              
                                              304
                                              
                                              
                                              
                                              3,183
                                              
                                              
                                              
                                              2,364Net
      income
                                              
                                              
                                              2,737
                                              
                                              
                                              
                                              768
                                              
                                              
                                              
                                              8,822
                                              
                                              
                                              
                                              6,949Other
      comprehensive income:Foreign
      currency translation adjustment
                                              
                                              
                                              7
                                              
                                              
                                              
                                              160
                                              
                                              
                                              
                                              14
                                              
                                              
                                              
                                              306Comprehensive
      income
                                              
                                              $
                                              2,744
                                              
                                              
                                              $
                                              928
                                              
                                              
                                              $
                                              8,836
                                              
                                              
                                              $
                                              7,255Basic
      and diluted net earnings per share
                                              
                                              $
                                              0.17
                                              
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.56
                                              
                                              
                                              $
                                              0.48Weighted
      average number of common shares outstanding, basic and
    diluted
                                              
                                              
                                              16,000,000
                                              
                                              
                                              
                                              14,560,000
                                              
                                              
                                              
                                              15,773,187
                                              
                                              
                                              
                                              14,560,000


See
accompanying notes to consolidated financial
statements


5


VLOV,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in thousands)




(Unaudited)




Nine
      Months Ended September 30,2009
                      
                      
                      2008(unaudited)
                      
                      
                      (unaudited)Cash
      flows from operating activities:Net
      income
                      
                      $
                      8,822
                      
                      
                      $
                      6,949Adjustments
      to reconcile net income to net cash  provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      71
                      
                      
                      
                      78Write
      off of property, plant and equipment
                      
                      
                      -
                      
                      
                      
                      1(Increase)
      decrease in assets:Accounts
      receivables
                      
                      
                      509
                      
                      
                      
                      (2,032
                      )Inventories
                      
                      
                      (277
                      )
                      
                      
                      4,280Prepaid
      expenses
                      
                      
                      (7
                      )
                      
                      
                      119Increase
      (decrease) in liabilities:Accounts
      payable
                      
                      
                      3,007
                      
                      
                      
                      (1,971
                      )Bills
      payable, accrued expenses and other payables
                      
                      
                      (585
                      )
                      
                      
                      154Income
      and other tax payables
                      
                      
                      (184
                      )
                      
                      
                      (2,793
                      )Net
      cash provided by operating activities
                      
                      
                      11,356
                      
                      
                      
                      4,785Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                      
                      
                      -
                      
                      
                      
                      (52
                      )Disposals
      of property, plant and equipment
                      
                      
                      -
                      
                      
                      
                      -Net
      cash (used in) investing activities
                      
                      
                      -
                      
                      
                      
                      (52
                      )Cash
      flows from financing activities:Pledged
      bank deposits
                      
                      
                      88
                      
                      
                      
                      -Amount
      due to/from a director
                      
                      
                      -
                      
                      
                      
                      168Proceeds
      from debt financing
                      
                      
                      440
                      
                      
                      
                      -Payments
      of short-term debt
                      
                      
                      (293
                      )
                      
                      
                      -Payments
      of dividend
                      
                      
                      (5,131
                      )
                      
                      
                      (3,219
                      )Net
      cash (used in) financing activities
                      
                      
                      (4,896
                      )
                      
                      
                      (3,051
                      )Effect
      of exchange rate changes
                      
                      
                      5
                      
                      
                      
                      281Net
      increase in cash and cash equivalents
                      
                      
                      6,465
                      
                      
                      
                      1,963Cash
      and cash equivalents, beginning of year
                      
                      
                      2,863
                      
                      
                      
                      2,758Cash
      and cash equivalents, end of year
                      
                      $
                      9,328
                      
                      
                      $
                      4,721Supplemental
      disclosure of cash flow information:Interest
      paid
                      
                      $
                      43
                      
                      
                      $
                      50Income
      taxes paid
                      
                      $
                      2,605
                      
                      
                      $
                      2,813





See
accompanying notes to consolidated financial statements


6


VLOV,
INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





1.
            ORGANIZATION





VLOV Inc.
(“VLOV” or the “Company”) was incorporated in Nevada on October 30, 2006
originally under the name “Sino Charter, Inc.” (“Sino Charter”)  On
February 13, 2009, Sino Charter completed a share exchange transaction with Peng
Xiang Peng Fei Investments Limited (“PXPF”), a British Virgin Island limited
liability company, and PXPF became a wholly-owned subsidiary of the Company. The
share exchange transaction was accounted for as a reverse acquisition and
recapitalization and, as a result, the consolidated financial statements of Sino
Charter (the legal acquirer) is, in substance, those of PXPF (the accounting
acquirer), with the assets and liabilities, and revenues and expenses, of Sino
Charter being included effective from the date of the share exchange
transaction. Sino Charter, Inc. changed its name to “VLOV Inc.” on March 20,
2009 in connection with the share exchange transaction.





VLOV is
in the business of designing, manufacturing and distributing apparel under the
brand name “VLOV” in the People’s Republic of China (“China” or the “PRC”). All
of the operations are carried out by Jinjiang Yinglin Jinduren Fashion limited
(“Yinglin Jinduren”), a company organized in the PRC which the Company controls.
VLOV controls Yinglin Jinduren through a series of contractual arrangements
between Korea Jinduren (International) Dress Limited (“Korea Jinduren”), a Hong
Kong company and the wholly-owned direct subsidiary of PXPF, and Yinglin
Jinduren. The contractual arrangements between Korea Jinduren and Yinglin
Jinduren enable VLOV to substantially influence the daily operations and
financial affairs of Yinglin Jinduren, appoint its senior executives and approve
all matters requiring shareholder approval. As a result of these contractual
arrangements, which obligate Korea Jinduren to absorb a majority of the risk of
loss from the activities of Yinglin Jinduren and enable Korea Jinduren to
receive a majority of Yinglin Jinduren’s expected residual returns, VLOV
accounts for Yinglin Jinduren as a variable interest entity (“VIE”) under
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 810, “Consolidation.” Accordingly,
VLOV consolidates the results, assets and liabilities of Yinglin
Jinduren.





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




(a)
            Basis
      of Presentation and Consolidation





The
accompanying unaudited consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in the United States
applicable to interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (which include all significant normal and recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows  for all periods presented have been made.
The accompanying results of operations are not necessarily indicative of the
operating results that may be expected for the entire year ending December 31,
2009. These consolidated financial statements should be read in conjunction with
the consolidated financial statements and accompanying notes thereto of PXPF for
the year ended December 31, 2008 and the pro forma consolidated financial
statements and accompanying notes thereto of the Company for the year ended
December 31, 2008 filed with the Company’s current report on Form 8-K/A on May
4, 2009.




The
consolidated financial statements include the financial statements of the
Company, its wholly owned subsidiaries PXPF and Korea Jinduren, and its VIE,
Yinglin Jinduren. All significant inter-company transactions and balances
between the Company, its subsidiaries and the VIE are eliminated upon
consolidation.





(b)
            Use
      of Estimates





Management
has made a number of estimates and assumptions relating to the reporting of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities to prepare these consolidated financial statements in
conformity with accounting principles generally accepted in the United States.
Significant areas requiring the use of management estimates relate primarily to
returns, sales allowances and customer chargebacks, inventory write-downs and
valuation of long-lived assets. Actual results could differ from those
estimates.





(c)
            Revenue
      Recognition





Revenue
from the sales of goods is recognized on the transfer of significant risks and
rewards of ownership, which generally coincides with the time when the goods are
delivered and the title has passed to the customers. Revenue excludes
value-added tax and is net of trade discounts and allowances.




(d)
            Cash
      and Cash Equivalents





For
purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents. Cash and cash equivalents comprise cash at bank and on hand
and demand deposits with banks.


7





(e)
            Accounts
      Receivable





Accounts
receivable, which are unsecured, are stated at the amount the Company expects to
collect. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company evaluates the collectability of its accounts receivable based on a
combination of factors, including customer credit-worthiness and historical
collection experience. Management reviews the receivable aging and adjusts the
allowance based on historical experience, financial condition of the customer
and other relevant current economic factors.  As of September 30,
2009, all of the trade receivable balances were aged less than 90 days and
management has determined that no allowance for uncollectible amounts is
required, the same as of December 31, 2008.





(f)
            Depreciation
      and Amortization





Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. Depreciation of property, plant and equipment is computed
using the straight-line method based on the following estimated useful
lives:





Buildings
            30
      yearsFurniture,
      fixtures and equipment
            5
      yearsMotor
      vehicles
            5
      yearsOffice
      equipment
            5
      yearsPlant
      and machinery
            5
      to 15 years





(g)
            Inventories





Inventories
are stated at the lower of cost or market value, determined by the weighted
average method. Work-in-progress and finished goods inventories consist of raw
materials, direct labor and overhead associated with the manufacturing
process.





(h)
            Foreign
      Currency Translation





The
Company’s functional currency is Renminbi (“RMB”) and its reporting currency is
U.S. dollars. The Company’s balance sheet accounts are translated using the
closing exchange rate in effect at the balance sheet dates and operating
accounts are translated using the average exchange rate prevailing
during the respective periods. Equity accounts are translated using the
historical rate as incurred. Translation gains and losses are deferred and
accumulated as a component of accumulated other comprehensive income in
shareholders’ equity. Transaction gains and losses that arise from exchange rate
fluctuations from transactions denominated in a currency other than the
functional currency are included in the statement of operations as
incurred.





(j)
            Land
      Use Right





All land
in the PRC is state-owned and cannot be sold to any individual or company.
However, the government grants “land use right” to allow individuals or
companies to use land.





The
Company acquired land use right on March 25, 2004 for a total amount of
US$259,000. Such land use right is for 50 years and expires in
2054.





