UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D. C. 20549




FORM
10-K




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





For the
fiscal year ended December 31, 2009





o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15 (d) OF THE 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 or organization)
                  
                  (IRS Employer Identification No.)




11/F.,
Xiamen Guanyin Shan International Commercial Operation Centre, A3-2
124


Hubin
Bei Road, Siming District


Xiamen,
Fujian Province


People’s
Republic of China





(Address of Principal Executive
Offices)




(86592)
2345999





(Issuer Telephone
Number)




N/A





(Former name or former address, if
changed since last report)






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





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





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 þ No o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained herein, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o




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




Large
      accelerated filer  o
                Accelerated
      filer  oNon-accelerated
      filer  o
                Smaller
      reporting company  þ





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




As of
June 30, 2009, the aggregate market value of the registrant's common stock,
$0.00001 par value, held by non-affiliates was approximately $14.5 million based
on the closing price of $2.50 as reported on the Over-the Counter Bulletin Board
on such date.





The
company had a total of 16,667,957 shares of common stock outstanding as of April
6, 2010.










TABLE
OF CONTENTS


TO
ANNUAL REPORT ON FORM 10-K


FOR
YEAR ENDED DECEMBER 31, 2009





PagePART
      IItem
      1.
                    Business
                    
                    3Item
      1A.
                    Risk
      Factors
                    
                    15Item
      1B.
                    Unresolved
      Staff Comments
                    
                    29Item
      2.
                    Properties
                    
                    29Item
      3.
                    Legal
      Proceedings
                    
                    30PART
      IIItem
      5.
                    Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    
                    30Item
      6.
                    Selected
      Financial Data
                    
                    31Item
      7.
                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
                    
                    31Item
      7A.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    38Item
      8.
                    Financial
      Statements and Supplementary Data
                    
                    F-1Item
      9.
                    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                    
                    39Item
      9A (T).
                    Controls
      and Procedures
                    
                    39Item
      9B.
                    Other
      Information
                    
                    41PART
      IIIItem
      10.
                    Directors,
      Executive Officers and Corporate Governance
                    
                    41Item
      11.
                    Executive
      Compensation
                    
                    44Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    
                    46Item
      13.
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    
                    47Item
      14.
                    Principal
      Accounting Fees and Services
                    
                    49PART
      IVItem
      15.
                    Exhibits,
      Financial Statement Schedules
                    
                    49Signatures
                    
                    
                    52




2




Forward Looking Statements




This
Form 10-K and other reports filed by the Registrant from time to time with the
Securities and Exchange Commission (collectively the “Filings”) contain or may
contain forward looking statements and information that are based upon beliefs
of, and information currently available to, the Registrant’s management as well
as estimates and assumptions made by the Registrant’s management. When used in
the filings the words “anticipate”, “believe”, “estimate”, “expect”, “future”,
“intend”, “plan” or the negative of these terms and similar expressions as they
relate to the Registrant or the Registrant’s management identify forward looking
statements. Such statements reflect the current view of the Registrant with
respect to future events and are subject to risks, uncertainties, assumptions
and other factors (including the risks contained in the section of this report
entitled “Risk Factors”) relating to the Registrant’s industry, the Registrant’s
operations and results of operations and any businesses that may be acquired by
the Registrant. Should one or more of these risks or uncertainties materialize,
or should the underlying assumptions prove incorrect, actual results may differ
significantly from those anticipated, believed, estimated, expected, intended or
planned.




Although
the Registrant believes that the expectations reflected in the forward looking
statements are reasonable, the Registrant cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, the
Registrant does not intend to update any of the forward-looking statements to
conform these statements to actual results. The following discussion should be
read in conjunction with the Registrant’s financial statements and the related
notes thereto included in this Form 10-K.




In
this Form 10-K, references to “we,” “our,” “us,” “VLOV” or the “Company” refer
collectively to VLOV, Inc. and its subsidiaries and affiliated
companies.





PART
I




ITEM
1.  BUSINESS





Overview





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





We design
and develop our apparel and clothing products in our production facility located
in Yinglin in southeastern Fujian Province. We market and distribute our
products through independent distributors, each of whom is granted rights to
market and sell our products in a defined market or territory through a
distribution agreement. We maintain and exercise control over brand advertising
and marketing activities from our headquarters in Yinglin, where we set the tone
for integrity, consistency and direction of the V·LOV brand image throughout
China. We also have marketing staff travelling around the country to help us
enforce our visions and provide support and guidelines for our
distributors.  We manufacture some of our apparel products at our
Yinglin production facility and outsource approximately 80% to 90% of
manufacturing to third parties.





All of
our business operations are carried out by our variable interest entity (“VIE”),
Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control
through contractual arrangements between Yinglin Jinduren and Dong Rong Capital
Investment Limited, formerly known as Korea Jinduren (International) Dress
Limited (“HK Dong Rong”), which is wholly-owned by Peng Xiang Peng Fei
Investments, Limited (“PXPF”), our wholly-owned subsidiary. Other than our
interests in the contractual arrangements, neither we nor PXPF and HK Dong Rong
own any equity interests in Yinglin Jinduren, which equity interests are owned
by our chief executive officer and his brother, who is also one of our
directors.




3




In
November 2009, we completed a financing transaction with 57 accredited investors
by issuing an aggregate of 2,796,721 shares of our series A convertible
preferred stock and warrants to purchase 1,398,360 shares of our common stock
(the “Preferred Shares” and the “Warrants”) for an aggregate purchase price of
approximately $8 million (the “Preferred Share Financing”). There were two
closings, the first on October 27, 2009, for gross proceeds of approximately
$4.14 million, and the second on November 17, 2009, for gross proceeds of
approximately $3.86 million. Each Preferred Share is convertible into one share
of our common stock at $2.86 per share (subject to certain adjustments) at any
time at its holder’s option, and will automatically convert upon the listing of
our common stock on either the Nasdaq Capital Market or NYSE Amex Equities. Each
Warrant entitles its holder to purchase a share of common stock at an exercise
price of $3.43 per share (subject to certain adjustments) for a period of three
years. We are also entitled to redeem the Warrants for the then applicable
exercise price (currently $3.43 per Warrant) if the volume-weighted average
price of our common stock for 20 consecutive days exceeds 200% of the then
applicable exercise price.





On
December 1, 2009, we entered into a securities purchase agreement with 17
accredited investors, pursuant to which we sold to them 653,534 shares of our
common stock and Warrants to purchase 326,767 shares of our common stock for
aggregate proceeds of approximately $1.87 million (the “Common Share
Financing”). Except for their issuance date, the Warrants issued in this
transaction have terms that are identical to those Warrants issued in the
Preferred Shares transaction described above.





History
and Corporate Structure





We were
incorporated in Nevada on October 30, 2006, originally under the name “Sino
Charter, Inc.”, with a principal business objective to provide internet-based
flight charter booking for East Asia. On January 12, 2009, we effected a
1-for-100 reverse split of our common stock by filing a Certificate of Amendment
to our Articles of Incorporation with the Nevada Secretary of State. We were a
development stage company with no operations since inception until the closing
of the share exchange transaction described below.





On February
13, 2009 (the “Closing Date”), we entered into a share exchange agreement (the
“Exchange Agreement”) with PXPF and its shareholders who, immediately prior
to the closing of the transactions contemplated by the Exchange Agreement (the
“Exchange Transaction”), collectively held 100% of PXPF’s issued and outstanding
share capital (the “BVI Shareholders”). On the Closing Date, we issued
14,560,000 shares of common stock to the BVI Shareholders in exchange for all of
their equity interests in PXPF.  The BVI Shareholders became our
controlling shareholders, PXPF became our wholly-owned subsidiary, and we
acquired the business and operations of PXPF. Immediately prior to the Exchange
Transaction, we had 1,454,421 shares of common stock outstanding, including
122,800 shares held by MMH Group, LLC, which is owned by Matt Hayden, who was
our then sole officer and director, as well as 343,840 shares held by Pope
Investments II LLC, which held more than 10% of our total outstanding prior to
the Exchange Transaction. Immediately after the Exchange Transaction, we had
16,014,421 shares of common stock outstanding. In connection with the Exchange
Transaction, we changed our name from “Sino Charter, Inc.” to “VLOV, Inc.” on
March 4, 2009, to better reflect our business operations.





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





PXPF was
incorporated in the British Virgin Islands on April 30, 2008. Other than holding
100% of the equity interests in HK Dong Rong, PXPF has no operations of its
own.





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




4




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





On
November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the
PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital
of $8 million. China Dong Rong, which currently conducts no business activities,
is deemed to be a wholly foreign owned enterprise, or WFOE, as its direct parent
company, HK Dong Rong, is not a PRC company. $4 million of the registered
capital has been funded, with the balance to be funded within two years from the
incorporation date. It is our intention and that of the equity owners of Yinglin
Jinduren to transfer all of the business operations currently conducted by
Yinglin Jinduren to China Dong Rong sometime in 2010.





Contractual
Arrangements with Yinglin Jinduren and its Owners





Our
relationships with Yinglin Jinduren and its owners are governed by a series of
contractual arrangements, as we (including our subsidiaries) do not own any
equity interests in Yinglin Jinduren. The contractual arrangements constitute
valid and binding obligations of the parties of such agreements. Each of the
contractual arrangements and the rights and obligations of the parties thereto
are enforceable and valid in accordance with the laws of the PRC. Under Chinese
laws, each of HK Dong Rong and Yinglin Jinduren is an independent legal entity
and neither of them is exposed to liabilities incurred by the other
party.





On
December 28, 2005, HK Dong Rong (then known as Korea Jinduren) entered into the
following contractual arrangements with Yinglin Jinduren:





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




5




Because
all of our business operations are conducted by Yinglin Jinduren, we have
generally allowed Yinglin Jinduren to retain its net income in the PRC in order
to support its operations. Additionally, Yinglin Jinduren was allowed to declare
dividends, which dividends were declared and paid to Yinglin Jinduren’s owners
prior to the Exchange Transaction. Yinglin Jinduren has not declared or paid any
dividend since the Exchange Transaction and will not do so in the
future.




Operating
Agreement.  Pursuant to the operating agreement among HK Dong
Rong, Yinglin Jinduren and the owners of Yinglin Jinduren who collectively hold
100% of the outstanding equity interests of Yinglin Jinduren (our chief
executive officer and his brother), HK Dong Rong provides guidance and
instructions on Yinglin Jinduren’s daily operations, financial management and
employment issues.  The owners of Yinglin Jinduren must designate the
candidates recommended by HK Dong Rong as their representatives on Yinglin
Jinduren’s board of directors.  HK Dong Rong has the right to appoint
senior executives of Yinglin Jinduren.  In addition, HK Dong Rong
agrees to guarantee the performance of Yinglin Jinduren under any agreements or
arrangements relating to Yinglin Jinduren’s business arrangements with any third
party.  Yinglin Jinduren, in return, agrees to pledge its accounts
receivable and all of its assets to HK Dong Rong.  Moreover, Yinglin
Jinduren agrees that without the prior consent of HK Dong Rong, Yinglin Jinduren
will not engage in any transactions that could materially affect the assets,
liabilities, rights or operations of Yinglin Jinduren, including, without
limitation, incurrence or assumption of any indebtedness, sale or purchase of
any assets or rights, incurrence of any encumbrance on any of its assets or
intellectual property rights in favor of a third party or transfer of any
agreements relating to its business operation to any third party.  The
term of this agreement is the maximum period of time permitted by law unless
sooner terminated by any other agreements reached by all parties or upon a
30-day written notice from HK Dong Rong.  The term may be extended
only upon HK Dong Rong’s written confirmation prior to the expiration of the
agreement, with the extended term to be mutually agreed upon by the
parties.





Equity Pledge
Agreement.
Under the equity pledge agreement between the owners of Yinglin Jinduren and HK
Dong Rong, the stockholders of Yinglin Jinduren pledged all of their equity
interests in Yinglin Jinduren to HK Dong Rong to guarantee Yinglin Jinduren’s
performance of its obligations under the consulting services
agreement.  If Yinglin Jinduren or its owners breach their respective
contractual obligations, HK Dong Rong, as pledgee, will be entitled to certain
rights, including, but not limited to, the right to vote with, control and sell
the pledged equity interests.  The owners of Yinglin Jinduren also
agreed, that upon occurrence of any event of default, HK Dong Rong shall be
granted an exclusive, irrevocable power of attorney to take actions in the place
and instead of the owners to carry out the security provisions of the equity
pledge agreement, and take any action and execute any instrument as required by
HK Dong Rong to accomplish the purposes of the equity pledge
agreement.  The owners of Yinglin Jinduren agreed not to dispose of
the pledged equity interests or take any actions that would prejudice HK Dong
Rong’s interest.  The equity pledge agreement will expire two years
from the fulfillment of Yinglin Jinduren’s obligations under the consulting
services agreement.





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





Proxy Agreement.  Pursuant to the
proxy agreement between HK Dong Rong and the owners of Yinglin Jinduren, the
owners agreed to irrevocably grant a designee of HK Dong Rong with the right to
exercise the owners’ voting and other rights, including the rights to attend and
vote at shareholders’ meetings (or by written consent in lieu of such meetings)
in accordance with applicable laws and Yinglin Jinduren’s governing
charters.  The proxy agreement may not be terminated without the
unanimous consent of all parties, except that HK Dong Rong may terminate the
proxy agreement with or without cause upon 30-day written notice to the
owners.




6




As a
result of the these contractual arrangements between HK Dong Rong and Yinglin
Jinduren, we are considered the primary beneficiary of Yinglin Jinduren and
Yinglin Jinduren is deemed our variable interest entity (“VIE”).