Land use
right is stated at cost less accumulated amortization and impairment losses.
Amortization is calculated on the straight-line method over the estimated useful
life of 50 years.





The
Company’s land use right, which is considered intangible asset, is reviewed at
least annually to determine whether its carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of September 30, 2009, the Company
expects such asset to be asset fully recoverable.





(k)
            Long-Lived
      Assets





The
Company estimates the future undiscounted cash flows to be derived from an asset
to assess whether or not impairment has occurred when events or circumstances
indicate that the carrying value of a long-lived asset may be impaired. If the
carrying value exceeds the Company’s estimate of future undiscounted cash flows,
the Company then calculates the impairment as the excess of the carrying value
of the asset over the Company’s estimate of its fair market
value.


8





(l)
            Income
      Taxes





The
Company is mainly subject to income taxes in the PRC. Significant judgment is
required in determining the provision for income taxes. There are many
transactions and calculations for which the ultimate tax determination is
uncertain during the ordinary course of business. The Company recognizes
liabilities for anticipated tax audit issues based on estimates of whether
additional taxes will be due. Where the final tax outcome of these matters is
different from the amounts that were initially recorded, such differences affect
the income tax and deferred tax provisions in the period in which such
determination is made.





The
Company accounts for income taxes under Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 740 “Income Taxes” (“ASC 740”).
Under ASC 740, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applicable to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under ASC 740, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.





Based on
our evaluation, we have concluded that there are no significant uncertain tax
positions, as defined by ASC 740, that require recognition in our financial
statements. Our evaluation was performed for the tax year ended December 31,
2008 which was examined by major tax jurisdictions (PRC).  We are in
the process of the evaluation for the tax year ending December 31, 2009, which
remains subject to examination by major tax jurisdictions (PRC) as of September
30, 2009. We may from time to time be assessed interest or penalties by major
tax jurisdictions. In the event we receive an assessment for interest and/or
penalties, it will be classified in the financial statements as tax
expense.





(m)
            Comprehensive
      Income





The
Company has adopted the provisions of FASB ASC Topic 220, “Comprehensive Income” (“ASC
220”). ASC 220 establishes standards for the reporting and presentation and
disclosure of comprehensive income, its components and accumulated balances in a
full set of general purpose financial statements. ASC 220 defines comprehensive
income or loss to include all changes in equity except those resulting from
investments by owners and distributions to owners, including adjustments to
minimum pension liabilities, accumulated foreign currency translation, and
unrealized gains or losses on marketable securities.





The
Company’s only component of other comprehensive income is foreign currency
translation gain (loss). The foreign currency translation gain for the three and
nine months ended September 30, 2009 and 2008 were approximately $7,000,
$160,000, $14,000and $306,000, respectively. Accumulated other comprehensive
income is recorded as a separate component of shareholders’ equity.





(n)
            Advertising
      Costs





Advertising
costs are expensed in the period in which the advertisements are first run or
over the life of the endorsement contract. Advertising costs were approximately
$748,000 and $1,231,000 for the three months and $2,191,000 and $2,533,000 for
the nine months ended September 30, 2009 and 2008, respectively. Advertising
costs include advertising subsidy expense which is accrued based on the terms in
effect with distributors and paid when all attaching conditions are
completed.





(o)
            Shipping
      and Handling Costs





Shipping
and handling costs are expensed as incurred and included in cost of
sales.





(p)
            Research
      and Development Costs





The
Company charges all product design and development costs to expense when
incurred. Product design and development costs aggregated approximately
$340,000, $511,000, $1,121,000 and $1,764,000 for the three months and nine
months ended September 30, 2009 and 2008, respectively.




(q)
            Fair
      Value of Financial Instruments





The
carrying amount of the Company’s consolidated financial instruments, which
principally include cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, approximates fair value due to the relatively
short maturity of such instruments.





The
carrying amount of the Company’s short-term borrowings approximates the fair
value based upon current rates and terms available to the Company for similar
debt.


9





(r)
            Recently
      Adopted Accounting Pronouncements





The
Company adopted FASB ASC Topic 820 “Fair Value Measurements and
Disclosures” (“ASC 820”) and Topic 825-10 “Financial Instruments” (“ASC
825-10”) and on January 1, 2008.   ASC 820 establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three levels as follows:





Level I -
Quoted prices (unadjusted) in active markets for identical asset or liabilities
that the Company has the ability to access as of the measurement
date.





Level II
- Inputs other than quoted prices included within Level I that are directly
observable for the asset or liability or indirectly observable through
corroboration with observable market data.





Level III
- Unobservable inputs for the asset or liability only used when there is little,
if any, market activity for the asset or liability at the measurement
date.





Since the
issuance of ASC 820, the FASB has issued several pronouncements to clarify the
application of ASC 820.  These pronouncements apply to financial
assets within the scope of accounting pronouncements that require or permit fair
value measurements in accordance with ASC 820.  In April 2009, the
FASB issued ASC Topic 820-10-65-4, “Transaction Related to FASB Staff
Position FAS 157-4 Determining the Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“ASC 820-10-65-4”), which provides
additional guidance for estimating fair value in accordance with ASC 820, when
the volume and level of activity for the asset or liability have significantly
decreased.  ASC 820-10-65-4 also provides guidance on identifying
circumstances that indicate a transaction is not orderly.  ASC
820-10-65-4 is effective for interim and periods ending after June 15, 2009, and
shall be applied prospectively.





In
February 2007, the FASB issued ASC 825-10, “Financial Instruments”, which
provides companies with an option to report selected financial assets and
liabilities at fair value. ASC 825-10’s objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally accepted
accounting principles have required different measurement attributes for
different assets and liabilities that can create artificial volatility in
earnings. ASC 825-10 helps to mitigate this type of accounting-induced
volatility by enabling companies to report related assets and liabilities at
fair value, which would likely reduce the need for companies to comply with
detailed rules for hedge accounting. ASC 825-10 also establishes presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. ASC 825-10 requires companies to provide additional information
that will help investors and other users of financial statements to more easily
understand the effect of the Company’s choice to use fair value on its earnings.
ASC 825-10 also requires companies to display the fair value of those assets and
liabilities for which the Company has chosen to use fair value on the face of
the balance sheet. ASC 825-10 does not eliminate disclosure requirements
included in other accounting standards, including requirements for disclosures
about fair value measurements included in ASC 820 and ASC 825.  The
Company adopted ASC 825-10 on January 1, 2008, but did not elect the fair value
option for any financial assets or liabilities. Accordingly, the adoption of ASC
825-10 did not have any impact on the Company’s consolidated financial statement
presentation or disclosures.





The
Company’s financial assets mainly consist of cash and cash equivalents, and
accounts receivables. The fair values of the financial assets approximate their
book value due to short maturities. Therefore, the adoption of the above
accounting principles, as they became or will become applicable to the Company,
had no significant impact on the measurement of the financial
assets.





In
December 2007, the FASB issued ASC Topic 805, “Business Combinations” (“ASC
805”), which requires an acquirer to recognize in its financial statements as of
the acquisition date (i) the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree, measured at their
fair values on the acquisition date, and (ii) goodwill as the excess of the
consideration transferred plus the fair value of any non-controlling interest in
the acquiree at the acquisition date over the fair values of the identifiable
net assets acquired. Acquisition-related costs, which are the costs an acquirer
incurs to effect a business combination, will be accounted for as expenses in
the periods in which the costs are incurred and the services are received,
except that costs to issue debt or equity securities will be recognized in
accordance with other applicable GAAP. ASC 805 makes significant amendments to
other Statement of Financial Accounting Standards and other authoritative
guidance to provide additional guidance or to conform the guidance in that
literature to that provided in ASC 805. ASC 805 also provides guidance as to
what information is to be disclosed to enable users of financial statements to
evaluate the nature and financial effects of a business combination. ASC 805 is
effective for financial statements issued for fiscal years beginning on or after
December 15, 2008.  The Company adopted ASC 805 on January 1,
2009.  The adoption of ASC 805 did not have any impact on the
Company’s consolidated financial statement presentation or
disclosures.





In
December 2007, the FASB issued ASC 805 “Business Combinations” and
810 “Consolidation”
(“ASC 810”), which require that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled and presented in the consolidated financial
statements.   ASC 805 and ASC 810 also require that once a
subsidiary is deconsolidated, any retained non-controlling equity investment in
the former subsidiary be initially measured at fair value.  Sufficient
disclosures are required to clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners.  ASC 805 and ASC 810 amend ASC 260 to provide that the
calculation of earnings per share amounts in the consolidated financial
statements will continue to be based on the amounts attributable to the parent.
ASC 805 and ASC 810 are effective for financial statements issued for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, and require retroactive adoption of the presentation and
disclosure requirements for existing minority interests.  All other
requirements are applied prospectively.  The Company adopted ASC 805
and ASC 810 on January 1, 2009.  The adoption of ASC 805 and ASC 810
did not have any impact on the Company’s consolidated financial statement
presentation or disclosures.


10





In March
2008, the FASB issued ASC Topic 815-10-50, “Disclosures about Derivative
Instruments and Hedging Activities”(“ASC 815-10-50”).  ASC
Topic 815-10-50 amends and expands the disclosure requirements of ASC 815,
“Accounting for Derivative Instruments and Hedging Activities”. The objective of
ASC 815-10-50 is to provide users of financial statements with an enhanced
understanding of how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for under ASC 815
and its related interpretations, and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows.  ASC 815-10-50 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements.  ASC 815-10-50 applies to all derivative financial
instruments, including bifurcated derivative instruments (and non-derivative
instruments that are designed and qualify as hedging instruments and related
hedged items accounted for under ASC 815 and its related
interpretations.  ASC 815-10-50 also amends certain provisions of ASC
815. ASC 815-10-50 is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged.  ASC 815-10-50 encourages, but does not require,
comparative disclosures for earlier periods at initial adoption.  The
Company adopted ASC 815-10-50 on January 1, 2009.  The adoption of ASC
815-10-50 did not have any impact on the Company’s consolidated financial
statement presentation or disclosures.





In June
2008, the FASB ratified ASC 815-40-25, “Derivative and Hedging, Contracts in
Entity’s Own Equity, Recognition” (“ASC 815-40-25”) ASC 815-40-25
mandates a two-step process for evaluating whether an equity-linked financial
instrument or embedded feature is indexed to the entity’s own stock. Warrants
that a company issues that contain a strike price adjustment feature, upon the
adoption of ASC 815-40-25, results in the instruments no longer being considered
indexed to the company’s own stock. Accordingly, adoption of ASC 815-40-25 will
change the current classification (from equity to liability) and the related
accounting for such warrants outstanding at that date. ASC 815-40-25 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The Company adopted ASC 815-40-25 on January
1, 2009.  The adoption of ASC 815-40-25 did not have any impact on the
Company’s consolidated financial statement presentation or
disclosures.  The Company adopted ASC 815-40-25 on January 1,
2009.  The adoption of ASC 815-40-25 did not have any impact on the
Company’s consolidated financial statement presentation or
disclosures.





In April
2009, the FASB issued Topic ASC 825-10-65-1, “Transition Related to FAS FSP 107-1
and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments” (“ASC 825-10-65-1”), which requires disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements.  ASC 825-10-65-1
requires those disclosures in summarized financial information at interim
reporting.  The adoption of ASC 825-10-65-1 did not have any impact on
the Company’s consolidated financial statement presentation or
disclosures.





In April
2009, the FASB issued ASC Topic 82-10-65-4, “Transition Related to FASB Staff
Position FAS FSP 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset and Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (“ASC
82-10-65-4”).  This pronouncement emphasizes that even if there has
been a significant decrease in the volume and level of activity, the objective
of a fair value measurement remains the same.  Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants.  The pronouncement provides a number of
factors to consider when evaluating whether there has been a significant
decrease in the volume and level of activity for an asset or liability in
relation to normal market activity.   In addition, when
transactions or quoted prices are not considered orderly, adjustments to those
prices based on the weight of available information may be needed to determine
the appropriate fair value.  The pronouncement also requires increased
disclosures.  This pronouncement is effective for interim and annual
reporting periods ending after June 15, 2009, and shall be applied
prospectively.  Early adoption is permitted for periods ending after
March 15, 2009.  The adoption of this pronouncement at June 30, 2009
did not have a material impact on the Company’s results of operations or
financial position.





In May
2009, the FASB issued ASC Topic 855, “Subsequent Events” (“ASC
855”).  ASC 855 establishes the principles and requirements for the
disclosure of subsequent events including the period after the balance sheet
date during which management of a reporting entity will evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity will recognize
events or transactions occurring after the balance sheet date in its financial
statements, and the disclosures that an entity will make about events or
transactions that occurred after the balance sheet date.  ASC 855 is
effective for interim or annual periods ending after June 15, 2009, and should
be applied prospectively.  Note 16 sets forth the Company’s evaluation
of significant events that occurred after September 30, 2009 and as of November
12, 2009, the date the interim financial statements as of and for the
three-months and nine-months ended September 30, 2009 were
issued.


11





Management
does not believe that any other recently issued, but not yet effective,
accounting standards or pronouncements, if currently adopted, would have a
material effect on the Company’s consolidated financial statement presentation
or disclosures.





3.
            PROPERTY,
      PLANT AND EQUIPMENT





Property,
plant and equipment are summarized as follows (in thousands):





September
      30,
                    
                    
                    December 31,2009
                    
                    
                    2008Buildings
                    
                    $
                    914
                    
                    
                    $
                    914Furniture,
      fixtures and equipment
                    
                    
                    84
                    
                    
                    
                    84Motor
      vehicles
                    
                    
                    196
                    
                    
                    
                    196Office
      equipment
                    
                    
                    24
                    
                    
                    
                    24Plant
      and machinery
                    
                    
                    235
                    
                    
                    
                    235Total
      property, plant and equipment
                    
                    
                    1,453
                    
                    
                    
                    1,453Less:
      accumulated depreciation
                    
                    
                    (450)
                    
                    
                    
                    (386
                    )$
                    1,003
                    
                    
                    $
                    1,067




Depreciation
expense was approximately $20,000, $26,000 for the three months ended September
30, 2009 and 2008, respectively, and $65,000 and $72,000 for the nine months
ended September 30, 2009 and 2008, respectively.




4.
            LAND
      USE RIGHT





Land use
right is summarized as follows (in thousands):





September
      30,
                      
                      December 31,2009
                      
                      2008Land
      use right
                      
                      $
                      315
                      
                      
                      $
                      315Less
      : accumulated amortization
                      
                      
                      (50)
                      
                      
                      
                      (43
                      )$
                      265
                      
                      
                      $
                      272





Amortization
expense was approximately $2,000 per quarter for the three months and
nine months ended September 30, 2009 and 2008,
respectively.  Amortization expense for each of the next 5 years is
expected to be $8,000.





5.
            INVENTORIES





Inventories
consist of the following (in thousands):




September
      30,
                    
                    
                    December 31,2009
                    
                    
                    2008Raw
      materials
                    
                    $
                    166
                    
                    
                    $
                    262Work
      in process
                    
                    
                    444
                    
                    
                    
                    23Finished
      goods
                    
                    
                    180
                    
                    
                    
                    229$
                    790
                    
                    
                    $
                    514





6.
            ACCRUED
      EXPENSES AND OTHER PAYABLES





Accrued
expenses and other payables are summarized as follows (in
thousands):





September
      30,
                    
                    
                    December 31,2009
                    
                    
                    2008Accrued
      salaries and wages
                    
                    $
                    114
                    
                    
                    $
                    120Accrued
      electricity
                    
                    
                    3
                    
                    
                    
                    4Accrued
      professional  fee
                    
                    
                    30
                    
                    
                    
                    -Advertising
      subsidies payables
                    
                    
                    105
                    
                    
                    
                    419$
                    252
                    
                    
                    $
                    543


12





7.
            RELATED
      PARTY TRANSACTIONS





The
amount due to a director is unsecured, interest-free and repayable on
demand.





The
Company has been granted the rights to use several trademarks which are owned by
the Company's Chief Executive Officer and which applications are pending.
However, the Company has not utilized the use of these trademarks. The Company's
Chief Executive Officer is in the process of transferring these trademarks to
the Company.





8.           SHORT-TERM
BORROWINGS





The
carrying amounts of the Company’s borrowings are as follows (in
thousands):





September
      30,
                        
                        December 31,2009
                        
                        2008Interest
                        
                        
                        
                        
                        
                        InterestAmounts
                        
                        Rate
                        
                        Due
      date
                        
                        Amounts
                        
                        Rate
                        
                        Due
      dateBank
      loan 1
                        
                        $
                        294
                        
                        7.43
                        %
                        11/30/2009
                        
                        $
                        293
                        
                        11.21
                        %
                        1/8/2009Bank
      loan 2
                        
                        
                        293
                        
                        7.43
                        %
                        1/16/2010
                        
                        
                        294
                        
                        7.43
                        %
                        11/30/2009Bank
      loan 3
                        
                        
                        147
                        
                        7.97
                        %
                        3/23/2010
                        
                        
                        -$
                        734
                        
                        
                        
                        
                        
                        $
                        587





As of
September 30, 2009, the short-term borrowings were secured by the personal
guarantee granted by the Company’s Chief Executive Officer.





9.
            INCOME
      TAXES





The
provisions for income tax expense were as follows (in thousands):




Nine Months Ended September
      30,2009
                          
                          
                          2008PRC
      enterprise income tax – current
                          
                          $
                          3,183
                          
                          
                          $
                          2,364





The
Company is mainly subject to income taxes in the PRC and provision for the PRC
corporate income tax was calculated based on the statutory tax rate of 25% on
taxable income effective from January 1, 2008 pursuant to the PRC Enterprise
Income Tax Law passed by the Tenth National People’s Congress.  For
the nine months period ended September 30, 2009, the income tax provision also
included additional income tax provision for the year ended 2008 because of a
change in management’s estimate of the tax liability for 2008 based on the
information that became available during 2009.





The
applicable rates of Hong Kong profit tax for the three months periods ended
September 30, 2009 and 2008 were 16.5% and 17.5%, respectively. However, no
provision for Hong Kong profit tax has been made for the three months and nine
months ended September 30, 2009 and 2008 as the Company did not generate any
taxable profits under the relevant Hong Kong tax laws during the
periods.





PXPF is a
company incorporated in the BVI and is fully exempt from the BVI’s domestic
corporate tax.





As of the
balance sheet dates presented, there were no deferred tax assets or
liabilities.





10.           STATUTORY
RESERVES





Under PRC
regulations, Yinglin Jinduren should pay dividends only out of its accumulated
profits, if any, determined in accordance with PRC GAAP.  In addition,
Yinglin Jinduren is required to set aside at least 10% of its after-tax net
profits each year, if any, to fund the statutory reserves until the balance of
such reserves reaches 50% of Yinglin Jinduren’s registered capital. As of
December 31, 2007, the balance of Yinglin Jinduren’s statutory reserves reached
50% of its registered capital. Thus, no further profits are required to be set
aside for the statutory reserves.  The statutory reserves are not
distributable as cash dividends to the Company.


13





11.
            LEASE
      COMMITMENTS





The
Company leases certain facilities under, non-cancelable leases and year-to-year
leases. These leases are accounted for as operating leases.  Rent
expense amounted to $19,000 and $11,000, $41,000 and $25,000 for the three
months and nine months ended September 30, 2009 and 2008
respectively.