Our
Current Corporate Structure





The
following diagram illustrates our current corporate structure:











(1)
            Our management includes: Mr.
      Qingqing Wu as Chairman and Chief Executive Officer, Mr. Yushan Zheng
      as Chief Financial Officer, and Dr. Jianwei Shen, Mr. Zhifan Wu, Mr.
      Yuzhen Wu, Mr. Congming Xie and Ms. Ying Zhang as members of the board of
      directors. As of April 6, 2010: Mr. Qingqing Wu owns
      approximately 57.57% of our issued and outstanding common stock; Mr.
      Yushan Zheng, Dr. Jianwei Shen, Mr. Zhifan Wu, Mr. Yuzhan Wu, Mr. Congming
      Xie and Ms. Ying Zhang do not own any shares of common
      stock.





(2)
            The management of PXPF is
      comprised of Mr. Qingqing Wu as its sole director.  We are
      the sole shareholder of
PXPF.





(3)
            The management of HK Dong Rong is
      comprised of Mr. Qingqing Wu as Chairman and Mr. Lileng Lin as
      Director. PXPF is the sole
shareholder.





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





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




7




(6)
            The management of China Dong Rong
      is comprised of Mr. Qingqing Wu as executive
    director.





Our Products





We
currently design and distribute a broad array of men’s apparel.  Our
current product lines include the following: jeans, jackets, undershirts,
t-shirts, shirts, windbreakers, sweaters, cotton wear, knit wear and
accessories. Our 2009 revenue breakdown by product line was as follows: 30%
jeans; 24% shirts, undershirts and windbreakers; 15% jackets; 16% t-shirts; 5%
cotton wear; and 10% other clothing and accessories.




Our
Distribution Channel and Customers





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




Distributor
              Geographical
                Location
              
              Fiscal
      2009
                Sales (RMB)
              
              
              Fiscal
      2009
                Sales (US$) *
              
              %
      of SalesC-002
      of Mingzhu 100 Market
              Zhejiang
              
              
              83,256,840
              
              $
              12,206,285
              
              
              18.97
              %Jinyang
      Commerce Co., Ltd.
              Hubei
              
              
              59,420,579
              
              $
              8,711,651
              
              
              13.54
              %Jingduren
      Store, Tianqiao District, Jinan
              Shandong
              
              
              49,135,132
              
              $
              7,203,702
              
              
              11.20
              %Clothwork
      Apparel, Wanma Plaza
              Jiangxi
              
              
              47,724,795
              
              $
              6,996,932
              
              
              10.87
              %Yunfang
      Jingduren Store
              Yunnan
              
              
              43,276,857
              
              $
              6,344,820
              
              
              9.86
              %Jinduren
      Store, Shenhe District
              Liaoning
              
              
              33,392,242
              
              $
              4,895,637
              
              
              7.61
              %Yinji
      Fuchun Apparel
              Henan
              
              
              31,841,242
              
              $
              4,668,244
              
              
              7.26
              %Jinduren
      Store in Duocai Xintiandi
              Shaanxi
              
              
              31,610,646
              
              $
              4,634,437
              
              
              7.20
              %Nachun
      Li
              Guangxi
              
              
              29,739,903
              
              $
              4,360,167
              
              
              6.78
              %Xinshiji
      Apparel City
              Beijing
              
              
              20,207,711
              
              $
              2,962,652
              
              
              4.60
              %Jiaming
      Tang
              Sichuan
              
              
              5,657,487
              
              $
              829,444
              
              
              1.29
              %Fujian
      Minhou Yonghui Business Company Ltd.
              Fujian
              
              
              3,610,127
              
              $
              529,441
              
              
              0.82
              %








* Based
on an average exchange rate of 1RMB = 0.14661 USD for the year ended December
31, 2009, as quoted on www.oanda.com.





As of
December 31, 2009, our products were sold by our distributors at 742 V·LOV
retail locations operated by our distributors throughout northern, central and
southern China. These retail locations, also known as points of sales (“POS”),
include counters, concessions, free standing stores and store-in-stores. We do
not own or operate any V·LOV retail locations ourselves; the POS are established
and owned by our distributors, each of whom operates its network of POS directly
or through third-party retail operators. A geographical breakdown of V·LOV POS
operated by our distributors as of December 31, 2009, is as
follows:





Province/City:
                      
                      Number
      of POSBeijing
                      
                      
                      39Zhejiang
                      
                      
                      103Shandong
                      
                      
                      94Jiangxi
                      
                      
                      90Yunnan
                      
                      
                      77Shaanxi
                      
                      
                      66Liaoning
                      
                      
                      49Hubei
                      
                      
                      103Henan
                      
                      
                      66Guangxi
                      
                      
                      42Sichuan
                      
                      
                      10Fujian
                      
                      
                      3




8




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




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





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




·
              operational
      and managerial experience of casual wear retail
  locations;
 ·
              the
      ability to develop and operate a network of retail locations in its
      designated sales region;


·
                  the
      perceived ability to meet our sales
targets;


·
              the
      suitability of its POS locations and size;
and


·
              overall
      creditworthiness.





We
identify suitable distributors and enter into distributorship agreements,
generally for a term of up to 12 months, renewable on a year to year basis upon
the distributor meeting certain criteria.  We set guidelines for our
distributors in respect of the location, store layout and product display of
their V·LOV POS.  We allow our distributors to use authorized
third-party retail operators to operate their V·LOV POS.  Distributors
must obtain our prior written approval before appointing a third-party retail
operator.





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





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




9




Our
Suppliers and Manufacturers





Although
we have our own manufacturing capacity at our Yinglin facility, the most
important function of that facility is to support our research and development
department in sample and prototype designs and other research and development
activities. We outsource approximately 80% to 90% of our manufacturing to
independent third-party factories as a part of our overall sourcing strategy.
Outsourcing work allows us to maximize production flexibility while managing
capital expenditures and minimizing the costs of maintaining what would
otherwise be a large workforce.





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





Our
outsourcing varies seasonally depending upon such factors as current factory
capacity and customer demand. We currently work with 17 O.E.M. manufacturers. We
do not execute agreements with them since there are many well-qualified clothing
manufacturers to choose from and any of them can be readily replaced. However,
we have established good working relationships with all of the manufacturers
that we work with and do not expect to replace any of them. Prior to entering
into a relationship with an O.E.M. manufacturer, we review and assess their
product quality thoroughly. We generally agree to pay our O.E.M. manufacturers
within 30-60 days after dispatching finished goods to our distributors. We
typically place orders with our O.E.M. manufacturers when we receive orders from
our distributors.




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





In 2009,
two suppliers accounted for 10% or more of our total supply purchases for our
own production: Zhongshan Luzhicheng Garment Co., Ltd. for 11.46% and Shishi
City Jiexing Apparel Industry Development Co., Ltd. for 11.50%. The same
suppliers accounted for 15.31% and 38.17% of total supply purchases,
respectively, in 2008. To date, we have not experienced any significant
difficulty in obtaining materials that are essential to our
business.





Our
Sales and Marketing





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





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





Our
advertising expenses were RMB 21,684,000 (US$3,179,000) and RMB 18,618,000
(US$2,684,000) for 2009 and 2008 respectively, representing 34% and 43% of our
operating costs for these periods, respectively.





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




10




Production
and Quality Control





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





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


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


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


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


·
            final
      audit the products before products are
  delivered.




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





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





Logistics
and Inventory





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





Competition





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





We
believe that our chief competitive strength is our in-depth and thorough
understanding of our targeted customer groups in China. Our design team led by
Mr. Qingqing Wu, our chief executive officer, with inputs from our
distributors, formulates new design concepts by analyzing information on global
and local fashion trends and market research. Prototypes are reviewed by our
distributors and marketing team and further refined based on evaluations carried
out by marketing personnel before showcasing the final designs at our sales
fairs.





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




11




Intellectual
Properties and Licenses





We
presently have 19 trademarks registered with the Trademark Bureau of the State
Administration of Industry and Commerce of the PRC (the “PRC Trademark Office”),
which are issued for a period of 10 years. Additionally, we have licensed 4
trademarks registered with the PRC Trademark Office from Mr. Qingqing Wu, our
chief executive officer, pursuant to trademark license contracts that have
irrevocably and perpetually granted us the right to use such trademarks in the
PRC for free.




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





Governmental
Regulations





Fabric
Safety





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





Enterprise
Taxation





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





Value
Added Tax





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





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




12




Environmental
Protection Regulations





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





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




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





Foreign
Exchange Controls




Pursuant
to the Foreign Currency Administration Rules promulgated in 1996, as amended and
various regulations issued by the State Administration of Foreign Exchange
(“SAFE”), and other relevant PRC government authorities, RMB is convertible
without prior approval from SAFE only to the extent of current account items,
such as trade-related receipts and payments, interest and dividends and after
complying with certain procedural requirements. Capital account items, such as
direct equity investments, loans and repatriation of investments, require the
prior approval from the SAFE or its local counterpart for conversion of RMB into
a foreign currency, such as U.S. dollars, and remittance of the foreign currency
outside the PRC.
 
 Payments
for transactions that take place within the PRC must be made in RMB.
Foreign-invested enterprises may retain foreign exchange in accounts with
designated foreign exchange banks subject to limitations set by the SAFE or its
local counterpart. Unless otherwise approved, domestic enterprises must convert
all of their foreign currency receipts into RMB.


13




Pursuant
to the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Control on
Domestic Residents’ Corporate Financing and Roundtrip Investment Through
Offshore Special Purpose Vehicles, or Circular No. 75, issued on
October 21, 2005, (i) a PRC citizen residing in the PRC, or PRC
resident, shall register with the local branch of the SAFE before it establishes
or controls an overseas special purpose vehicle, or overseas SPV, for the
purpose of overseas equity financing (including convertible debts financing);
(ii) when a PRC resident contributes the assets of or its equity interests
in a domestic enterprise into an overseas SPV, or engages in overseas financing
after contributing assets or equity interests to an overseas SPV, such PRC
resident shall register his or her interest in the overseas SPV and the change
thereof with the local branch of the SAFE; and (iii) when the overseas SPV
undergoes a material event outside of China, such as change in share capital or
merger and acquisition, the PRC resident shall, within 30 days from the
occurrence of such event, register such change with the local branch of the
SAFE. On May 29, 2007, the SAFE issued relevant guidance to its local
branches for the implementation of Circular No. 75. This guidance
standardizes more specific and stringent supervision on the registration
requirement relating to Circular No. 75 and further requires PRC residents
holding any equity interests or options in SPVs to register with the SAFE.
Failure to comply with such registration requirement may result in liability
under PRC laws for evasion of applicable foreign exchange
restrictions.
 
 Although
Mr. Qingqing Wu, our principal shareholder, resides in the PRC, he is a foreign
national. As such, he has not registered with the local branch of the SAFE under
Circular No. 75.




Seasonality





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





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





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





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


·
            consumer
      acceptance of our new and existing
products;


·
            changes
      in the overall clothing industry growth
rates;


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


·
            the
      mix of products ordered by our
distributors;


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




14




·
            variations
      in the expenditure necessary to support our
  business.





Employees





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





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




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





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




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





Compliance
with Environmental Laws





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





Principal
Executive Office





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





ITEM
1A.  RISK FACTORS





RISK FACTORS





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




15




Risks
Relating to Our Industry





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





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





Intense
competition in the worldwide apparel industry could reduce our sales and
prices.




We face a
variety of competitive challenges from other apparel producers both in China and
other countries.  Some of these competitors have greater financial and
marketing resources than we do and may be able to adapt to changes in consumer
preferences or retail requirements more quickly, devote greater resources to the
marketing and sale of their products or adopt more aggressive pricing policies
than we can.  As a result, we may not be able to compete successfully
with them if we cannot continue enhancing our marketing and management
strategies, quality and value or respond appropriately to consumer
needs.




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




We face
intense competition in the apparel industry from other established
companies.  A number of our competitors may have significantly greater
financial, technological, manufacturing, sales, marketing and distribution
resources than we do.  Their greater capabilities in these areas may
enable them to better withstand periodic downturns in the apparel industry,
compete more effectively on the basis of price and production and more quickly
develop new products.  In addition, new companies may enter the
markets in which we compete, further increasing competition in the
industry.  We believe that our ability to compete successfully depends
on a number of factors, including the style and quality of our products and the
strength of our brand name, as well as many factors beyond our
control.  We may not be able to compete successfully in the future,
and increased competition may result in price reductions, reduced profit
margins, loss of market share and an inability to generate cash flows that are
sufficient to maintain or expand our development and marketing of new products,
which would adversely impact the trading price of our common stock.




The
worldwide apparel industry is subject to ongoing pricing pressure.





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





·
            require
      us to reduce wholesale prices on existing
  products;


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


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




16




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





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





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





For the
fiscal year ended December 31, 2009, two suppliers accounted for 11.50% and
11.46%, respectively, of our total supply purchases for our own production. For
the fiscal year ended December 31, 2008, the same two suppliers accounted for
38.17% and 15.31%, respectively, of our total supply purchases.  We do
not have any long-term written agreements with any of our suppliers and do
not anticipate entering into any such agreements in the near
future.  We do not believe that the loss of any of these suppliers
would have a material adverse effect on our ability to obtain finished goods or
raw materials essential to our business because we believe we can locate other
suppliers in a timely manner.




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




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




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




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




Risks
Relating to Our Business





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




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





·
            maintain our market
      position;





·
            attract additional customers and
      increase spending per
customer;





·
            respond to competitive market
      conditions;




17




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





·
            respond to changes in our
      regulatory environment;





·
            maintain effective control of our
      costs and expenses;





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





·
            attract, retain and motivate
      qualified personnel.