Future
minimum payments under long-term, non-cancelable leases as of September 30, 2009
are as follows:





Future minimum
                          paymentsThree
      months ending December 31, 2009
                        
                        $
                        7,000





There are
no other non-cancelable leases for the year ending December 31, 2010 and
thereafter.




12.
            BUSINESS
      AND CREDIT CONCENTRATIONS





The
Company operates in the fashion apparel industry and generates all of its sales
in the PRC. The fashion apparel industry is impacted by the general economy.
Changes in the marketplace would significantly affect management’s estimates and
the Company’s performance.





The
Company has the following concentrations of business with each customer
constituting greater than 10% of the Company’s sales:





Three Months Ended September 30,
                      
                      
                      Nine Months Ended September 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Customers:Customer
      A
                      
                      
                      17.57
                      %
                      
                      
                      25.65
                      %
                      
                      
                      19.36
                      %
                      
                      
                      26.35
                      %Customer
      B
                      
                      
                      13.86
                      %
                      
                      
                      12.59
                      %
                      
                      
                      13.54
                      %
                      
                      
                      12.71
                      %Customer
      C
                      
                      
                      11.53
                      %
                      
                      
                      10.25
                      %
                      
                      
                      11.17
                      %
                      
                      
                      10.47
                      %Customer
      D
                      
                      
                      10.55
                      %
                      
                      
                      15.34
                      %
                      
                      
                      11.66
                      %
                      
                      
                      15.29
                      %Customer
      E
                      
                      
                      10.11
                      %
                      
                      
                      *
                      
                      
                      
                      10.09
                      %
                      
                      
                      *





The
Company has the following concentrations of business with each vendor
constituting greater than 10% of the Company’s purchases:





Three Months Ended September 30,
                      
                      
                      Nine Months Ended September 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Vendors:Vendor
      A
                      
                      
                      11.06
                      %
                      
                      
                      29.98%
                      
                      
                      
                      10.64%
                      
                      
                      
                      45.85%Vendor
      B
                      
                      
                      11.02
                      %
                      
                      
                      18.67%
                      
                      
                      
                      13.12%
                      
                      
                      
                      16.30%Vendor
      C
                      
                      
                      10.18
                      %
                      
                      
                      *
                      
                      
                      
                      *
                      
                      
                      
                      *





*
Representing concentrations of business with those customers constituting less
than 10% of the Company’s sales or purchases with those vendors constituting
less than 10% of the Company’s purchases for the respective
periods.





Such
concentrations make the Company vulnerable to a near-term severe impact should
relationships with these customers and/or vendors be terminated.





13.
            EARNINGS
      PER SHARE





Basic and
diluted earnings per share (“EPS”) for the three and nine months ended September
30, 2009 and 2008 were determined by dividing net income for the three-month and
nine-month periods by the respective weighted average number of common shares
outstanding.




14.
            BENEFIT
      PLAN





Pursuant
to the relevant regulations of the PRC government, Yinglin Jinduren participates
in a local municipal government retirement benefits scheme (the “Scheme”),
whereby Yinglin Jinduren is required to contribute a certain percentage of the
basic salaries of its employees to the Scheme to fund their retirement benefits.
Contributions under the Scheme are charged to the income statement as incurred.
Yinglin Jinduren’s contributions to the Scheme amounted to $44,000 and $43,000
for the three months ended September 30, 2009 and 2008, respectively, and
$133,000 and $132,000 for the nine months ended September 30, 2009 and 2008,
respectively.


14





15.
            NEW
      ACCOUNTING PROUNOUNCEMENTS





In May
2008, the FASB issued ASC Topic 105 “Generally Accepted Accounting
Principles” (“ASC 105”).  ASC 105 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).  The Statement is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning ofPresent Fairly
in Conformity With Generally Accepted Accounting Principles.  The
adoption of this pronouncement did not have a material impact on the Company’s
consolidated financial statements.





In June
2009, the FASB issued ASC Topic 860-20, "Sales of Financial Assets, SFAS
166" (“ASC 860-20”).  ASC 820-20 is intended to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial statements regarding transfers
of financial assets, including the effects of a transfer on its financial
position, financial performance, and cash flows, and the transferor's continuing
involvement, if any, in the transferred financial assets. This statement must be
applied as of the beginning of the Company’s first annual reporting period that
begins after November 15, 2009. The Company does not expect the adoption of ASC
820-20 to have a material impact on its results of operations, financial
condition or cash flows.





In June
2009, the FASB issued ASC Topic 810-10, "Amendments to FASB Interpretation
No. 46(R)" (“ASC 810-10”).  ASC 810-10 is intended to (1)
address the effects on certain provisions of FASB Interpretation No. 46 (revised
December 2003), “Consolidation of Variable Interest Entities,” as a result of
the elimination of the qualifying special-purpose entity concept in ASC 860-20,
and (2) constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provided timely and useful information
about an enterprise's involvement in a variable interest entity.  This
statement must be applied as of the beginning of the Company’s first annual
reporting period that begins after November 15, 2009.  The Company
does not expect the adoption of 810-10 to have a material impact on its results
of operations, financial condition or cash flows.





In June
2009, the FASB issued ASC Topic 105-10, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles" (“ASC 105-10”).  ASC 105-10 will become the source
of authoritative U.S. generally accepted accounting principles (GAAP) recognized
by the FASB to be applied by non-governmental entities.  Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of Federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this statement, the Codification will
supersede all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification will become non-authoritative.  This
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009.  The Company does not expect
the adoption of ASC 105-10 to have a material impact on its results of
operations, financial condition or cash flows.




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants, and
the United States Securities and Exchange Commission did not or are not believed
to have a material impact on the Company's present or future consolidated
financial statements.





16.
            SUBSEQUENT
      EVENTS




On
October 27, 2009, the Company entered into a securities purchase agreement (the
“Purchase Agreement”) with several accredited investors (collectively the
“Purchasers”) pursuant to which the Company agreed to issue and sell up to
2,797,203 shares of Company’s series A convertible preferred stock (the
“Preferred Shares”) to accredited investors at $2.86 per share for an aggregate
purchase price of up to $8 million, and to issue warrants (the “Warrants”) to
purchase up to 1,398,602 shares of the Company’s common stock, par value
$0.00001 per share (“Common Stock”), for no additional consideration. The
Purchase Agreement contemplates an initial closing of $4 million (the “Initial
Closing”), and a final closing of the balance (the “Final Closing”). At the
Initial Closing on October 27, 2009, the Company issued to the Purchasers
1,446,252 Preferred Shares and Warrants to purchase up to 723,126 shares of
Common Stock for gross proceeds of approximately $4.1 million. The Company is
anticipating the Final Closing to take place on or after November 13,
2009.





The
Purchase Agreement includes customary representations and warranties by each
party thereto. The Company is required to register the Common Stock underlying
the Preferred Shares and Warrants with the SEC for resale by the Purchasers
within 30 days after the Final Closing and to have the registration statement
declared effective within 90 days thereafter (or 150 days if the registration
statement receives full review). If the registration statement is not timely
filed or declared effective, the Company will be subject to liquidated damages
of 1% of the Purchasers’ aggregate purchase price per month, up to 10%, and
pro-rated for partial periods.





The above
transaction by the Company is considered a “nonrecognized subsequent event” as
defined by ASC 855.  Management is in the process of determining the
impact of this transaction on the financial statements as of December 31, 2009
and beyond.


15


Item
2.    Management’s Discussion and Analysis or Plan of
Operation.





The
following management’s discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto and the other
financial information appearing elsewhere in this item. In addition to
historical information, the following discussion contains certain
forward-looking statements within the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as “may, “will,” “could,” “expect,,
“anticipate,” “intend,” “believe, “estimate,” “plan,” “predict” and similar
terms or terminology, or the negative of such terms or other comparable
terminology. Although we believe the expectations expressed in these
forward-looking statements are based on reasonable assumptions within the bound
of our knowledge of our business, our actual results could differ materially
from those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed in the “Risk
Factors” section of the Company's current report on Form 8-K filed with the SEC
on February 13, 2009.  We undertake no obligation to update publicly
any forward-looking statements for any reason even if new information becomes
available or other events occur in the future.





Our
financial statements are prepared in U.S. Dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange
Rates” below for information concerning the exchanges rates at which Renminbi
were translated into U.S. Dollars at various pertinent dates and for pertinent
periods.





In
this Form 10-Q, references to “we,” “our, “us,” the "Company”, or the
“Registrant” refer to VLOV Inc., a Nevada corporation, its subsidiary and
affiliated entities.





Overview





VLOV Inc.
(“VLOV” or the “Company”), formerly known as Sino Charter, Inc., was
incorporated in Nevada on October 30, 2006.  Prior to February 13,
2009, the Company was a public reporting “shell company,” as defined in Rule
12b-2 of the Securities Exchange Act of 1934, as amended.  On February
13, 2009, the Company entered into a share exchange transaction with Peng Xiang
Peng Fei Investments Limited (“Peng Xiang”), a British Virgin Islands company,
and acquired its apparel business in the People’s Republic of China (“China” or
“PRC”), which is marketed and distributed apparel under the brand name
“V·LOV.”  The share exchange transaction closed on February 13, 2009,
and Peng Xiang became a wholly-owned subsidiary of the Company.





Peng
Xiang is a holding company that, through its wholly-owned subsidiary, Korea
Jinduren (International) Dress Limited (“Korea Jinduren”), a Hong Kong company,
controls Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), a PRC
company, by a series of contractual arrangements.  Yinglin Jinduren
holds the government licenses and approvals necessary to operate the apparel
business in China.  Neither the Company nor its direct and indirect
subsidiaries own any equity interests in Yinglin Jinduren, but control and
receive the economic benefits of its business operations through contractual
arrangements. Through Korea Jinduren, the Company has contractual arrangements
with Yinglin Jinduren and its owners to provide consulting and other general
business operation services on an exclusive basis. Through these contractual
arrangements, the Company also has the ability to substantially influence the
daily operations and financial affairs of Yinglin Jinduren. As a result of these
contractual arrangements, which enable the Company to control Yinglin Jinduren
and to receive, through Korea Jinduren, all of its net profits, the Company is
considered the primary beneficiary of Yinglin Jinduren. Accordingly, the Company
consolidates the results, assets and liabilities of Yinglin Jinduren in its
financial statements.





On March
20, 2009, the Company changed its name to “VLOV Inc.” to better reflect the
direction and business of the Company after the share exchange transaction with
Peng Xiang.





Subsequent
Event.





On
October 27, 2009, we sold and issued 1,446,252 shares of our series A
convertible preferred stock (the “Preferred Shares”) for approximately $4.1
million in gross proceeds, and issued warrants to purchase up to 723,126 shares
of our common stock for no additional consideration, to several accredited
investors in a private placement pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended.





Critical
Accounting Policies





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


16





While our
significant accounting policies are described in note 1 to our financial
statements under the section above titled “Financial Statements,” we believe
that the following accounting policies are the most critical to aid you in fully
understanding and evaluating this management discussion and
analysis:





Revenue
Recognition





Revenue
is measured at the fair value of the consideration received or receivable and
represents amounts receivable for goods sold and services provided in the normal
course of business, net of discounts and sales related taxes. Revenue from sale
of goods is recognized when the goods are delivered and title has
passed.





Accounts
Receivable





Accounts
receivable, which are unsecured, are stated at the amount the Company expects to
collect. We continuously monitor collections and payments from our customers and
maintain a provision for estimated credit losses based upon historical
experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that have been experienced in
the past. As of September 30, 2009, all of the trade receivable balances were
aged less than 90 days and management has determined that no allowance for
uncollectible amounts is required.





Depreciation
and Amortization





Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. Depreciation of property, plant and equipment is computed
using the straight-line method based on the following estimated useful
lives:





Buildings
            30
      yearsFurniture,
      fixtures and equipment
            5
      yearsMotor
      vehicles
            5
      yearsOffice
      equipment
            5
      yearsPlant
      and machinery
            5
      to 15 years





Income
Taxes





The
Company is mainly subject to income taxes in the PRC. While we believe we have
adequately provided for all tax positions, amounts asserted by tax authorities
could be greater or less than our accrued position. The Company has concluded
all PRC corporate income tax matters through fiscal year 2008. We do not
anticipate that total gross unrecognized tax benefits will change significantly
as a result of full or partial settlement of this or other audits within the
next twelve months.





The
Company accounts for income taxes under ASC Topic 740, “Income Taxes” (“ASC 740”)
Under ASC 740, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applicable to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under ASC 740, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.





Foreign
Currency Translation





The
Company’s functional currency is Renminbi (“RMB”) and its reporting currency is
U.S. dollars. The Company’s balance sheet accounts are translated using the
closing exchange rate in effect at the balance sheet date and operating accounts
are translated using the average exchange rate prevailing during the quarter.
Equity accounts are translated using the historical rate as incurred.
Translation gains and losses are deferred and accumulated as a component of
accumulated other comprehensive income in shareholders’ equity. Transaction
gains and losses that arise from exchange rate fluctuations from transactions
denominated in a currency other than the functional currency are included in the
statement of operations as incurred.


17





Results
of Operations





Three Month Periods Ended September 30,
                      
                      
                      Nine Month Periods Ended September
      30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008(Amounts in thousands, in U.S. Dollars, except for
                        percentages)
                      
                      
                      (Amounts in thousands, in U.S. Dollars, except for
                        percentages)Sales
                      
                      $
                      13,882
                      
                      
                      
                      100.00
                      %
                      
                      $
                      9,309
                      
                      
                      
                      100.00
                      %
                      
                      $
                      45,823
                      
                      
                      
                      100.00
                      %
                      
                      $
                      40,013
                      
                      
                      
                      100.00
                      %Gross
      Profit
                      
                      $
                      5,032
                      
                      
                      
                      36.25
                      %
                      
                      $
                      3,033
                      
                      
                      
                      32.58
                      %
                      
                      $
                      16,507
                      
                      
                      
                      36.02
                      %
                      
                      $
                      14,393
                      
                      
                      
                      35.97
                      %Operating
      Expense
                      
                      $
                      1,361
                      
                      
                      
                      9.80
                      %
                      
                      $
                      1,947
                      
                      
                      
                      20.92
                      %
                      
                      $
                      4,473
                      
                      
                      
                      9.76
                      %
                      
                      $
                      5,043
                      
                      
                      
                      12.60
                      %Income
      From Operations
                      
                      $
                      3,671
                      
                      
                      
                      26.45
                      %
                      
                      $
                      1,086
                      
                      
                      
                      11.66
                      %
                      
                      $
                      12,034
                      
                      
                      
                      26.26
                      %
                      
                      $
                      9,350
                      
                      
                      
                      23.37
                      %Other
      Expenses/(Income)
                      
                      $
                      12
                      
                      
                      
                      0.09
                      %
                      
                      $
                      14
                      
                      
                      
                      0.15
                      %
                      
                      $
                      29
                      
                      
                      
                      0.06
                      %
                      
                      $
                      37
                      
                      
                      
                      0.09
                      %Income
      tax expenses
                      
                      $
                      922
                      
                      
                      
                      6.64
                      %
                      
                      $
                      304
                      
                      
                      
                      3.27
                      %
                      
                      $
                      3,183
                      
                      
                      
                      6.95
                      %
                      
                      $
                      2,364
                      
                      
                      
                      5.91
                      %Net
      Income
                      
                      $
                      2,737
                      
                      
                      
                      19.72
                      %
                      
                      $
                      768
                      
                      
                      
                      8.24
                      %
                      
                      $
                      8,822
                      
                      
                      
                      19.25
                      %
                      
                      $
                      6,949
                      
                      
                      
                      17.37
                      %





Sales for
the three months ended September 30, 2009 were $13,882,000, an increase of
49.12% from $9,309,000 for the same period in 2008, while sales for the nine
months ended September 30, 2009 were $45,823,000, an increase of 14.52% from
$40,013,000 for the same period of 2008.  We generate revenue
primarily from the production and sale of apparels in China which are sold
through 734 Point-of-Sales (“POS”) spread across 11 provinces that are owned and
operated by or for our distributors.  The increase in our sales for
the nine months ended September 30, 2009 was primarily attributable to our
marketing efforts under the VLOV brand and the rapid expansion of our sales
network period-over-period.





The
following table sets forth a breakdown of our total sales revenue, by provinces,
for the periods indicated:





Three
      Month Periods Ended September 30,
                            
                            
                            Nine
      Month Periods Ended September 30,2009
                            
                            
                            2008
                            
                            
                            
                            
                            
                            2009
                            
                            
                            2008(Amounts
      in thousands, in U.S. Dollars,
                              except
      for percentages)
                            
                            
                            (Amounts
      in thousands, in U.S. Dollars,
                              except
      for percentages)$
                            
                            
                            % of
      total
                              sales revenue
                            
                            
                            $
                            
                            
                            % of total
                              sales revenue
                            
                            
                            Growth
                              in
      2009
                              compared
                              with
                              2008
                            
                            
                            $
                            
                            
                            % of
      total
                              sales revenue
                            
                            
                            $
                            
                            
                            % of total
                              sales revenue
                            
                            
                            Growth
                              in
      2009
                              compared
                              with
                              2008Beijing
                            
                            $
                            641
                            
                            
                            
                            4.62
                            %
                            
                            $
                            310
                            
                            
                            
                            3.33
                            %
                            
                            
                            106.77
                            %
                            
                            $
                            2,108
                            
                            
                            
                            4.60
                            %
                            
                            $
                            1,308
                            
                            
                            
                            3.27
                            %
                            
                            
                            61.16
                            %Zhejiang
                            
                            
                            2,440
                            
                            
                            
                            17.58
                            %
                            
                            
                            2,388
                            
                            
                            
                            25.65
                            %
                            
                            
                            2.18
                            %
                            
                            
                            8,873
                            
                            
                            
                            19.36
                            %
                            
                            
                            10,544
                            
                            
                            
                            26.35
                            %
                            
                            
                            (15.85)
                            %Shandong
                            
                            
                            1,600
                            
                            
                            
                            11.53
                            %
                            
                            
                            954
                            
                            
                            
                            10.25
                            %
                            
                            
                            67.71
                            %
                            
                            
                            5,119
                            
                            
                            
                            11.17
                            %
                            
                            
                            4,188
                            
                            
                            
                            10.47
                            %
                            
                            
                            22.23
                            %Jiangxi
                            
                            
                            1,465
                            
                            
                            
                            10.55
                            %
                            
                            
                            1,428
                            
                            
                            
                            15.34
                            %
                            
                            
                            2.59
                            %
                            
                            
                            5,342
                            
                            
                            
                            11.66
                            %
                            
                            
                            6,119
                            
                            
                            
                            15.29
                            %
                            
                            
                            (12.70)
                            %Yunnan
                            
                            
                            1,404
                            
                            
                            
                            10.11
                            %
                            
                            
                            887
                            
                            
                            
                            9.53
                            %
                            
                            
                            58.29
                            %
                            
                            
                            4,622
                            
                            
                            
                            10.09
                            %
                            
                            
                            3,699
                            
                            
                            
                            9.24
                            %
                            
                            
                            24.95
                            %Shaanxi
                            
                            
                            1,001
                            
                            
                            
                            7.21
                            %
                            
                            
                            540
                            
                            
                            
                            5.80
                            %
                            
                            
                            85.37
                            %
                            
                            
                            3,300
                            
                            
                            
                            7.20
                            %
                            
                            
                            2,377
                            
                            
                            