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




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




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




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




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




We
rely on our distributors to operate our retail network.




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




18




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




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




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




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




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




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




We sell
our product to certain distributors on open account with 60 to 90 day
payment terms, but these arrangements are not always
possible.  Financial difficulties of our distributors could result in
losses for our Company.




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




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


19


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




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




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





Presently
we have distribution agreements with 12 distributors.  For the year
ended December 31, 2009, our five largest distributors represented 64.44% of our
total net sales. A decision by a major distributor, whether motivated by
competitive considerations, strategic shifts, financial requirements or
difficulties, economic conditions or otherwise, to decrease its purchases from
us or to change its manner of doing business with us, could adversely affect our
business and financial condition. In addition, although we have long-standing
relationships, we do not have long term contracts with any of our distributors.
We identify suitable distributors and enter into distributorship agreements,
generally for a term of up to 12 months, renewable on a year to year basis upon
satisfying certain criteria.




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





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





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





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


20


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





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





Business interruptions could adversely affect our
business.





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





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





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





Risks
Related to Our Corporate Structure




We conduct our
business through Yinglin Jinduren by means of contractual arrangements. If the
Chinese government determines that these contractual arrangements do not comply
with applicable regulations, our business could be adversely
affected.If the PRC
regulatory bodies determine that the agreements that establish the structure for
operating our business in China do not comply with PRC regulatory restrictions
on foreign investment, we could be subject to severe penalties. In addition,
changes in such Chinese laws and regulations may materially and adversely affect
our business.





There are
uncertainties regarding the interpretation and application of PRC laws, rules
and regulations, including but not limited to the laws, rules and regulations
governing the validity and enforcement of the contractual arrangements between
HK Dong Rong and Yinglin Jinduren. Although we have been advised by our PRC
counsel, that based on their understanding of the current PRC laws, rules and
regulations, the structure for operating our business in China (including our
corporate structure and contractual arrangements with Yinglin Jinduren and its
owners, as well our ability to enforce our rights thereunder) comply with all
applicable PRC laws, rules and regulations, and do not violate, breach,
contravene or otherwise conflict with any applicable PRC laws, rules or
regulations, we cannot assure you that the PRC regulatory authorities will not
determine that our corporate structure and contractual arrangements violate PRC
laws, rules or regulations. If the PRC regulatory authorities determine that our
contractual arrangements are in violation of applicable PRC laws, rules or
regulations, our contractual arrangements will become invalid or unenforceable.
In addition, new PRC laws, rules and regulations may be introduced from time to
time to impose additional requirements that may be applicable to our contractual
arrangements. For example, the PRC Property Rights Law that became effective on
October 1, 2007 may require us to register with the relevant government
authority the security interests on the equity interests in Yinglin Jinduren
granted to us under the equity pledge agreements that are part of the
contractual arrangements. If we are required to register such security
interests, failure to complete such registration in a timely manner may make
such equity pledge agreements unenforceable against third party
claims.


21


The
Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future Chinese laws or regulations.
As a result, we may be subject to sanctions, including fines, and could be
required to restructure our operations or cease to provide certain services. Any
of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.





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





·
            revoking
      the business and operating licenses of our PRC consolidated
      entities;


·
            discontinuing
      or restricting the operations of our PRC consolidated
      entities;


·
            imposing
      conditions or requirements with which we or our PRC consolidated entities
      may not be able to comply;


·
            requiring
      us or our PRC consolidated entities to restructure the relevant ownership
      structure or operations;


·
            restricting
      or prohibiting our use of the proceeds from raising capital to finance our
      business and operations in China;
or


·
            imposing
      fines.





The
imposition of any of these penalties would severely disrupt our ability to
conduct business and have a material adverse effect on our financial condition,
results of operations and prospects.





Our
contractual arrangements with Yinglin Jinduren and its owners may not be as
effective in providing control over these entities as direct
ownership.




We have
no equity ownership interest in Yinglin Jinduren, and rely on contractual
arrangements to control and operate the company and its businesses. These
contractual arrangements may not be as effective in providing control over the
company as direct ownership. For example, Yinglin Jinduren could fail to take
actions required for our business despite its contractual obligation to do so.
If Yinglin Jinduren fails to perform under its agreements with us, we may have
to rely on legal remedies under Chinese law, which may not be effective. In
addition, we cannot assure you that the owners of Yinglin Jinduren will act in
our best interests.




Because
we rely on the consulting services agreement with Yinglin Jinduren for our
income, the termination of this agreement will severely and detrimentally affect
our continuing business viability under our current corporate
structure.





We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between HK Dong Rong, our indirect
wholly owned subsidiary, and Yinglin Jinduren. As a result, we currently rely
entirely for our income on the fees we earn from Yinglin Jinduren pursuant to
the consulting services agreement which forms a part of the contractual
arrangements. The consulting services agreement may be terminated by written
notice of HK Dong Rong or Yinglin Jinduren in the event that: (a) Yinglin
Jinduren causes a material breach of the agreement, provided that if the breach
does not relate to a financial obligation of the breaching party, that party may
attempt to remedy the breach within 14 days following the receipt of the written
notice; (b) one party becomes bankrupt, insolvent, is the subject of proceedings
or arrangements for liquidation or dissolution, ceases to carry on business, or
becomes unable to pay its debts as they become due; (c) HK Dong Rong terminates
its operations; or (d) circumstances arise which would materially and adversely
affect the performance or the objectives of the agreement. Additionally, HK Dong
Rong may terminate the consulting services agreement without cause. Because
neither we nor our direct and indirect subsidiaries own equity interests of
Yinglin Jinduren, the termination of the consulting services agreement would
sever our ability to continue receiving payments from Yinlin Jinduren under our
current holding company structure. Although we are currently not aware of any
event or reason that may cause the consulting services agreement to terminate,
we cannot assure you that such an event or reason will not occur in the future.
In the event that the consulting services agreement is terminated, this may have
a severe and detrimental effect on our continuing business viability under our
current corporate structure, which in turn may affect the value of your
investment.


22


We
rely principally on payments from Yinglin Jinduren to fund any cash and
financing requirements we may have, and any limitation on the ability of Yinglin
Jinduren to make such payments to us could have a material adverse effect on our
ability to conduct our business.





We are a
holding company, and rely principally on payments from Yinglin Jinduren under
the consulting services agreement for cash requirements, including the funds
necessary to service any debt we may incur. In particular, we rely on earnings
generated by Yinglin Jinduren, which are passed on to us through HK Dong Rong.
If Yinglin Jinduren incurs debt in its own name in the future, the instruments
governing such debt may restrict its ability to make payments to us. In
addition, the PRC tax authorities may require us to adjust our taxable income
under the contractual arrangements HK Dong Rong currently has in place with
Yinglin Jinduren, in a manner that would materially and adversely affect our
ability to pay dividends and other distributions.




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




Mr.
Qingqing Wu, our Chief Executive Officer, is also the Chairman of Yinglin
Jinduren and owns 65.91% of its equity ownership interests. Mr. Yushan Zheng,
who is our Chief Financial Officer, is the Chief Financial Officer of Yinglin
Jinduren. Mr. Zhifan Wu, who is one of our directors and a brother of Mr.
Qingqing Wu, is the Executive Director of Yinglin Jinduren and owns 34.09% of
its equity ownership interests. Conflicts of interest between their respective
duties to our company and Yinglin Jinduren may arise. As our directors and
executive officers, they have a duty of loyalty and care to us under U.S. and
Hong Kong law when there are any potential conflicts of interest between our
company and Yinglin Jinduren. We cannot assure you, however, that when conflicts
of interest arise, every one of them will act completely in our interests or
that conflicts of interest will be resolved in our favor. For example, they may
determine that it is in Yinglin Jinduren’s interests to sever the contractual
arrangements with HK Dong Rong, irrespective of the effect such action may have
on us. In addition, any one of them could violate his legal duties by diverting
business opportunities from us to others, thereby affecting the amount of
payment that Yinglin Jinduren is obligated to remit to us under the consulting
services agreement.




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





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





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


Our
principle shareholder may be subject to registration requirement under current
regulations relating to offshore investment activities by PRC residents, the
non-compliance of which may subject us to fines and sanctions that could
adversely affect our business.
 
 In
October 2005, the State Administration of Foreign Exchange (“SAFE”) promulgated
Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’
Corporate Financing and Roundtrip Investment Through Offshore Special Purpose
Vehicles, or Circular 75, that states that if PRC citizens residing in the
PRC, or PRC residents, uses assets or equity interests in their PRC entities as
capital contributions to establish offshore companies or inject assets or equity
interests of their PRC entities into offshore companies to raise capital
overseas, they must register with local SAFE branches with respect to their
overseas investments in offshore companies. They must also file amendments to
their registrations if their offshore companies experience material events
involving capital variation, such as changes in share capital, share transfers,
mergers and acquisitions, spin-off transactions, long-term equity or debt
investments or uses of assets in China to guarantee offshore obligations. Under
this regulation, their failure to comply with the registration procedures set
forth in such regulation may result in restrictions being imposed on the foreign
exchange activities of the relevant PRC entity, including the payment of
dividends and other distributions to its offshore parent, as well as
restrictions on the capital inflow from the offshore entity to the PRC
entity.
 
 Although
Mr. Qingqing Wu, our principal shareholder, resides in the PRC, he is a foreign
national. As such, he has not registered with the local branch of the SAFE under
Circular No. 75. However, we cannot provide any assurance that SAFE may
nevertheless require Mr. Wu to comply with such registration requirement. Should
SAFE make such determination, failure to comply could subject us to fines or
sanctions imposed by the PRC government, which may adversely affect our
business.




23


Risks
Related to Doing Business in China





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




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





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





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





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




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





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





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


24


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




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





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





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





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





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




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





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




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


25


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





The PRC
Enterprise Income Tax Law, or the EIT Law, and the implementation regulations
for the EIT Law issued by the PRC State Council, became effective as of
January 1, 2008. The EIT Law provides that a maximum income tax rate of 20%
is applicable to dividends payable to non-PRC investors that are “non-resident
enterprises,” to the extent such dividends are derived from sources within the
PRC, and the State Council has reduced such rate to 10% through the
implementation regulations. We have incorporated a wholly-owned subsidiary in
the PRC, China Dong Rong, which is deemed to be a wholly foreign owned
enterprise (“WFOE”). Although China Dong Rong does not currently conduct any
business, we intend for it do so in the future. If and when China Dong Rong
commences business operations, and elects to pay dividends, any such dividends
paid to us may be subject to the 10% income tax if we are considered as a
“non-resident enterprise” under the EIT Law. If we are required under the EIT
Law and its implementation regulations to pay income tax for any dividends we
receive from our WFOE, it may have a material and adverse effect on our net
income and materially reduce the amount of dividends, if any, we may pay to our
shareholders.





We
face risks related to health epidemics and other outbreaks.




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





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




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




Risks
Related to an Investment in Our Securities




Our
common stock has limited liquidity.





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





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





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


26


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





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





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





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





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





·
            receipt
      of substantial orders or order cancellations of
  products;


·
            quality
      deficiencies in services or
products;


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


·
            changes
      in recommendations of securities
analysts;


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


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


·
            energy
      blackouts;


·
            acts
      of terrorism and war;


·
            widespread
      illness;


·
            proprietary
      rights or product or patent
litigation;


·
            strategic
      transactions, such as acquisitions and
  divestitures;


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


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





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





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





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


27


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





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





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





Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
“penny stocks” has suffered in recent years from patterns of fraud and
abuse.  Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses.  Our management is aware of the
abuses that have occurred historically in the penny stock
market.  Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
The occurrence of these patterns or practices could increase the future
volatility of our share price.




Our
corporate actions are substantially controlled by our principal shareholders and
affiliated entities.




Our
principal shareholders, which includes certain of our officers and directors,
and their affiliated entities, own approximately 59.98% of our outstanding
shares of common stock. These shareholders, acting individually or as a group,
could exert substantial influence over matters such as electing directors and
approving mergers or other business combination transactions.  In
addition, because of the percentage of ownership and voting concentration in
these principal shareholders and their affiliated entities, elections of our
board of directors will generally be within the control of these shareholders
and their affiliated entities. Although all of our shareholders are entitled to
vote on matters submitted to our shareholders for approval, the concentration of
shares and voting control presently lies with these principal shareholders and
their affiliated entities. As such, it would be difficult for shareholders to
propose and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all of our
shareholders.





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





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


28


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





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





If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent material
misstatements.




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




ITEM
1B. UNRESOLVED STAFF COMMENTS




As we are
not an accelerated filer or a large accelerated filer, as such terms are defined
in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or a
well-known seasoned issuer as defined in Rule 405 of the Securities Act of 1933,
as amended, we are not required to make disclosures under this
item.





ITEM
2. DESCRIPTION OF PROPERTY





The table
below provides a general description of our current offices and facilities,
which are located in Fujian Province, China.




Location
              
              Principal Activities
              
              Area (sq.
                meters)
              
              Lease Expiration Date11/F.,
      Xiamen Guanyin Shan
                International
      Commercial Operation
                Centre,
      A3-2 124
                Hubin
      Bei Road, Siming District,
                Xiamen,
      Fujian Province, PRC
              
              Marketing,
      R&D,
                accounting
      and finance
              
              1,376
              
              October
      7, 2012Yinglin
      Dongpu Village, Yilin
                Town,
      Jinjiang City, Fujian Province,
                PRC
      362200
              
              Manufacturing
      and
                distribution
              
              2,859
              
              N/A
      (property owned by V·LOV)


29


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





ITEM
3. LEGAL PROCEEDINGS





We know
of no material, active, pending or threatened proceeding against us or our
subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or
defendant in any material proceeding or pending litigation.