                            5.94
                            %
                            
                            
                            38.83
                            %Liaoning
                            
                            
                            1,135
                            
                            
                            
                            8.18
                            %
                            
                            
                            490
                            
                            
                            
                            5.26
                            %
                            
                            
                            131.63
                            %
                            
                            
                            3,256
                            
                            
                            
                            7.11
                            %
                            
                            
                            2,093
                            
                            
                            
                            5.23
                            %
                            
                            
                            55.57
                            %Hubei
                            
                            
                            1,923
                            
                            
                            
                            13.85
                            %
                            
                            
                            1,172
                            
                            
                            
                            12.59
                            %
                            
                            
                            64.08
                            %
                            
                            
                            6,205
                            
                            
                            
                            13.54
                            %
                            
                            
                            5,087
                            
                            
                            
                            12.71
                            %
                            
                            
                            21.98
                            %Henan
                            
                            
                            1,006
                            
                            
                            
                            7.25
                            %
                            
                            
                            546
                            
                            
                            
                            5.87
                            %
                            
                            
                            84.25
                            %
                            
                            
                            3,328
                            
                            
                            
                            7.26
                            %
                            
                            
                            2,224
                            
                            
                            
                            5.56
                            %
                            
                            
                            49.64
                            %Guangxi
                            
                            
                            945
                            
                            
                            
                            6.81
                            %
                            
                            
                            505
                            
                            
                            
                            5.42
                            %
                            
                            
                            87.13
                            %
                            
                            
                            3,101
                            
                            
                            
                            6.77
                            %
                            
                            
                            2,190
                            
                            
                            
                            5.47
                            %
                            
                            
                            41.60
                            %Sichuan
                            
                            
                            228
                            
                            
                            
                            1.64
                            %
                            
                            
                            n.a.*
                            
                            
                            
                            n.a.*
                            
                            
                            
                            n.a.*
                            
                            
                            
                            228
                            
                            
                            
                            0.50
                            %
                            
                            
                            n.a.*
                            
                            
                            
                            n.a.*
                            %
                            
                            
                            n.a.*
                            %Others
                            
                            
                            94
                            
                            
                            
                            0.67
                            %
                            
                            
                            89
                            
                            
                            
                            0.96
                            %
                            
                            
                            5.62
                            %
                            
                            
                            341
                            
                            
                            
                            0.74
                            %
                            
                            
                            184
                            
                            
                            
                            0.47
                            %
                            
                            
                            85.33
                            %Total
      Net Sales
                            
                            $
                            13,882
                            
                            
                            
                            100.00
                            %
                            
                            $
                            9,309
                            
                            
                            
                            100.00
                            %
                            
                            
                            49.12
                            %
                            
                            $
                            45,823
                            
                            
                            
                            100.00
                            %
                            
                            $
                            40,013
                            
                            
                            
                            100.00
                            %
                            
                            
                            14.52
                            %





* Not
applicable as the Company engaged the Sichuan distributor during the three-month
period ended September 30, 2009


18


Cost
of Sales and Gross Profit Margin





The
following table sets forth the components of our cost of sales and gross profit
both in absolute amount and as a percentage of total net sales for the periods
indicated.




Three Month Periods Ended September 30,
                            
                            
                            Nine Month Periods Ended September 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008(Amounts in thousands, in U.S. Dollars, except
                              for percentages)
                            
                            
                            (Amounts in thousands, in U.S. Dollars, except
                              for percentages)Total Net Sales
                            
                            $
                            13,882
                            
                            
                            
                            100.00
                            %
                            
                            $
                            9,309
                            
                            
                            
                            100.00
                            %
                            
                            $
                            45,823
                            
                            
                            
                            100.00
                            %
                            
                            $
                            40,013
                            
                            
                            
                            100.00
                            %O.E.M.
      Finished Goods
                            
                            
                            8,124
                            
                            
                            
                            58.52
                            %
                            
                            
                            5,224
                            
                            
                            
                            56.12
                            %
                            
                            
                            26,798
                            
                            
                            
                            58.48
                            %
                            
                            
                            19,781
                            
                            
                            
                            49.44
                            %Raw
      Materials
                            
                            
                            517
                            
                            
                            
                            3.72
                            %
                            
                            
                            691
                            
                            
                            
                            7.42
                            %
                            
                            
                            1,706
                            
                            
                            
                            3.72
                            %
                            
                            
                            3,867
                            
                            
                            
                            9.66
                            %Labor
                            
                            
                            165
                            
                            
                            
                            1.19
                            %
                            
                            
                            276
                            
                            
                            
                            2.96
                            %
                            
                            
                            643
                            
                            
                            
                            1.40
                            %
                            
                            
                            557
                            
                            
                            
                            1.39
                            %Outsource
      Production Costs
                            
                            
                            -
                            
                            
                            
                            -
                            %
                            
                            
                            -
                            
                            
                            
                            -
                            %
                            
                            
                            -
                            
                            
                            
                            -
                            %
                            
                            
                            832
                            
                            
                            
                            2.08
                            %Other
      and Overhead
                            
                            
                            44
                            
                            
                            
                            0.32
                            %
                            
                            
                            85
                            
                            
                            
                            0.92
                            %
                            
                            
                            169
                            
                            
                            
                            0.38
                            %
                            
                            
                            583
                            
                            
                            
                            1.46
                            %Total
      Cost of Sales
                            
                            
                            8,850
                            
                            
                            
                            63.75
                            %
                            
                            
                            6,276
                            
                            
                            
                            67.42
                            %
                            
                            
                            29,316
                            
                            
                            
                            63.98
                            %
                            
                            
                            25,620
                            
                            
                            
                            64.03
                            %Gross
      Profit
                            
                            $
                            5,032
                            
                            
                            
                            36.25
                            %
                            
                            $
                            3,033
                            
                            
                            
                            32.58
                            %
                            
                            $
                            16,507
                            
                            
                            
                            36.02
                            %
                            
                            $
                            14,393
                            
                            
                            
                            35.97
                            %





Raw
materials cost accounted for 3.72% of our total net sales for both of the three
months and nine months periods ended September 30, 2009, compared to 7.42% and
9.66% for the same periods ended September 30, 2008, respectively. Labor cost
accounted for 1.19% and 1.40% of our total net sales for the three months and
nine months ended September 30 2009, respectively, a decrease of 1.77% and an
increase of 0.01%, respectively, compared to the same periods in 2008, because
the Company had more reliance on out-sourced O.E.M. goods for the three months
ended September 30, 2009.  O.E.M. finished goods cost accounted for
58.52% and 58.48% of our net sales for the three months and nine months periods
ended September 30, 2009 respectively, compared to 56.12% and 49.44% for the
same periods ended September 30, 2008, respectively. The increase resulted from
more reliance on O.E.M. goods.





Total
cost of sales for the three months and nine months ended September 30, 2009 were
$8,850,000 and $29,316,000, respectively, an increase of 41.01% from $6,276,000
for the same three-month period in 2008 and an increase of 14.43% from
$25,620,000 for the same nine-month period in 2008. As a percentage of total net
sales, our cost of sales decreased to 63.75% and 63.98% of total net sales for
the three months and nine months ended September 30, 2009 respectively, down
from approximately 67.42% and 64.03% of total net sales for the same three-month
and nine-month periods in 2008, respectively.





The
following tables set forth our total net sales, cost of sales, gross profit and
gross margin of the geographic market segments for the periods
indicated.





Three Months Ended September 30,2009
                        
                        
                        2008Net Sales
                        
                        
                        Cost of
                          sales
                        
                        
                        Gross
                          profit
                        
                        
                        Gross
                          margin
                        
                        
                        Net Sales
                        
                        
                        Cost of
                          sales
                        
                        
                        Gross
                          profit
                        
                        
                        Gross
                          margin(Amounts
      in thousands, in U.S. Dollars, except for percentages)Beijing
                        
                        $
                        641
                        
                        
                        $
                        409
                        
                        
                        $
                        232
                        
                        
                        
                        36.19
                        %
                        
                        $
                        310
                        
                        
                        $
                        209
                        
                        
                        $
                        101
                        
                        
                        
                        32.58
                        %Zhejiang
                        
                        
                        2,440
                        
                        
                        
                        1,555
                        
                        
                        
                        885
                        
                        
                        
                        36.27
                        %
                        
                        
                        2,388
                        
                        
                        
                        1,648
                        
                        
                        
                        740
                        
                        
                        
                        30.99
                        %Shandong
                        
                        
                        1,600
                        
                        
                        
                        1,020
                        
                        
                        
                        580
                        
                        
                        
                        36.25
                        %
                        
                        
                        954
                        
                        
                        
                        637
                        
                        
                        
                        317
                        
                        
                        
                        33.23
                        %Jiangxi
                        
                        
                        1,465
                        
                        
                        
                        934
                        
                        
                        
                        531
                        
                        
                        
                        36.25
                        %
                        
                        
                        1,428
                        
                        
                        
                        961
                        
                        
                        
                        467
                        
                        
                        
                        32.70
                        %Yunnan
                        
                        
                        1,404
                        
                        
                        
                        895
                        
                        
                        
                        509
                        
                        
                        
                        36.25
                        %
                        
                        
                        887
                        
                        
                        
                        600
                        
                        
                        
                        287
                        
                        
                        
                        32.36
                        %Shaanxi
                        
                        
                        1,001
                        
                        
                        
                        638
                        
                        
                        
                        363
                        
                        
                        
                        36.26
                        %
                        
                        
                        540
                        
                        
                        
                        363
                        
                        
                        
                        177
                        
                        
                        
                        32.78
                        %Liaoning
                        
                        
                        1,135
                        
                        
                        
                        724
                        
                        
                        
                        411
                        
                        
                        
                        36.21
                        %
                        
                        
                        490
                        
                        
                        
                        337
                        
                        
                        
                        153
                        
                        
                        
                        31.22
                        %Hubei
                        
                        
                        1,923
                        
                        
                        
                        1,226
                        
                        
                        
                        697
                        
                        
                        
                        36.25
                        %
                        
                        
                        1,172
                        
                        
                        
                        790
                        
                        
                        
                        382
                        
                        
                        
                        32.59
                        %Henan
                        
                        
                        1,006
                        
                        
                        
                        641
                        
                        
                        
                        365
                        
                        
                        
                        36.28
                        %
                        
                        
                        546
                        
                        
                        
                        371
                        
                        
                        
                        175
                        
                        
                        
                        32.05
                        %Guangxi
                        
                        
                        945
                        
                        
                        
                        602
                        
                        
                        
                        343
                        
                        
                        
                        36.30
                        %
                        
                        
                        505
                        
                        
                        
                        339
                        
                        
                        
                        166
                        
                        
                        
                        32.87
                        %Sichuan
                        
                        
                        228
                        
                        
                        
                        146
                        
                        
                        
                        82
                        
                        
                        
                        35.96
                        %
                        
                        
                        n.a.*
                        
                        
                        
                        n.a.*
                        
                        
                        
                        n.a.*
                        
                        
                        
                        n.a.*
                        %Others
                        
                        
                        94
                        
                        
                        $
                        60
                        
                        
                        
                        34
                        
                        
                        
                        36.17
                        %
                        
                        
                        89
                        
                        
                        
                        21
                        
                        
                        
                        68
                        
                        
                        
                        76.40
                        %Total
                        
                        $
                        13,882
                        
                        
                        $
                        8,850
                        
                        
                        $
                        5,032
                        
                        
                        
                        36.25
                        %
                        
                        $
                        9,309
                        
                        
                        $
                        6,276
                        
                        
                        $
                        3,033
                        
                        
                        
                        32.58
                        %





* Not
applicable as the Company engaged the Sichuan distributor during the three-month
period ended September 30, 2009.


19





Nine Months Ended September 30,2009
                        
                        
                        2008Net Sales
                        
                        
                        Cost of
                          sales
                        
                        
                        Gross
                          profit
                        
                        
                        Gross
                          margin
                        
                        
                        Net Sales
                        
                        
                        Cost of
                          sales
                        
                        
                        Gross
                          profit
                        
                        
                        Gross
                          margin(Amounts
      in thousands, in U.S. Dollars, except for percentages)Beijing
                        
                        $
                        2,108
                        
                        
                        $
                        1,348
                        
                        
                        $
                        760
                        
                        
                        
                        36.05
                        %
                        
                        $
                        1,308
                        
                        
                        $
                        854
                        
                        
                        $
                        454
                        
                        
                        
                        34.71
                        %Zhejiang
                        
                        
                        8,873
                        
                        
                        
                        5,675
                        
                        
                        
                        3,198
                        
                        
                        
                        36.04
                        %
                        
                        
                        10,544
                        
                        
                        
                        6,703
                        
                        
                        
                        3,841
                        
                        
                        
                        36.43
                        %Shandong
                        
                        
                        5,119
                        
                        
                        
                        3,274
                        
                        
                        
                        1,845
                        
                        
                        
                        36.04
                        %
                        
                        
                        4,188
                        
                        
                        
                        2,701
                        
                        
                        
                        1,487
                        
                        
                        
                        35.51
                        %Jiangxi
                        
                        
                        5,342
                        
                        
                        
                        3,417
                        
                        
                        
                        1,925
                        
                        
                        
                        36.04
                        %
                        
                        
                        6,119
                        
                        
                        
                        3,924
                        
                        
                        
                        2,195
                        
                        
                        
                        35.87
                        %Yunnan
                        
                        
                        4,622
                        
                        
                        
                        2,956
                        
                        
                        
                        1,666
                        
                        
                        
                        36.05
                        %
                        
                        
                        3,699
                        
                        
                        
                        2,383
                        
                        
                        
                        1,316
                        
                        
                        
                        35.58
                        %Shaanxi
                        
                        
                        3,300
                        
                        
                        
                        2,111
                        
                        
                        
                        1,189
                        
                        
                        
                        36.03
                        %
                        
                        
                        2,377
                        
                        
                        
                        1,534
                        
                        
                        
                        843
                        
                        
                        
                        35.46
                        %Liaoning
                        
                        
                        3,256
                        
                        
                        
                        2,083
                        
                        
                        
                        1,173
                        
                        
                        
                        36.03
                        %
                        
                        
                        2,093
                        
                        
                        
                        1,351
                        
                        
                        
                        742
                        
                        
                        
                        35.45
                        %Hubei
                        
                        
                        6,205
                        
                        
                        
                        3,969
                        
                        
                        
                        2,236
                        
                        
                        
                        36.04
                        %
                        
                        
                        5,087
                        
                        
                        
                        3,237
                        
                        
                        
                        1,850
                        
                        
                        
                        36.37
                        %Henan
                        
                        
                        3,328
                        
                        
                        
                        2,128
                        
                        
                        
                        1,200
                        
                        
                        
                        36.06
                        %
                        
                        
                        2,224
                        
                        
                        
                        1,415
                        
                        
                        
                        809
                        
                        
                        
                        36.38
                        %Guangxi
                        
                        
                        3,101
                        
                        
                        
                        1,984
                        
                        
                        
                        1,117
                        
                        
                        
                        36.02
                        %
                        
                        
                        2,190
                        
                        
                        
                        1,401
                        
                        
                        
                        789
                        
                        
                        
                        36.03
                        %Sichuan
                        
                        
                        228
                        
                        
                        
                        146
                        
                        
                        
                        82
                        
                        
                        
                        35.96
                        %
                        
                        
                        n.a.*
                        
                        
                        
                        n.a.*
                        
                        
                        
                        n.a.*
                        
                        
                        
                        n.a.*
                        %Others
                        
                        
                        341
                        
                        
                        
                        225
                        
                        
                        
                        116
                        
                        
                        
                        34.02
                        %
                        
                        
                        184
                        
                        
                        
                        117
                        
                        
                        
                        67
                        
                        
                        
                        36.41
                        %Total
                        
                        $
                        45,823
                        
                        
                        $
                        29,316
                        
                        
                        $
                        16,507
                        
                        
                        
                        36.02
                        %
                        
                        
                        40,013
                        
                        
                        $
                        25,620
                        
                        
                        $
                        14,393
                        
                        
                        
                        35.97
                        %




* Not
applicable as the Company engaged the Sichuan distributor during the three-month
period ended September 30, 2009.





Overall
gross margin for the three months and nine months ended September 30, 2009 was
36.25% and 36.02%, respectively, which increased from 32.58% and 35.97% for the
same periods in 2008, respectively. Our gross margin increased due to an
increase in average selling price from approximately RMB80 in 2008 to RMB96 in
2009.




Selling,
General and Administrative Expenses





Three Months Ended September 30,
                        
                        
                        Nine Months Ended September 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008$
                        
                        
                        % of
                          Total
                          Net Sales
                        
                        
                        $
                        
                        
                        % of
                          Total
                          Net Sales
                        
                        
                        $
                        
                        
                        % of
                          Total
                          Net Sales
                        
                        
                        $
                        
                        
                        % of
                          Total
                          Net Sales(Amounts in thousands, in U.S. Dollars,
                          except for
      percentages)
                        
                        
                        (Amounts in thousands, in U.S. Dollars,
                          except for
      percentages)Gross Profit
                        
                        $
                        5,032
                        
                        
                        
                        36.25
                        %
                        
                        $
                        3,033
                        
                        
                        
                        32.58
                        %
                        
                        $
                        16,507
                        
                        
                        
                        36.02
                        %
                        
                        $
                        14,393
                        
                        
                        
                        35.97
                        %Operating
      Expenses:Selling
      Expenses
                        
                        
                        841
                        
                        
                        
                        6.06
                        %
                        
                        
                        1,315
                        
                        
                        
                        14.13
                        %
                        
                        
                        2,900
                        
                        
                        
                        6.33
                        %
                        
                        
                        2,965
                        
                        
                        
                        7.41
                        %General
      and Administrative Expenses
                        
                        
                        520
                        
                        
                        
                        3.74
                        %
                        
                        
                        632
                        
                        
                        
                        6.79
                        %
                        
                        
                        1,573
                        
                        
                        
                        3.43
                        %
                        
                        
                        2,078
                        
                        
                        
                        5.19
                        %Total
                        
                        
                        1,331
                        
                        
                        
                        9.80
                        %
                        
                        
                        1,947
                        
                        
                        
                        20.92
                        %
                        
                        
                        4,443
                        
                        
                        
                        9.76
                        %
                        
                        
                        5,043
                        
                        
                        
                        12.60
                        %Income
      from Operations
                        
                        $
                        3,701
                        
                        
                        
                        26.45
                        %
                        
                        $
                        1,086
                        
                        
                        
                        11.66
                        %
                        
                        $
                        12,034
                        
                        
                        
                        26.26
                        %
                        
                        $
                        9,350
                        
                        
                        
                        23.37
                        %




Selling
expenses for the three months ended September 30, 2009 decreased by 36.05% to
$841,000 as compared to the same period in 2008, and decreased by 2.19% to
$2,900,000 for the nine months ended September 30, 2009 as compared to for the
same periods in 2008.   The decrease was mainly due to a decrease
in advertising expenses and exhibition expenses for our sales fairs conducted in
June 2009, which should have been held in April.  As we missed the
competitive period for sales fair, the expenses used for the sales fair
decreased.





General
and administrative expenses decreased by 22.47% from $632,000 for the three
months ended September 30, 2008 to $520,000 for the same period in 2009, and
decreased by 25.75% from $2,078,000 for the nine month ended September 30, 2008
to $1,573,000 for the same period in 2009.  The decreases were mainly
due to decrease in research and development expenses.