PART II




ITEM 5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





Market
Information





On April
2, 2008, our shares of common stock commenced trading on the Over-The-Counter
Bulletin Board (the “OTCBB”) under the symbol “SNOH.” On January 16, 2009, in
connection with a 1-for-100 reverse split of our issued and outstanding shares
of common stock, our symbol changed to “SICI.”  On March 20, 2009, in
connection with our name change, our symbol changed to “VLOV.”





The
following table sets forth the high and low bid information for our common stock
for each quarter within our last two fiscal years and interim periods, as
reported by the OTC Bulletin Board. The bid prices reflect inter-dealer
quotations, do not include retail markups, markdowns, or commissions, and do not
necessarily reflect actual transactions.




Low
                        
                        
                        High2010Quarter
      ended March 31, 2010
                        
                        $
                        4.00
                        
                        
                        $
                        7.002009Quarter
      ended December 31, 2009
                        
                        $
                        2.95
                        
                        
                        $
                        7.50Quarter
      ended September 30, 2009
                        
                        
                        1.00
                        
                        
                        
                        5.50Quarter
      ended June 30, 2009
                        
                        
                        1.25
                        
                        
                        
                        2.50Quarter
      ended March 31, 2009 *
                        
                        
                        0.28
                        
                        
                        
                        8.002008Quarter
      ended December 31, 2008*
                        
                        $
                        5.00
                        
                        
                        $
                        5.00Quarter
      ended September 30, 2008*
                        
                        
                        13.00
                        
                        
                        
                        13.00Quarter
      ended June 30, 2008 * **
                        
                        
                        10.00
                        
                        
                        
                        10.00




* Price
adjusted to reflect 1-for-100 reverse split effected January 12,
2009.


** Our
common stock had no active trading market until April 2, 2008.





The last
reported closing sales price for shares of our common stock was $5.20 per share
on the OTCBB on April 9, 2010.





Holders





As of
April 6, 2010, we had 50 stockholders of record of our common stock based upon
the stockholder list provided by our transfer agent.


30


Dividends





We have
never paid cash dividends on our common stock.  We intend to keep
future earnings, if any, to finance the expansion of our business, and we do not
anticipate that any cash dividends will be paid in the foreseeable
future.  Our future payment of dividends will depend on our earnings,
capital requirements, expansion plans, financial condition and other relevant
factors that our board of directors may deem relevant.  Our retained
earnings deficit currently limits our ability to pay dividends.





Recent
Sales of Unregistered Securities





During
the year ended December 31, 2009, we did not sell any equity securities not
registered under the Securities Act of 1933, as amended, that were not
previously disclosed in a quarterly report on Form 10-Q or on a current report
on Form 8-K.





ITEM
6. SELECTED FINANCIAL DATA





Not
applicable.





ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




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





Overview





We
design, develop, manufacture, distribute and sell casual apparel and clothing
products in the PRC targeted toward middle-class Chinese men under the brand
name “V·LOV”.  We sell our products to our independent distributors,
each of whom is granted rights to market and sell our products in a defined
market or territory.  As of December 31, 2009, we had agreements with
12 distributors throughout northern, central and southern
China.  After distributors place purchase orders for our products,
such products are manufactured by us and our outsourced manufacturers and
delivered to our distributors.  As of December 31, 2009, our
distributors owned and operated 742 points of sales, or POS, across the PRC,
including counters, concessions and free standing stores and
store-in-stores.  We maintain and exercise control over advertising
and marketing activities from our headquarters in Fujian, China, where we set
the tone for integrity, consistency and direction of the V·LOV brand image
throughout China.





All of
our business operations are carried out by our variable interest entity Jinjiang
Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control through
contractual arrangements between Yinglin Jinduren and our wholly-owned
subsidiary Dong Rong Capital Investment Limited (“HK Dong Rong”), a Hong Kong
company.  Through these contractual arrangements, we have the ability
to control Yinglin Jinduren’s daily operations and financial affairs, appoint
its senior executives and approve all matters requiring shareholder approval,
and receive a fee equal to Yinglin Jinduren’s net income. As a result of these
contractual arrangements, we are considered the primary beneficiary of Yinglin
Jinduren’s operations. Accordingly, we consolidate Yinglin Jinduren’s results,
assets and liabilities in our financial statements.  Mr. Qingqing Wu,
our Chief Executive Officer, and his brother Mr. Zhifan Wu, a director of our
Company, hold 65.91% and 34.09%, respectively, of the ownership interests of
Yinglin Jinduren.


31


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.





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





Basis
of presentation and consolidation





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





Revenue
Recognition





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





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




Accounts
receivable





Accounts
receivable, which are unsecured, are stated at the amount we expect to collect.
We continuously monitor collections and payments from our customers and maintain
a provision for estimated credit losses based upon historical experience and any
specific customer collection issues that have been identified. Our credit losses
have historically not been significant. As of December 31, 2009 and 2008, all of
the trade receivable balances were aged less than 90 days and have been
collected in full subsequent to the balance sheet date. Therefore, management
concluded that no allowance for uncollectible amounts was
required.


32


Income
Taxes





We are
subject to income taxes, primarily in the PRC. We believe we have adequately
provided for all taxes due but amounts asserted by tax authorities could be
greater or less than the amounts we have accrued. We have concluded all PRC
corporate income tax matters through fiscal year 2009 and do not anticipate
adjustments as a result of any tax audits within the next twelve
months.





Derivative
instruments





In
connection with the sale of debt or equity instruments, we may sell warrants to
purchase our common stock. In certain circumstances, these warrants may be
classified as derivative liabilities, rather than as equity. Additionally, the
debt or equity instruments may contain embedded derivative instruments, such as
conversion options, which in certain circumstances may be required to be
bifurcated from the associated host instrument and accounted for separately as a
derivative instrument liability.





The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income in the period in which the changes occur. At
December 31, 2009, the warrants that we issued in 2009 in connection with sales
of our series A convertible preferred stock and our common stock are accounted
for as derivative instrument liabilities, We determine the fair value of these
instruments using a binomial option pricing model. That model requires the use
of a number of assumptions, including our expected dividend yield and the
expected volatility of our common stock price over the life of the instruments.
Because of the limited trading history for our common stock, we have estimated
the future volatility of our common stock price based on the historical
experience of other entities considered comparable to us. The identification of,
and accounting for, derivative instruments and the assumptions used to value
them can significantly affect our financial statements.





Results
of Operations




Year Ended December 31,2009
                
                
                2008(Amounts in thousands, in U.S. Dollars, except for percentages)Sales
                
                $
                64,343
                
                
                
                100.00
                %
                
                $
                51,867
                
                
                
                100.00
                %Gross
      Profit
                
                $
                23,263
                
                
                
                36.15
                %
                
                $
                18,551
                
                
                
                35.77
                %Operating
      Expenses
                
                $
                9,694
                
                
                
                15.07
                %
                
                $
                6,249
                
                
                
                12.05
                %Income
      From Operations
                
                $
                13,569
                
                
                
                21.08
                %
                
                $
                12,302
                
                
                
                23.72
                %Other
      Expenses / (Income)
                
                $
                (982
                )
                
                
                (1.53
                )%
                
                $
                44
                
                
                
                0.08
                %Income
      Tax Expense
                
                $
                4,106
                
                
                
                6.38
                %
                
                $
                3,065
                
                
                
                5.91
                %Net
      Income
                
                $
                10,445
                
                
                
                16.23
                %
                
                $
                9,193
                
                
                
                17.73
                %





Sales





Sales
were $64,343,000 for the year ended December 31, 2009 compared with $51,867,000
for 2008, an increase of $12,476,000 or 24%.  We generate revenue
primarily from the sales of our apparel products to our distributors, who retail
them throughout northern, central and southern China.  These retail
locations, also known as points of sales (“POS”), include counters, concessions,
free standing stores and store-in-stores. We do not own or operate any V·LOV
retail locations ourselves; the POS are established and owned by our
distributors, each of whom operates its network of POS directly or through
third-party retail operators. The increase in our sales was primarily
attributable to our marketing efforts and the increase in the number of POS in
our distributors’ retail sales network, from 689 in 2008 to 742 in
2009.


33


The
following table sets forth the geographical breakdown of our total sales revenue
for the periods indicated:




Year Ended December 31,2009
                                    
                                    
                                    2008(Amounts in thousands, in U.S. Dollars,
                                      except for percentages)$
                                    
                                    
                                    % of total
                                      sales revenue
                                    
                                    
                                    $
                                    
                                    
                                    % of total
                                      sales revenue
                                    
                                    
                                    Growth (Decline)
                                      in 2009
                                      compared
                                      with 2008Beijing
                                    
                                    $
                                    2,963
                                    
                                    
                                    
                                    4.60
                                    %
                                    
                                    $
                                    1,707
                                    
                                    
                                    
                                    3.29
                                    %
                                    
                                    
                                    73.58
                                    %Zhejiang
                                    
                                    $
                                    12,206
                                    
                                    
                                    
                                    18.97
                                    %
                                    
                                    $
                                    13,361
                                    
                                    
                                    
                                    25.76
                                    %
                                    
                                    
                                    (8.64
                                    )%Shandong
                                    
                                    $
                                    7,204
                                    
                                    
                                    
                                    11.20
                                    %
                                    
                                    $
                                    5,407
                                    
                                    
                                    
                                    10.42
                                    %
                                    
                                    
                                    33.23
                                    %Jiangxi
                                    
                                    $
                                    6,997
                                    
                                    
                                    
                                    10.87
                                    %
                                    
                                    $
                                    7,910
                                    
                                    
                                    
                                    15.25
                                    %
                                    
                                    
                                    (11.54
                                    )%Yunnan
                                    
                                    $
                                    6,345
                                    
                                    
                                    
                                    9.86
                                    %
                                    
                                    $
                                    4,854
                                    
                                    
                                    
                                    9.36
                                    %
                                    
                                    
                                    30.72
                                    %Shanxi
                                    
                                    $
                                    4,634
                                    
                                    
                                    
                                    7.20
                                    %
                                    
                                    $
                                    3,051
                                    
                                    
                                    
                                    5.88
                                    %
                                    
                                    
                                    51.88
                                    %Liaoning
                                    
                                    $
                                    4,896
                                    
                                    
                                    
                                    7.61
                                    %
                                    
                                    $
                                    2,741
                                    
                                    
                                    
                                    5.29
                                    %
                                    
                                    
                                    78.62
                                    %Hubei
                                    
                                    $
                                    8,712
                                    
                                    
                                    
                                    13.54
                                    %
                                    
                                    $
                                    6,600
                                    
                                    
                                    
                                    12.72
                                    %
                                    
                                    
                                    32.00
                                    %Henan
                                    
                                    $
                                    4,668
                                    
                                    
                                    
                                    7.26
                                    %
                                    
                                    $
                                    2,915
                                    
                                    
                                    
                                    5.62
                                    %
                                    
                                    
                                    60.14
                                    %Guangxi
                                    
                                    $
                                    4,360
                                    
                                    
                                    
                                    6.78
                                    %
                                    
                                    $
                                    2,841
                                    
                                    
                                    
                                    5.48
                                    %
                                    
                                    
                                    53.47
                                    %Sichuan
                                    
                                    $
                                    829
                                    
                                    
                                    
                                    1.29
                                    %
                                    
                                    $
                                    -
                                    
                                    
                                    
                                    -
                                    %
                                    
                                    
                                    NA
                                    %Fujian
                                    
                                    $
                                    529
                                    
                                    
                                    
                                    0.82
                                    %
                                    
                                    $
                                    480
                                    
                                    
                                    
                                    0.93
                                    %
                                    
                                    
                                    10.21
                                    %Total
      Net Sales
                                    
                                    $
                                    64,343
                                    
                                    
                                    
                                    100.00
                                    %
                                    
                                    $
                                    51,867
                                    
                                    
                                    
                                    100.00
                                    %
                                    
                                    
                                    24.05
                                    %





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.




Year Ended December 31,2009
                
                
                2008(Amounts in thousands, in U.S. Dollars, except for percentages)Total
      Net Sales
                
                $
                64,343
                
                
                
                100.0
                %
                
                $
                51,867
                
                
                
                100.00
                %O.E.M.
      Finished Goods Cost
                
                $
                36,605
                
                
                
                56.89
                %
                
                $
                26,267
                
                
                
                50.64
                %Raw
      Materials
                
                $
                3,040
                
                
                
                4.72
                %
                
                $
                4,758
                
                
                
                9.17
                %Labor
                
                $
                1,168
                
                
                
                1.82
                %
                
                $
                759
                
                
                
                1.46
                %Subcontract
      Production Costs
                
                $
                -
                
                
                
                -
                %
                
                $
                809
                
                
                
                1.56
                %Overhead
      and Other Expenses
                
                $
                267
                
                
                
                0.42
                %
                
                $
                723
                
                
                
                1.40
                %Total
      Cost of Sales
                
                $
                41,080
                
                
                
                63.85
                %
                
                $
                33,316
                
                
                
                64.23
                %Gross
      Profit
                
                $
                23,263
                
                
                
                36.15
                %
                
                $
                18,551
                
                
                
                35.77
                %




A
majority of our products are manufactured on our behalf by third parties, based
on orders for our products that we receive from our distributors. Historically,
we have outsourced to two types of manufacturers: (1) sub-contractors, which
require us to provide them with the raw materials for our products, and (2)
O.E.M. manufacturers, which supply their own raw materials. Beginning in 2009,
we have shifted our outsourcing entirely to O.E.M. manufacturers.