Interest
Expenses




Interest
expenses were $15,000 and $43,000, respectively, for the three months and nine
months ended September 30, 2009 compared to $19,000 and $50,000, respectively,
for the same three-month and nine-month periods in 2008. The decrease was mainly
due to decrease in interest rates on short-term borrowings.


20





Income
Tax Expenses




Income
tax expenses for the three months and nine months ended September 30, 2009
amounted to $922,000 and $3,183,000, respectively, compared to $304,000 and
$2,364,000 respectively, for the same three-month and nine-month periods in
2008.   The increase in income tax expenses was attributable to an
increase in pre-tax income.  Our statutory income tax rates were 25%
in 2008 and 2009. Effective tax rates for the nine-month periods ended September
30, 2009 were greater than 25% because of a change in management’s estimate of
the tax liability for 2008 based on information that became available during the
period.





Net
Income





Net
income for the three months and nine months ended September 30, 2009 were
$2,737,000 and $8,822,000 respectively, an increase of 256.38% from $768,000 for
the same three-month period in 2008, and an increase of 26.95% from $6,949,000
for the same nine-month period in 2008. The increase for the three months period
was mainly due to the two-month delay in our 2009 autumn/winter sales fair, held
in June rather in April as in previous years. Thus, sales orders from the fair
occurred mostly in the third quarter. For the nine months period, the increase
was mainly due to our marketing efforts and the expansion of our sales network
period-over-period.





Liquidity
and Capital Resources





As of
September 30, 2009, we had cash and cash equivalents of $9,328,000, other
current assets of $8,130,000 and current liabilities of $7,465,000. We presently
finance our operations primarily from the cash flows from our operations, and we
anticipate that this will continue to be our primary source of funds to finance
our short-term cash needs. If we require additional capital to expand or enhance
our existing facilities, we will consider debt or equity offerings or
institutional borrowing as potential means of financing.





Net cash
provided by operating activities for the nine months ended September 30, 2009
was $11,356,000 compared with net cash provided by operating activities of
$4,785,000 for the same period in 2008. This increase was mainly attributable to
increase in accounts payable.





There was
no cash used in investing activities for the nine months ended September 30,
2009, compared with $52,000 used in investing activities for the same period in
2008. This decrease in net cash for investing activities was mainly because we
did not purchase any property, plant and equipment during the nine months ended
September 30, 2009.





Net cash
used in financing activities was $4,896,000 for the nine months ended September
30, 2009, compared with $2,990,000 net cash used in financing activities for the
same period in 2008. The increase in net cash used in financing activities was
mainly due to dividend payments to the private shareholders prior to share
exchange transaction with Peng Xiang.





As of
September 30, 2009, our inventories increased to $790,000 compared with $657,000
as of September 30, 2008, as we were in production for extra orders received in
the sales fair in June 2009. However, finished goods decreased to $180,000 as of
September 30, 2009 from $242,000 as of September 30, 2008, resulting from more
reliance on O.E.M. products which are directly delivered to the distributors
from suppliers.




As of
September 30, 2009, we had accounts receivable of $7,333,000, compared with
$6,890,000 as of September 30, 2008. The accounts receivable turnover ratio
decreased to 44.71 days as of September 30, 2009 from 72.21 days as of September
30, 2008.





As of
September 30, 2009, we had accounts payables of $5,049, compared with $1,623 as
of September 30, 2008. The increase was mainly due to increase in purchase to
meet sales orders.





As of
September 30, 2009, we had accrued expenses and other payables of $252,000,
compared with $1,113,000 as of September 30, 2008. The decrease was mainly due
to a decrease in advertising subsidy payable which was mainly settled in March,
June and September 2009.




Contractual
Obligations and Off-Balance Sheet Arrangements





Contractual
Obligations





We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We present below a summary of the most significant
assumptions used in our determination of amounts presented in the tables in
order to assist in the review of this information within the context of our
consolidated financial position, results of operations, and cash
flows.


21





The
following tables summarize our contractual obligations as of September 30, 2009,
and the effect that these obligations are expected to have on our liquidity and
cash flows in future periods.





Payments Due by PeriodTotal
                          
                          Less than 1
                            year
                          
                          1 Year +(in thousands of dollars)Contractual
      Obligations:Total
      Indebtedness
                          
                          $
                          734
                          
                          
                          $
                          734
                          
                          $Operating
      Leases
                          
                          
                          7
                          
                          
                          
                          7Total
      Contractual Obligations:
                          
                          $
                          741
                          
                          
                          $
                          741
                          
                          $




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





Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for office facilities, as well as limited computer and office equipment
that we utilize under certain lease arrangements.





Off-Balance
Sheet Arrangements





We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.





Item
3.               Quantitative
and Qualitative Disclosures About Market Risk





Currency
Risk





All of
the Company’s business is carried out in the PRC and uses the RMB as its only
functional currency. Hence, the effect of the fluctuations of the RMB exchange
rate relative to other currencies is considered minimal to our business
operations. However, we use the U.S. dollar for financial reporting purposes and
therefore, fluctuations in the exchange rate between the RMB and the U.S. dollar
will result in increases or decreases in other comprehensive income or
loss.  Conversion of RMB into foreign currencies is regulated by The
People’s Bank of China through a unified floating exchange rate system. Although
the PRC government has stated its intention to support the value of RMB, there
can be no assurance that such exchange rate will not again become volatile or
that RMB will not strengthen or devalue significantly against the U.S.
dollar.  Exchange rate fluctuations may adversely affect the value, in
U.S. dollar terms, of our net assets and income derived from our operations in
the PRC.





Credit
Risk





The
Company’s credit risks are primarily attributable to trade receivables and bank
balances.





The
Company’s maximum exposure to credit risk in the event of the failure of
counterparties to perform their obligations as at September 30, 2009 in relation
to each class of recognized financial assets is the carrying amount of those
assets as stated in the consolidated balance sheets. In order to minimize credit
risk, management reviews the accounts receivable aging and adjusts the allowance
based on historical experience, financial condition of customers and other
relevant current economic factors. As of September 30, 2009, all of the trade
receivable balances were aged less than 90 days and management has determined
that no allowance for uncollectible amounts is required.





The
Company’s bank balances and cash are deposited with banks of high credit rating
and the Company has limited the exposure to any single financial institution.
The credit risk on liquid funds is limited because the counterparties are banks
with good credit-rating. The Company has no significant concentration of credit
risks as its exposure is spread over a number of counterparties and
customers.





Item
4.               Controls
and Procedures





Evaluation
of Disclosure Controls and Procedures


22





As of
September 30, 2009, we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended.  Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the applicable period to ensure that the information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act (i) is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosures.





Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting during the quarter
ended September 30, 2009 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.




PART
II - OTHER INFORMATION





Item
1.              
Legal Proceedings.





None





Item
1A.            Risk
Factors.





There
have been no material changes in our risk factors from those disclosed in Part
II, Item 1A, of our Quarterly Report on Form 10-Q as of and for the quarter end
March 31, 2009.





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





None





Item
3.               Defaults
upon Senior Securities.




None





Item
4.               Submission
of Matters to a Vote of Securities Holders.




None





Item
5.               Other
Information.





None




Item
6.               Exhibits.





Exhibit
                            Number
                          
                          Description2.1
                          
                          Share
      Exchange Agreement (3)3.1
                          
                          Articles
      of Incorporation of Sino Charter, Inc. (1)3.2
                          
                          Articles
      of Merger filed with the Secretary of State of Nevada on March 4, 2009 and
      which is effective March 20, 2009 (4)3.3
                            3.4
                          
                          Certificate
      of Correction filed with the Secretary of State of Nevada on March 6, 2009
      (4)
                            Certificate
      of Designation of Preferences, Rights and Limitations of Series A
      Preferred Stock, filed October 23, 2009 with the Nevada Secretary of State
      (6)3.5
                          
                          Bylaws
      of Sino Charter, Inc. (1)3.6
                          
                          Amendment
      to the Bylaws of Sino Charter, Inc. (3)4.1
                            4.2
                          
                          Specimen
      Stock Certificate of Sino Charter, Inc. (1)
                            Form
      of Certificate of Series A Convertible Preferred Stock
  (6)10.1
                          
                          Form
      of Share Purchase Binding Letter of Intent, dated September 29, 2009
      (5)10.2
                          
                          Form
      of Securities Purchase Agreement, dated October 27, 2009
    (6)10.3
                          
                          Form
      of Warrant (6)10.4
                          
                          Form
      of Escrow Agreement (6)31.1
                          
                          Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended
*




23




31.2
              32.1
              32.2
            
            Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended *
              Certifications
      pursuant to 18 U.S.C. Section 1350 *
              Certifications
      pursuant to 18 U.S.C. Section 1350 *99.1
            
            Consulting
      Services Agreement (3)99.2
            
            Operating
      Agreement (3)99.3
            
            Equity
      Pledge Agreement (3)99.4
            
            Option
      Agreement (3)99.5
            
            Voting
      Rights Proxy Agreement (3)99.6
            
            Audit
      Committee Charter (2)99.7
            
            Disclosure
      Committee Charter (2)




* Filed
Herewith.





(1)
Previously filed with our Registration Statement on Form SB-2 on February 9,
2007.


(2)
Previously filed with our Annual Report on Form 10-K on March 7,
2008.


(3)
Previously filed with our Current Report on Form 8-K on February 13,
2009.


(4)
Previously filed with our Current Report on Form 8-K on March 20,
2009.


(5)
Previously filed with our Annual Report on Form 8-K on October 5,
2009.


(6)
Previously filed with our Current Report on Form 8-K on October 30,
2009




24


SIGNATURES







In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





VLOV
      INC.(Registrant)Date: November
      12, 2009
              By:
              /s/
      Qingqing WuQingqing
      WuChief
      Executive Officer


25