As we
shifted away from sub-contract manufacturing entirely to O.E.M. manufacturing in
2009, the components of our cost of sales have correspondingly shifted. Raw
material costs and subcontract production costs accounted for 4.72% and 0%,
respectively, of our total net sales in 2009, compared with 9.17% and 1.56%,
respectively, in 2008. With the shift to O.E.M. manufacturing, O.E.M. finished
goods cost, representing our purchase of finished products from the O.E.M.
manufacturers, correspondingly increased, accounting for 56.89% of our total net
sales in 2009, compared with 50.64% in 2008.





Labor
cost accounted for 1.82% of our total net sales in 2009, compared with 1.46% in
2008. The increase was primarily attributable to increases in management and
quality control costs in tandem with the increase in O.E.M. finished goods cost,
from $26,267,000 for 2008 to $36,605,000 for 2009.





Overhead
and other expenses were 0.42% of our total net sales in 2009, compared with
1.39% for 2008. The decrease was primarily attributable to the reduction of our
own production activities and volume.


34


Total
cost of sales for 2009 was $41,080,000, an increase of 23.30% from $33,316,000
for 2008. As a percentage of total net sales, our cost of sales decreased to
63.85% of total net sales for 2009, down from 64.23% of total net sales for
2008. Consequently, gross margin as a percentage of total net sales increased to
36.15% for 2009 from 35.77% for 2008. Our gross margin increased mainly due to
the general recovery of the Chinese economy in 2009 and our customers’
acceptance of increases in selling prices.





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





Year Ended December 31,2009
                
                
                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
                
                $
                2,963
                
                
                $
                1,890
                
                
                $
                1,073
                
                
                
                36.21
                %
                
                $
                1,707
                
                
                $
                1,108
                
                
                $
                599
                
                
                
                35.09
                %Zhejiang
                
                $
                12,206
                
                
                $
                7,790
                
                
                $
                4,416
                
                
                
                36.18
                %
                
                $
                13,361
                
                
                $
                8,580
                
                
                $
                4,781
                
                
                
                35.78
                %Shandong
                
                $
                7,204
                
                
                $
                4,597
                
                
                $
                2,607
                
                
                
                36.19
                %
                
                $
                5,407
                
                
                $
                3,479
                
                
                $
                1,928
                
                
                
                35.66
                %Jiangxi
                
                $
                6,997
                
                
                $
                4,467
                
                
                $
                2,530
                
                
                
                36.16
                %
                
                $
                7,910
                
                
                $
                5,079
                
                
                $
                2,831
                
                
                
                35.79
                %Yunnan
                
                $
                6,345
                
                
                $
                4,049
                
                
                $
                2,296
                
                
                
                36.19
                %
                
                $
                4,854
                
                
                $
                3,119
                
                
                $
                1,735
                
                
                
                35.74
                %Shanxi
                
                $
                4,634
                
                
                $
                2,957
                
                
                $
                1,677
                
                
                
                36.19
                %
                
                $
                3,051
                
                
                $
                1,964
                
                
                $
                1,087
                
                
                
                35.63
                %Liaoning
                
                $
                4,896
                
                
                $
                3,123
                
                
                $
                1,773
                
                
                
                36.21
                %
                
                $
                2,741
                
                
                $
                1,768
                
                
                $
                973
                
                
                
                35.50
                %Hubei
                
                $
                8,712
                
                
                $
                5,559
                
                
                $
                3,153
                
                
                
                36.19
                %
                
                $
                6,600
                
                
                $
                4,217
                
                
                $
                2,383
                
                
                
                36.11
                %Henan
                
                $
                4,668
                
                
                $
                2,979
                
                
                $
                1,689
                
                
                
                36.18
                %
                
                $
                2,915
                
                
                $
                1,857
                
                
                $
                1,058
                
                
                
                36.30
                %Guangxi
                
                $
                4,360
                
                
                $
                2,782
                
                
                $
                1,578
                
                
                
                36.19
                %
                
                $
                2,841
                
                
                $
                1,816
                
                
                $
                1,025
                
                
                
                36.08
                %Sichuan
                
                $
                829
                
                
                $
                527
                
                
                $
                302
                
                
                
                36.43
                %
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                
                -
                %Fujian
                
                $
                529
                
                
                $
                360
                
                
                $
                169
                
                
                
                31.95
                %
                
                $
                480
                
                
                $
                329
                
                
                $
                151
                
                
                
                31.46
                %Total
                
                $
                64,343
                
                
                $
                41,080
                
                
                $
                23,263
                
                
                
                36.15
                %
                
                $
                51,867
                
                
                $
                33,316
                
                
                $
                18,551
                
                
                
                35.77
                %





Selling,
General and Administrative Expenses





Year Ended December 31,2009
                
                
                2008$
                
                
                % of Total
                  Net Sales
                
                
                $
                
                
                % of Total
                  Net Sales(Amounts in thousands, in U.S. Dollars, except for percentages)Gross
      Profit
                
                $
                23,263
                
                
                
                36.15
                %
                
                $
                18,551
                
                
                
                35.77
                %Operating
      Expenses:Selling
      Expenses
                
                
                4,604
                
                
                
                7.16
                %
                
                
                3,547
                
                
                
                6.84
                %General
      and Administrative Expenses
                
                
                5,090
                
                
                
                7.91
                %
                
                
                2,702
                
                
                
                5.21
                %Total
                
                
                9,694
                
                
                
                15.07
                %
                
                
                6,249
                
                
                
                12.05
                %Income
      from Operations
                
                
                13,569
                
                
                
                21.08
                %
                
                
                12,302
                
                
                
                23.72
                %





Selling
expenses were $4,604,000 in 2009, compared with $3,547,000 in, an increase of
$1,057,000 or 29.80%.  The increase was mainly due to a $495,000
increase in promotional and advertising expenses, from $2,684,000 for 2008 to
$3,179,000 for 2009.





General and
administrative expenses increased from $2,702,000 for 2008 to $5,090,000 for
2009, an increase of $2,388,000 or 88.38%.  The increase was mainly
due to the professional fees incurred in connection with our reverse acquisition
transaction in February 2009, including legal and accounting
fees.


35


Change
in Fair Value of Derivative Liability




We issued
common stock purchase warrants to the investors in our financings completed in
November and December 2009.  These warrants are accounted for at fair
value as derivative instruments and are marked-to-market each period, with
changes in the fair value charged or credited to income each period. In 2009,
the fair value of these warrants declined between the time they were issued and
year end, and we recognized a gain of $1,009,000, primarily as a result of the
reduction in our stock price.  In future periods, we may experience
significant gains or losses, as the value of these warrants fluctuates in
response to changes in our stock price.





Interest
Expense




Interest
expense was $58,000 for 2009 compared with $67,000 for 2008 mainly due to an
additional $1,000,000 short-term loan we obtained in 2009 to supplement our
working capital.





Income
Tax Expenses




In both
2008 and 2009, we were subject to income tax at a rate of 25%. Income tax
expense for 2008 and 2009 amounted to $3,065,000 and $4,106,000, respectively.
The increase in income tax expense was attributable to the increase in
assessable profit for the year ended December 31, 2009.





Net
Income




Net
income was $10,445,000 for the year ended December 31, 2009, compared with
$9,193,000 for the year ended December 31, 2008, an increase of $1,252,000 or
13.62%.
 
 Net
Income Attributable to Common Shareholders
 
 In
connection with the Preferred Shares issued in our financing completed in
November 2009, $4,003,000 of our net income for the year ended December 31, 2009
was deemed dividend on the Preferred Shares, resulting in $6,442,000 in net
income attributable to our common shareholders for 2009, compared with
$9,193,000 of net income attributable to common shareholders from a year ago, a
29.92% decrease.




Liquidity
and Capital Resources





As of
December 31, 2009, we had cash and cash equivalents of $11,036,000, other
current assets of $14,976,000 and current liabilities of $9,197,000. We
presently finance our operations primarily from the cash flow from our
operations, and we anticipate that this will continue to be our primary source
of funds to finance our short-term cash needs. We raised approximately $8
million in November 2009 from private placement of our Preferred Shares and
Warrants, and an additional $1.87 million in December 2009 from private
placement of our common stock and Warrants, for general working capital,
including for marketing and brand promotion, and expansion and/or enhancement of
our existing distribution network and facilities. Depending on the extent of
such activities, if any, we may need additional capital.





Net cash
provided by operating activities in 2009 was $5,668,000 compared with $9,027,000
in 2008. This decrease was mainly attributable to trade deposits paid of
$2,307,000 near the end of 2009.





Net cash
provided by investing activities was $51,000 in 2009, compared with $114,000 net
cash provided by investing activities in 2008. This decrease in 2009 was mainly
due to a decrease in advances from a Company director.




Net cash
provided by financing activities was $2,452,000 in 2009, compared with net cash
used of $9,389,000 in 2008. The increase in net cash provided by financing
activities was mainly due to the equity financings that we completed in November
and December 2009. Also, $2,428,000 was converted into RMB to avoid currency
translation losses from RMB appreciation against the U.S. dollars and held in
trust in a personal RMB account of Mr. Qingqing Wu, our chief executive officer,
which amount we did not deposit back into our account until after the fiscal
year end. In 2008 and 2009, Yinglin Jinduren paid dividends to its equity
owners, which were declared and paid prior to our reverse acquisition of PXPF.
Since the completion of the reverse acquisition, neither we nor Yinglin Jinduren
have declared or paid any dividend, nor do we currently expect to declare or pay
any dividends.





As of
December 31, 2009, we had inventories of $285,000, compared with $514,000 as of
December 31, 2008. The decrease in inventories resulted from the continuing
shift to outsourcing our manufacturing requirements for a majority of our
products, with finished goods shipped directly to our distributors after final
quality inspection. As a result, raw material and finished goods as of December
31, 2009 decreased to $145,000 and $125,000, respectively, from $262,000 and
$229,000, respectively, as of December 31, 2008.


36




As of
December 31, 2009, our accounts and other receivables amounted to $9,191,000, an
increase of 17.2% from $7,843,000 as of December 31, 2008. The debtor turnover
ratio increased to 48 days as of December 31, 2009 from 44 days as of December
31, 2008. The increase in accounts receivable was mainly due to increases in
sales and delay of payment by our distributors. Although the debtor turnover
ratio increased by 4 days, the average settlement days were still less than 90
days and within the credit period we grant to our distributors.





As of
December 31, 2009, we had accounts payables of $2,565,000, compared with
$2,040,000 as of December 31, 2008, an increase of 26%. The increase was mainly
due to an increase in amount of O.E.M. finished goods purchased resulting from
our increased sales. As of December 31, 2008, most of our accounts payables were
aged less than 90 days. With increasing cash inflows during 2009, we were able
to settle our outstanding payables and as a result, most of our accounts
payables as of December 31, 2009 were aged less than 90 days.





As of
December 31, 2009, we had accrued expenses and other payables of $583,000,
compared with $543,000 as of December 31, 2008. The change was mainly due to
settlement of advertising subsidies payable in 2009 and our accrual of $300,000
in penalties anticipated with the registration statement filed in connection
with our November and December 2009 financings.





Contractual
Obligations and Off-Balance Sheet Arrangements





Contractual
Obligations





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





The
following tables summarize our contractual obligations as of December 31, 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
                            
                            
                            194
                            
                            
                            
                            70
                            
                            
                            
                            124Total
      Contractual Obligations:
                            
                            $
                            928
                            
                            
                            $
                            804
                            
                            
                            $
                            124




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





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


37




Off-Balance
Sheet Arrangements





Under the
operating agreement between our subsidiary HK Dong Rong and our variable
interest entity Yinglin Jinduren, it was agreed that, if any guarantee for the
performance of Yinglin Jinduren for any contract or loan was required, HK Dong
Rong would agree to provide such guarantee.  To date, no such
guarantees have been provided. We have not entered into any other financial
guarantees or other commitments to guarantee the payment obligations of any
third parties. We do not use off-balance sheet derivative financial instruments
to hedge or partially hedge interest rate exposure nor do we maintain any other
off-balance sheet arrangements for the purpose of credit enhancement, hedging
transactions, or other financial or investment purposes. We have not entered
into any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.





ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





We are a
“smaller reporting company” as defined by Regulations S-K and as such, are not
required to provide this information.




38




ITEM
8. FINANCIAL STATEMENTS





VLOV,
INC.


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





Contents




Page(s)Report
      on Independent Registered Accounting Firm
                
                F-2Consolidated
      Balance Sheets
                
                F-3Consolidated
      Statements of Income
                
                F-4Consolidated
      Statement of Stockholders’ Equity and Comprehensive Income
                
                F-5Consolidated
      Statements of Cash Flows
                
                F-6Notes
      to Consolidated Financial Statements
                
                F-7





F-1





Report of
Independent Registered Accounting Firm





To the
Board of Directors and Stockholders


VLOV,
Inc.





We have
audited the accompanying consolidated balance sheets of VLOV, Inc. (the
“Company”) and its subsidiaries (hereinafter collectively referred to as the
“Group”) as of December 31, 2009 and 2008 and the related consolidated
statements of income, stockholders' equity and comprehensive income, and cash
flows for the years then ended.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal controls over financial
reporting.  Our audits included consideration of internal controls
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal controls over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of VLOV, Inc. as of December
31, 2009 and 2008, and the results of its operations and its cash flows for the
years then ended in conformity with U.S. generally accepted accounting
principles.





Crowe
Horwath LLP


Sherman
Oaks, California


April 14,
2010





F-2





VLOV,
INC.


CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands – except for share and per share data)





December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                  
                  $
                  11,036
                  
                  
                  $
                  2,863Pledged
      bank deposits
                  
                  
                  -
                  
                  
                  
                  88Accounts
      and other receivables
                  
                  
                  9,191
                  
                  
                  
                  7,843Amount
      due from a director
                  
                  
                  2,428
                  
                  
                  
                  -Trade
      deposits
                  
                  
                  2,309
                  
                  
                  
                  -Inventories
                  
                  
                  285
                  
                  
                  
                  514Prepaid
      expenses
                  
                  
                  763
                  
                  
                  
                  -Total
      current assets
                  
                  
                  26,012
                  
                  
                  
                  11,308Property,
      plant and equipment, net
                  
                  
                  966
                  
                  
                  
                  1,067Land
      use rights
                  
                  
                  263
                  
                  
                  
                  272TOTAL
      ASSETS
                  
                  $
                  27,241
                  
                  
                  $
                  12,647LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
                  
                  $
                  2,565
                  
                  
                  $
                  2,040Accrued
      expenses and other payables
                  
                  
                  583
                  
                  
                  
                  543Amount
      due to a director
                  
                  
                  30
                  
                  
                  
                  2Bills
      payable
                  
                  
                  -
                  
                  
                  
                  293Derivative
      liability
                  
                  
                  3,684
                  
                  
                  
                  -Short-term
      bank loans
                  
                  
                  734
                  
                  
                  
                  587Income
      taxes payable
                  
                  
                  1,601
                  
                  
                  
                  1,613Total
      current liabilities
                  
                  
                  9,197
                  
                  
                  
                  5,078Non-current
      Liabilities:Other
      payable
                  
                  
                  75
                  
                  
                  
                  -Total
      liabilities
                  
                  
                  9,272
                  
                  
                  
                  5,078Commitments
                  
                  
                  -
                  
                  
                  
                  -Stockholders'
      Equity:Common
      stock, $0.00001 par value, 100,000,000 shares authorized, 16,667,957 and
      14,560,000 shares respectively issued and outstanding
                  
                  
                  1
                  
                  
                  
                  1Preferred
      stock, $0.00001 par value, 100,000,000 shares authorized, 2,796,721 shares
      issued and outstanding (liquidation preference $7,998,622)
                  
                  
                  4,003
                  
                  
                  
                  -Additional
      paid-in capital
                  
                  
                  6,319
                  
                  
                  
                  1,236Statutory
      reserve
                  
                  
                  913
                  
                  
                  
                  913Retained
      earnings
                  
                  
                  6,173
                  
                  
                  
                  4,876Accumulated
      other comprehensive income
                  
                  
                  560
                  
                  
                  
                  543Total
      stockholders' equity
                  
                  
                  17,969
                  
                  
                  
                  7,569TOTAL
      LIABILITIES AND  STOCKHOLDERS' EQUITY
                  
                  $
                  27,241
                  
                  
                  $
                  12,647





See
accompanying notes to consolidated financial statements





F-3





VLOV,
INC.


CONSOLIDATED
STATEMENTS OF INCOME


(Amounts
in thousands – except for share and per share data)


Year Ended December 31,2009
                      
                      
                      2008Net
      sales
                      
                      $
                      64,343
                      
                      
                      $
                      51,867Cost
      of sales
                      
                      
                      41,080
                      
                      
                      
                      33,316Gross
      profit
                      
                      
                      23,263
                      
                      
                      
                      18,551Operating
      expenses:Selling
      expenses
                      
                      
                      4,604
                      
                      
                      
                      3,547General
      and administrative expenses
                      
                      
                      5,090
                      
                      
                      
                      2,7029,694
                      
                      
                      
                      6,249Income
      from operations
                      
                      
                      13,569
                      
                      
                      
                      12,302Other
      income (expenses):Change
      in fair value of derivative liability
                      
                      
                      1,009
                      
                      
                      
                      -Interest
      income
                      
                      
                      31
                      
                      
                      
                      23Interest
      expense
                      
                      
                      (58
                      )
                      
                      
                      (67
                      )982
                      
                      
                      
                      (44
                      )Income
      before provision for income taxes
                      
                      
                      14,551
                      
                      
                      
                      12,258Provision
      for income taxes
                      
                      
                      4,106
                      
                      
                      
                      3,065Net
      income
                      
                      
                      10,445
                      
                      
                      
                      9,193Other
      comprehensive income:Foreign
      currency translation adjustment
                      
                      
                      17
                      
                      
                      
                      334Comprehensive
      income
                      
                      $
                      10,462
                      
                      
                      $
                      9,527Net
      income
                      
                      
                      10,445
                      
                      
                      
                      9,193Less:
      Deemed dividend on Series A Convertible Preferred Stock
                      
                      
                      4,003
                      
                      
                      
                      -Net
      income attributable to common shareholders
                      
                      $
                      6,442
                      
                      
                      $
                      9,193Basic
      earnings per share
                      
                      $
                      0.41
                      
                      
                      $
                      0.63Diluted
      earnings per share
                      
                      $
                      0.40
                      
                      
                      $
                      0.63Weighted
      average number of common
    sharesoutstanding:Basic
                      
                      
                      15,898,584
                      
                      
                      
                      14,560,000Diluted
                      
                      
                      15,949,034
                      
                      
                      
                      14,560,000





See
accompanying notes to consolidated financial statements





F-4





VLOV,
INC.


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


(Amounts
in thousands – except for share and per share data)


Common
      stock
                                                                                                                      
                                                                                                                      Preferred
      stock
                                                                                                                      
                                                                                                                      
                                                                                                                      Additional
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      Accumulated

                                                                                                                        otherShares
                                                                                                                      
                                                                                                                      
                                                                                                                      Amount
                                                                                                                      
                                                                                                                      Shares
                                                                                                                      
                                                                                                                      
                                                                                                                      Amount
                                                                                                                      
                                                                                                                      
                                                                                                                      paid-in
      capital
                                                                                                                      
                                                                                                                      
                                                                                                                      Statutory
      reserve
                                                                                                                      
                                                                                                                      
                                                                                                                      comprehensive
      income
                                                                                                                      
                                                                                                                      
                                                                                                                      Retained
      earnings
                                                                                                                      
                                                                                                                      
                                                                                                                      Total
      equityBalance
      at January 1, 2008
                                                                                                                      
                                                                                                                      
                                                                                                                      14,560,000
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      1
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      1,236
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      913
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      209
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      84
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      2,443Net
      income
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      9,193
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      9,193Foreign
      currency translation adjustment
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      334
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      334Dividend
      declared
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (4,401
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (4,401
                                                                                                                      )Total
      comprehensive incomeBalance
      at December 31, 2008
                                                                                                                      
                                                                                                                      
                                                                                                                      14,560,000
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      1
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      1,236
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      913
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      543
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      4,876
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      7,569Shares
      issued in reverse merger acquisition
                                                                                                                      
                                                                                                                      
                                                                                                                      1,454,421
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -Sale
      of preferred stock and warrants
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      2,796,721
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      7,999
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      7,999Sale
      of common stock and warrants
                                                                                                                      
                                                                                                                      
                                                                                                                      653,536
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,870
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,870Fair
      value of warrant liability
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (3,996
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (698
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (4,694
                                                                                                                      )Preferred
      stock - beneficial conversion feature
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (4,003
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      4,003
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -Preferred
      stock - deemed dividend
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4,003
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (4,003
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      -Issuance
      fees and costs
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (92
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (92
                                                                                                                      )Net
      income
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10,445
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10,445Foreign
      currency translation adjustment
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      17
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      17Dividend
      declared
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (5,145
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (5,145
                                                                                                                      )Total
      comprehensive incomeBalance
      at December 31, 2009
                                                                                                                      
                                                                                                                      
                                                                                                                      16,667,957
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      1
                                                                                                                      
                                                                                                                      
                                                                                                                      2,796,721
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      4,003
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      6,319
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      913
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      560
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      6,173
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      17,969
 See
accompanying notes to consolidated financial
statements
 * The
dividend was paid to the private shareholders prior to the reverse
merger.


F-5





VLOV,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in thousand)





Year Ended December 31,2009
                          
                          
                          2008Cash
      flows from operating activities:Net
      income
                          
                          $
                          10,445
                          
                          
                          $
                          9,193Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                          
                          
                          90
                          
                          
                          
                          107(Gain)/loss
      on disposal of property, plant and equipment
                          
                          
                          (2
                          )
                          
                          
                          1Change
      in fair value of derivative liability
                          
                          
                          (1,009
                          )
                          
                          
                          -(Increase)
      decrease in assets:Accounts
      receivable
                          
                          
                          (3,057
                          )
                          
                          
                          (2,961
                          )Trade
      deposits
                          
                          
                          (2,307
                          )
                          
                          
                          -Inventories
                          
                          
                          228
                          
                          
                          
                          4,446Prepaid
      expenses
                          
                          
                          (764
                          )
                          
                          
                          144Increase
      (decrease) in liabilities:Accounts
      payable
                          
                          
                          525
                          
                          
                          
                          (1,577
                          )Bills
      payable, accrued expenses and other payables
                          
                          
                          1,531
                          
                          
                          
                          (471
                          )Income
      and other tax payables
                          
                          
                          (12
                          )
                          
                          
                          145Net
      cash provided by operating activities
                          
                          $
                          5,668
                          
                          
                          $
                          9,027Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                          
                          
                          -
                          
                          
                          
                          (61
                          )Disposals
      of property, plant and equipment
                          
                          
                          23
                          
                          
                          
                          7Amount
      due to/from a director
                          
                          
                          28
                          
                          
                          
                          168Net
      cash provided by investing activities
                          
                          $
                          51
                          
                          
                          $
                          114Cash
      flows from financing activities:Pledged
      bank deposits
                          
                          
                          88
                          
                          
                          
                          -Proceeds
      from equity financing
                          
                          
                          9,776
                          
                          
                          
                          -Amount
      due from a director
                          
                          
                          (2,428
                          )
                          
                          
                          -Proceeds
      from debt financing
                          
                          
                          733
                          
                          
                          
                          587Payments
      of short-term debt
                          
                          
                          (586
                          )
                          
                          
                          (587
                          )Payments
      of dividend
                          
                          
                          (5,131
                          )
                          
                          
                          (9,389
                          )Net
      cash provided by (used in) financing activities
                          
                          
                          2,452
                          
                          
                          
                          (9,389
                          )Effect
      of exchange rate changes
                          
                          
                          2
                          
                          
                          
                          353Net
      increase in cash and cash equivalents
                          
                          
                          8,173
                          
                          
                          
                          105Cash
      and cash equivalents, beginning of year
                          
                          
                          2,863
                          
                          
                          
                          2,758Cash
      and cash equivalents, end of year
                          
                          $
                          11,036
                          
                          
                          $
                          2,863Supplemental
      disclosure of cash flow information:Interest
      paid
                          
                          $
                          58
                          
                          
                          $
                          67Income
      taxes paid
                          
                          $
                          3,528
                          
                          
                          $
                          3,209





See
accompanying notes to consolidated financial statements





F-6





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEAR ENDED DECEMBER 31, 2009





(1)
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





(a)       Description
of business and organization





VLOV Inc.
(the “Company”) was incorporated on October 30, 2006 in the State of Nevada,
under the name Sino Charter, Inc. The Company changed its name to VLOV, Inc. on
March 20, 2009.





On
February 13, 2009, the Company completed a stock exchange transaction with the
stockholders of Peng Xiang Peng Fei Investments Limited (“PXPF”), whereby
14,560,000 restricted shares of common stock were issued to the stockholders of
PXPF in exchange for 100% of the common stock of PXPF (the “Share
Exchange”).





The
completion of the Share Exchange resulted in a change of control. Under the
terms of the share exchange agreement (the “Exchange Agreement”), effective
February 18, 2009, Qingqing Wu was appointed to the board of directors as
Chairman, Matthew Hayden resigned as the Company’s Chief Executive Officer,
President, Chief Financial Officer and Secretary, and the following persons were
appointed as the Company’s officers:





Name:
                      
                      Offices:Qingqing
      Wu, President,
                      
                      Chief
      Executive Officer, Chief Operating Officer and
SecretaryYushan
      Zheng
                      
                      Chief
      Financial Officer and
Treasurer





However,
it was the intent of the parties to the Exchange Agreement that Mr. Hayden
resign from his officer positions after the filing of the Company’s annual
report on Form 10-K for the fiscal year ended November 30, 2008 (the “10-K”).
Accordingly, the Company, Mr. Wu, Mr. Zheng and Mr. Hayden entered into a
Supplemental Agreement dated February 18, 2009, pursuant to which Mr. Wu and Mr.
Zheng agreed to resign from their offices, and Mr. Hayden agreed to be
reappointed as Chief Executive Officer, President, Chief Financial Officer and
Secretary on an interim basis, until the earlier of February 23, 2009 or
immediately after the filing of the 10-K. Accordingly, on February 23, 2009,
pursuant to the terms of the Supplemental Agreement, Mr. Hayden resigned from
his officer positions, and Mr. Wu was reappointed to the board of directors and
as President, Chief Executive Officer, Chief Operating Officer and Secretary,
and Mr. Zheng as Chief Financial Officer and Treasurer.





Under the
Exchange Agreement, Mr. Hayden also agreed to resign from the board of
directors, and Mr. Jianwei Shen, Mr. Zhifan Wu and Mr. Yuzhen Wu were appointed
as directors.





The Share
Exchange has been accounted for as a reverse acquisition and recapitalization of
the Company whereby PXPF is deemed to be the accounting acquirer (legal
acquiree) and the Company is the accounting acquiree (legal acquirer). The
accompanying consolidated financial statements are in substance those of PXPF
and the Company is deemed to be a continuation of the business of
PXPF.  At the time of the reverse merger with PXPF, the Company had no
assets or liabilities and the 1,454,421 shares of its common stock outstanding
immediately prior to the time of the Share Exchange have been accounted for at
their par value at the time of the transaction.





PXPF is a
limited liability company incorporated on April 30, 2008 in the British Virgin
Islands. PXPF designs, manufactures and sells fashion apparel under the brand
name “VLOV”. All current operations of the Company are in the People’s Republic
of China (“China” or the “PRC”).





The
Company does not conduct any substantive operations of its own and conducts its
primary business operations through a variable interest entity, Jinjiang Yinglin
Jinduren Fashion Limited (“Yinglin Jinduren”), which is controlled by the
Company’s subsidiary, Dong Rong Capital Investment Limited (“HK Dong Rong”). HK
Dong Rong is a limited liability company incorporated in Hong Kong on January 5,
2005 originally under the name Korea Jinduren International Dress Limited
(“Korea Jinduren”) and was acquired by PXPF from the majority shareholders of
PXPF on September 22, 2008.





F-7


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009


Yinglin
Jinduren is a limited company incorporated without shares in the PRC on January
19, 2002, of which the initial paid-in capital of RMB10,000,000 ($1,237,000) was
funded by the majority shareholders of PXPF. The management of Yinglin Jinduren
is comprised of Mr. Qingqing Wu as Chairman and Executive Director, and Mr.
Zhifan Wu as Executive Director.  Mr. Qingqing Wu is the Company’s
Chief Executive Officer, President and Chairman of the Board of Directors, and
Mr. Zhifan Wu is a Company director. Mr. Qingqing Wu and Mr. Zhifan Wu, who are
brothers, hold 65.91% and 34.09%, respectively, of the ownership interests of
Yinglin Jinduren.





PRC law
currently has limits on foreign ownership of domestic PRC companies. To comply
with these foreign ownership restrictions, on December 28, 2005, HK Dong Rong
(then known as Korea Jinduren) entered into certain exclusive agreements with
Yinglin Jinduren and its shareholders. Pursuant to these agreements, HK Dong
Rong provides exclusive consulting services to Yinglin Jinduren in return for a
consulting services fee which is equal to Yinglin Jinduren’s net profits. Prior
to the Exchange Agreement, however, certain dividends were paid from net income
to the equity owners of Yinglin Jinduren. In addition, Yinglin Jinduren’s
shareholders have pledged their equity interests in Yinglin Jinduren to HK Dong
Rong, irrevocably granted HK Dong Rong an exclusive option to purchase, to the
extent permitted under PRC law, all or part of the equity interests in Yinglin
Jinduren and agreed to entrust all the rights to exercise their voting power to
the person(s) appointed by HK Dong Rong. Through these contractual arrangements,
HK Dong Rong has the ability to control Yinglin Jinduren’s daily operations and
financial affairs, appoint its senior executives and approve all matters
requiring shareholder approval. As part of these contractual arrangements, HK
Dong Rong and Yinglin Jinduren entered into an operating agreement which,
amongst other matters, precludes Yinglin Jinduren from borrowing money, selling
or acquiring assets, including intellectual property rights, providing
guarantees to third parties or assigning any business agreements, without the
prior written consent of HK Dong Rong. HK Dong Rong also agreed that, if any
guarantee for Yinglin Jinduren’s performance of any contract or loan was
required, HK Dong Rong would provide such guarantee to Yinglin
Jinduren.





As a
result of these contractual arrangements, HK Dong Rong is entitled to
receive the expected residual returns of Yinglin Jinduren.  In
addition, although Yinglin Jinduren has been profitable, in the event that it
were to incur losses, HK Dong Rong would be obligated to absorb a majority of
the risk of loss from Yinglin Jinduren’s activities as a result of its inability
to receive payment for its accumulated consulting fees, which fees are equal to
Yinglin Jinduren’s net income. The Company believes that the equity investors in
Yinglin Jinduren do not have the characteristics of a controlling financial
interest, and that the Company is the primary beneficiary of the operations and
residual returns of Yinglin Jinduren and, in the event of losses, would be
required to absorb a majority of such losses. Accordingly, the Company
consolidates Yinglin Jinduren’s results, assets and liabilities in the
accompanying financial statements. Due to the contractual arrangements, the net
income and interest allocable to the noncontrolling interest is
zero.





The
Company’s consolidated assets do not include any collateral for Yinglin
Jinduren’s obligations. The creditors of Yinglin Jinduren do not have recourse
to the general credit of the Company.





On
November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the
PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital
of $8 million. As of December 31, 2009, $4 million has been contributed to China
Dong Rong and the remaining registered capital will be contributed within two
years after the date of incorporation. It is the intention of the Company and
the equity owners of Yinglin Jinduren to transfer the business operations of
Yinglin Jinduren to China Dong Rong; however, such transfer had not yet occurred
as of December 31, 2009.





(b)       Basis
of presentation and consolidation





The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.





As
described above, the Company, through its wholly owned subsidiary HK Dong Rong,
consolidates Yinglin Jinduren as Yinglin Jinduren is considered to be a variable
interest entity (VIE) and the Company is considered to be its primary
beneficiary.





F-8


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009


Because
the Company and Yinglin Jinduren are under common control, the initial
measurement of the assets and liabilities of Yinglin Jinduren for the purpose of
consolidation by the Company was at book value. The Company has had no other
business activities except for the exclusive agreements with Yinglin Jinduren
and its shareholders.





The
consolidated financial statements include the financial statements of the
Company, its subsidiary and the variable interest entity, Yinglin Jinduren. All
significant inter-company transactions and balances between the Company, its
subsidiary and the variable interest entity are eliminated upon
consolidation.





(c)       Use
of Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Estimates that are critical
to the accompanying consolidated financial statements relate primarily to
returns, sales allowances and customer chargebacks, the valuation of long-lived
assets and the identification and valuation of derivative
instruments. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period that they are determined to be
necessary. Actual results could differ from these estimates.





(d)
            Accounting
      Pronouncements





In June
2009, the Financial Accounting Standards Board (‘‘FASB’’) issued a statement
establishing the FASB Accounting Standards CodificationTM (the “FASB ASC" or the
“Codification"). The Codification became the single source of authoritative U.S.
generally accepted accounting principles (‘‘US GAAP’’) recognized by the FASB to
be applied by non-governmental entities. Rules and interpretive releases of the
United States Securities and Exchange Commission under authority of federal
securities laws are also sources of authoritative US GAAP for SEC registrants.
The Codification did not change existing US GAAP but incorporated existing
accounting and reporting standards into a new topical structure with a new
referencing system. Authoritative standards included in the Codification are
designated by their Accounting Standards Codification (‘‘ASC’’) topical
reference, and new standards will be designated as Accounting Standards Updates
(‘‘ASU’’), with a year and assigned sequence number. We have updated our
references to US GAAP to reflect the Codification.





(e)       Revenue
Recognition





A
majority of the Company’s products are manufactured on its behalf by third
parties, based on orders for the Company’s products received from customers. The
Company is responsible for product design, product specification, pricing to the
customer, the choice of third-party manufacturer, product quality and credit
risk associated with the customer receivable. As such, the Company acts as a
principal and records revenues on a gross basis.





The
Company recognizes revenues when (a) the price to the customer is fixed or
determinable, (b) persuasive evidence of an arrangement exists, (c) delivery has
occurred and (d) collectability of the resulting receivable is reasonably
assured. Revenue from the sales of goods is recognized on the transfer of
significant risks and rewards of ownership, which generally coincides with the
time when the goods are delivered and the title has passed to the customer.
Revenue excludes value-added tax and is stated after deduction of trade
discounts and allowances.





F-9





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEAR ENDED DECEMBER 31, 2009







(f)      Cash
and Cash Equivalents





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





(g)      Accounts
receivable





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





(h)      Depreciation
and Amortization





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





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





(i)       Inventories





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





(j)       Foreign
Currency Translation





The
Company has its local currency, Renminbi (“RMB”), as its functional currency.
The consolidated financial statements of the Company are translated from RMB
into US$.  Accordingly, all assets and liabilities are translated at the
exchange rates prevailing at the balance sheet dates, all income and expenditure
items are translated at the average rates for each of the periods and equity
accounts, except for retained earnings, are translated at the rate at the
transaction date. Retained earnings reflect the cumulative net income (loss)
translated at the average rates for the respective periods since inception less
dividends translated at the rate at the transaction date.





RMB is
not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the People's Bank of China (the "PBOC") or
other institutions authorized to buy and sell foreign exchange.  The
exchange rates adopted for the foreign exchange transactions are the rates of
exchange quoted by the PBOC, which are determined largely by supply and
demand.  Translation of amounts from RMB into US$ has been made at the
following exchange rates for the respective years:





Year Ended December 31,2009
                  
                  
                  2008Assets
      and liabilities
                  
                  US$
                  0.14670
                  
                  
                  US$
                  0.14670Statement
      of income
                  
                  US$
                  0.14661
                  
                  
                  US$
                  0.14415





The
resulting translation adjustments are recorded as other comprehensive income in
the consolidated statement of stockholders equity and comprehensive income and
as a separate component of stockholders equity.





F-10


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009


Commencing
from July 21, 2005, China adopted a managed floating exchange rate regime based
on market demand and supply with reference to a basket of currencies. Since
then, the PBOC administers and regulates the exchange rate of US$ against RMB
taking into account the demand and supply of RMB, as well as domestic and
foreign economic and financial conditions.





(k)      Land
use rights





All land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. However, the government grants the user a “land
use right” to use the land.






Land use
rights are 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. These land use rights expire in 2054.





Intangible
assets of the Company are reviewed annually to determine whether their carrying
value has become impaired. The Company considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations.
The Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of December 31, 2009, the Company expects these assets to be fully
recoverable.





(l)       Long-Lived
Assets





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





(m)     Comprehensive
Income





The
Company’s only component of other comprehensive income is foreign currency
translation gains and losses. The foreign currency translation gains for the
years ended December 31, 2009 and 2008 were US$17,000 and US$334,000
respectively. Accumulated other comprehensive income is recorded as a separate
component of stockholders’ equity.





(n)      Income
Taxes





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





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates applicable to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.









F-11


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009


(o)      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 expense for the years
ended December 31, 2009 and 2008 were approximately US$3.18 million and US$2.68
million, respectively. Advertising costs include advertising subsidy expense
which is accrued based on the terms in effect with distributors and paid when
all attaching conditions have been completed.





(p)      Shipping
and Handling Costs





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





(q)      Research
and Development Costs





The
Company charges all product design and development costs to expense when
incurred. Product design and development costs aggregated approximately US$1.79
million and US$2.24 million for the years ended December 31, 2009 and 2008
respectively.





(r)      Derivative
Financial Instruments





We do not
use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks.





We review
the terms of convertible debt or convertible preferred stock that we issue to
determine whether there are embedded derivative instruments, including the
embedded conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. Also, in connection with the
sale of convertible debt or equity instruments, we may issue freestanding
warrants that may, depending on their terms, be accounted for as derivative
instrument liabilities, rather than as equity.





Derivative
financial instruments are initially measured at their fair value. For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported as charges or credits to
income. For option-based derivative financial instruments, we use a binomial
option pricing model to value the derivative instruments.





(s)      Fair
Value of Financial Instruments





The
carrying amounts of the Company’s financial instruments, which principally
include cash and cash equivalents, accounts receivable and accounts payable,
approximate their fair values due to the relatively short maturity of such
instruments.





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





Warrants
that are recorded as derivative instrument liabilities are carried at their fair
value, with changes in the fair value reported as charges or credits to income
each period.





(t)      Earnings
Per Share





Basic net
income per share is computed by dividing net income attributable to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is calculated by
dividing net income by the weighted-average number of common shares used in the
basic earnings per share calculation plus the number of common shares that would
be issued assuming exercise or conversion of all potentially dilutive common
stock equivalents outstanding. We exclude equity instruments from the
calculation of diluted earnings per share if the effect of including such
instruments is antidilutive.





F-12


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009


(u)       New
Accounting Pronouncements





The
following lists the Accounting Standards Codification Updates that are relevant
to the Company’s consolidated financial statements have been issued, or will
become effective, after the end of the period covered by these financial
statements:





Pronouncement
                
                Issued
                
                TitleASU
      No. 2009-13
                
                October 
      2009
                
                Revenue
      Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a
      consensus of the FASB Emerging Issues Task ForceASU
      No. 2009-15
                
                October 
      2009
                
                Accounting
      for Own-Share Lending Arrangements in Contemplation of Convertible Debt
      Issuance or Other FinancingASU
      No. 2009-16
                
                December 
      2009
                
                Transfers
      and Servicing (Topic 860): Accounting for Transfers and Financial
      Assets.ASU
      No. 2009-17
                
                December 
      2009
                
                Consolidations
      (Topic 810):  Improvements to Financial Reporting by Enterprises
      Involved with Variable Interest EntitiesASU
      No. 2010-01
                
                January 
      2010
                
                Equity
      (Topic 505):  Accounting for Distributions to Shareholders with
      Components of Stock and Cash – a consensus of the FASB Emerging Issues
      Task ForceASU
      No. 2010-02
                
                January 
      2010
                
                Consolidation
      (Topic 810):  Accounting and Reporting for Decreases in
      Ownership of a Subsidiary – a Scope ClarificationASU
      No. 2010-05
                
                January
      2010
                
                Compensation  -
      Stock Compensation (Topic718): Escrowed Share Arrangements and the
      Presumption of CompensationASU
      No. 2010-06
                
                January
      2010
                
                Fair
      Value Measurements and Disclosures (Topic 820): Improving Disclosures
      about Fair Value MeasurementsASU
      No. 2010-09
                
                February
      2010
                
                Subsequent
      Events (Topic 855): Amendments to Certain Recognition and Disclosure
      RequirementsASU
      No. 2010-11
                
                March  2010
                
                Derivatives
      and Hedging (Topic 815): Scope Exception Related to Embedded Credit
      Derivatives




To the
extent appropriate, the guidance in the above Accounting Standards Codification
Updates is already reflected in our consolidated financial statements and
management does not anticipate that these accounting pronouncements will have
any future effect on our consolidated financial statements.





At its
meeting on March 18, 2010, the FASB’s Emerging Issues Task Force reached a
consensus on five Issues. The consensuses were ratified by the FASB at its
meeting on March 31, 2010, and the related Accounting Standards Codification
Updates to be issued will become authoritative accounting guidance. None of the
consensuses address Issues that have a material effect on our consolidated
financial statements.





F-13





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEAR ENDED DECEMBER 31, 2009







(2)      AMOUNT
DUE FROM A DIRECTOR





As
described in Note 9, the Company raised capital in the period from October to
December, 2009 by issuing convertible preferred stocks, common stock and
warrants.





Because
of strict control over the conversion of foreign currency and the transfer of
funds by corporate customers, the Company withdrew part of the net proceeds from
the capital raise ($2,428,000), converted such amount into RMB and
deposited them in a personal account held on trust by one of the Company’s
directors, Mr. Qingqing Wu.





The U.S.
dollars were converted into RMB and were deposited into the personal account on
the date of conversion. The RMB remained on deposit in the director’s bank
account until March 29, 2010, when the trust account was cancelled and the money
was transferred back to the account of HK Dong Rong.





(3)      TRADE
DEPOSITS PAID





The trade
deposits were paid to the apparels suppliers of the Company. The amounts have
been fully utilized as of March 31, 2010.





(4)      INVENTORIES





Inventories
consist of the following (in thousands):





December 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Raw
      materials
                    
                    $
                    145
                    
                    
                    $
                    262Work
      in process
                    
                    
                    15
                    
                    
                    
                    23Finished
      goods
                    
                    
                    125
                    
                    
                    
                    229$
                    285
                    
                    
                    $
                    514





(5)      PROPERTY,
PLANT AND EQUIPMENT





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





December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008Buildings
                  
                  $
                  914
                  
                  
                  $
                  914Furniture,
      fixtures and equipment
                  
                  
                  83
                  
                  
                  
                  84Motor
      vehicles
                  
                  
                  196
                  
                  
                  
                  196Office
      equipment
                  
                  
                  24
                  
                  
                  
                  24Plant
      and machinery
                  
                  
                  207
                  
                  
                  
                  235Total
      property, plant and equipment
                  
                  
                  1,424
                  
                  
                  
                  1,453Less
      : accumulated depreciation
                  
                  
                  (458
                  )
                  
                  
                  (386
                  )$
                  966
                  
                  
                  $
                  1,067




F-14


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009




There was
no capitalized interest for the years ended December 31, 2009 and
2008.





(6)      LAND
USE RIGHTS





Land use
rights are summarized as follows (in thousands):





December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008Land
      use right
                  
                  $
                  315
                  
                  
                  $
                  315Less
      : accumulated amortization
                  
                  
                  (52
                  )
                  
                  
                  (43
                  )$
                  263
                  
                  
                  $
                  272





There was
no capitalized interest for the years ended December 31, 2009 and
2008.





(7)      ACCRUED
EXPENSES AND OTHER PAYABLES





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





December 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Current
      portion:Accrued
      salaries and wages
                    
                    $
                    165
                    
                    
                    $
                    120Accrued
      expenses
                    
                    
                    305
                    
                    
                    
                    4Advertising
      subsidies payables
                    
                    
                    113
                    
                    
                    
                    419$
                    583
                    
                    
                    $
                    543Non-current
      portion:Advertising
      subsidies payables
                    
                    
                    75
                    
                    
                    
                    -$
                    658
                    
                    
                    $
                    543





(8)      RELATED
PARTY TRANSACTIONS




December
      31,2009
                          
                          
                          2008Amount
      due from a director:Mr. Qingqing Wu
                          
                          $
                          2,428,000
                          
                          
                          $
                          -Amount
      due to a director:Mr. Qingqing
      Wu
                          
                          $
                          30,000
                          
                          
                          $
                          2,000




Please
see Note 2 regarding the amount due from a director.
 
 The
amount due to a director is unsecured, interest-free and repayable on
demand.
 
 Pursuant
to licensing agreements with Mr. Qingqing Wu, a Company director, the Company
has the rights to use four trademarks which are owned by the director, although
to date, the Company has not utilized these trademarks. The director is in the
process of transferring these trademarks to the Company. Costs associated with
these trademarks are not significant.


(9)      SALE
OF PREFERRED STOCK, COMMON STOCK AND WARRANTS





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 sell to the Purchasers
shares of the Company’s series A convertible preferred stock (the “Preferred
Shares”) at $2.86 per share and to issue warrants (the “Warrants”) to purchase
shares of the Company’s common stock (the "Preferred Shares Financing"). At the
initial closing on October 27, 2009, the Company issued to the Purchasers
1,446,105 Preferred Shares and Warrants to purchase 723,052 shares of common
stock for gross proceeds of approximately $4.1 million. At the final closing on
November 17, 2009, the Company issued to the Purchasers an additional 1,350,616
Preferred Shares and Warrants to purchase 675,308 shares of common stock for
gross proceeds of approximately $3.9 million.





F-15





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEAR ENDED DECEMBER 31, 2009







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 a 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. As discussed further below, the registration statement was
filed on December 17, 2009, but has not yet been declared
effective.





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





Each
Warrant entitles its holder to purchase one share of common stock at an exercise
price of $3.43 per share (subject to certain adjustments) for a period of three
years. The Company is also entitled to redeem the Warrants for the then
applicable exercise price (currently $3.43) if the volume-weighted average price
of the common stock for 20 consecutive days exceeds 200% of the then applicable
exercise price.





The
conversion price of the Preferred Shares and the exercise price of the Warrants
are subject to anti-dilution adjustments in the event that the Company issues
additional equity, equity linked securities or securities convertible into
common stock at a purchase price less than the then applicable conversion or
exercise price (other than shares issued to the Company’s officers, directors,
employees or consultants pursuant to any stock or option plan duly adopted by a
majority of the Company’s non-employee directors, or issued upon the conversion
or exercise of any securities outstanding as of the closing date of the
Preferred Shares Financing, or for acquisitions or strategic transactions
approved by a majority of the Company’s directors). The conversion and exercises
prices are also subject to customary adjustments for stock dividends, stock
splits, reverse stock splits or other similar transactions.





In
connection with the Purchase Agreement, certain of the Company’s shareholders
entered into a lock-up agreement (the “Lock-up Agreement”) whereby they agreed
not to offer, sell, or other dispose of (a) 50% of their common stock holdings
for nine months from the initial closing of the Preferred Shares Financing, and
(b) the remaining 50% of their common stock holdings for twelve months from the
initial closing.





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





F-16


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009


Gilford
Securities, Incorporated acted as the placement agent in connection with the
Preferred Shares Financing (the “Placement Agent”).





On
December 1, 2009, the Company entered into a second securities purchase
agreement (the “Second Purchase Agreement”) with several accredited investors,
including some of the Purchasers (the “Common Shares Purchasers”) pursuant to
which the Company issued to the Common Shares Purchasers 653,534 shares of
common stock at $2.86 per share and warrants to purchase 326,767 shares of
Common Stock, for gross proceeds of approximately $1.87 million (the "Common
Shares Financing").  The terms of the warrants issued in connection
with the Second Purchase Agreement are identical to the Warrants issued in
connection with the Purchase Agreement.





The
Company is required to include the shares of common stock issued in the Common
Shares Financing (as well as the shares underlying the Warrants issued) in the
registration statement that it is obligated to file to register the common stock
underlying the Preferred Shares and Warrants issued in the Preferred Shares
Financing. The registration statement was required to be filed on or before
December 17, 2009, and must be declared effective within 90 days thereafter (or
150 days if the registration statement receives a 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, a
maximum amount of approximately $987,000. The registration statement was filed
on December 17, 2009, but has not yet been declared effective. Because the
Company does not expect that the registration statement will become effective by
the required date of May 16, 2010, the Company has accrued $300,000 at December
31, 2009 for estimated liquidated damages it expects to be required to pay to
the Purchasers.





Because
the Warrants contain provisions that would reduce their exercise price in the
event that the Company issues additional equity, equity linked securities or
securities convertible into common stock at a purchase price less than the then
applicable conversion or exercise price, and because the Warrants are
denominated in a currency that is different from the Company’s functional
currency, they have been accounted for as derivative instrument liabilities
(see Note 10).





The
Preferred Shares are not subject to redemption (except on liquidation), are
entitled to participate in any dividends declared and paid on the Company’s
common stock on an as-converted basis, and the holders of the Preferred Shares
are entitled to vote together with common stock holders on an as-converted
basis. The Preferred Shares, excluding the embedded conversion option, are
considered to be an equity instrument and accordingly, the embedded conversion
option has not been separated and accounted for as a derivative instrument
liability. However, the Company has recognized a beneficial conversion feature
related to the Preferred Shares, to the extent that the conversion feature,
based on the proceeds allocated to the Preferred Shares, was in-the-money at the
time they were issued. Such beneficial conversion feature amounted to
approximately $1.973 million and $2.030 million related to the initial closing
and the final closing of the Preferred Shares Financing, respectively. Because
the Preferred Shares do not have a stated redemption date and may be converted
by the holder at any time, the discount recognized by the allocation of proceeds
to the beneficial conversion feature has been immediately amortized through
retained earnings as a deemed dividend to the holders of the Preferred
Shares.





(10)   DERIVATIVE
FINANCIAL INSTRUMENTS





As
described in Note 9, on October 27, November 17 and December 1, 2009,
respectively, the Company issued 723,052, 675,308 and 326,767 Warrants,
respectively. Each Warrant entitles its holder to purchase one share of common
stock of the Company at an exercise price of $3.43 per share (subject to certain
adjustments) for a period of three years. The Company is entitled to redeem the
Warrants for the then applicable exercise price (currently $3.43) if the
volume-weighted average price of our common stock for 20 consecutive days
exceeds 200% of the then applicable exercise price.





The
Company uses a binomial option pricing model to value these Warrants. In valuing
the Warrants at the time they were issued and at December 31, 2009, the Company
used the market price of its common stock on the date of valuation, an expected
dividend yield of 0% and the remaining period to the expiration date of the
Warrants. All Warrants can be exercised by the holder at any time.





F-17





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEAR ENDED DECEMBER 31, 2009





Because
of the limited historical trading period of the Company’s common stock, the
expected volatility of its common stock over the remaining life of the Warrants,
which has been estimated at 85%, is based on a review of the volatility of
entities considered by management as comparable. The risk-free rates of return
used ranged from 1.14% to 1.66%, based on constant maturity rates published by
the U.S. Federal Reserve, applicable to the remaining life of the
Warrants.





At
December 31, 2009, the following derivative liabilities related to common stock
warrants were outstanding:





Issue Date
                            
                            Expiration Date
                            
                            # of
                              Warrants
                            
                            
                            Exercise
                              Price Per
                              Share
                            
                            
                            Value –
                              Issue Date
                            
                            
                            Value -
                              December 31,
                              2009October
      27, 2009
                            
                            October
      27, 2012
                            
                            
                            723,052
                            
                            
                            $
                            3.43
                            
                            
                            $
                            2,163,116
                            
                            
                            $
                            1,538,959November
      17 2009
                            
                            November
      17, 2012
                            
                            
                            675,308
                            
                            
                            
                            3.43
                            
                            
                            
                            1,832,410
                            
                            
                            
                            1,440,952December
      1, 2009
                            
                            December
      1, 2012
                            
                            
                            326,767
                            
                            
                            
                            3.43
                            
                            
                            
                            697,580
                            
                            
                            
                            704,5101,725,127
                            
                            
                            
                            
                            
                            
                            $
                            4,693,106
                            
                            
                            $
                            3,684,421





During
the quarter ended December 31, 2009, the Company recognized income of $1,008,685
related to the change in the fair value of these derivative instrument
liabilities.





Assets
and liabilities measured at fair value are classified in their entirety based on
the lowest level of input that is significant to their fair value measurement.
The Company’s derivative financial instruments which are required to be measured
at fair value on a recurring basis are measured at fair value using Level 3
inputs. Level 3 inputs are unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or
liabilities.





The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value using Level 3 inputs during the year ended
December 31, 2009:





WarrantsBalance
      – December 31, 2008
                    
                    $
                    -IssuancesOctober
      27, 2009
                    
                    
                    2,163,116November
      17, 2009
                    
                    
                    1,832,410December
      1, 2009
                    
                    
                    697,580Fair
      value adjustments
                    
                    
                    (1,008,685
                    )Balance
      – December 31, 2009
                    
                    $
                    3,684,421





Estimating
the fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, valuation techniques are sensitive to changes in
the trading market price of our common stock, which may exhibit significant
volatility. Because derivative financial instruments are initially and
subsequently carried at fair values, our income will reflect the volatility in
these estimate and assumption changes.





F-18


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009


(11)   SHORT-TERM
BORROWINGS





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





December 31 ,2009
                  
                  
                  December 31 ,2008Amount
                  
                  
                  Interest
                    Rate
                  
                  
                  Amount
                  
                  
                  Interest
                    RateBank
      loan
                  
                  $
                  734
                  
                  
                  
                  7.700
                  %
                  
                  $
                  587
                  
                  
                  
                  9.320
                  %





As of
December 31, 2009, the short-term borrowings were secured by a personal
guarantee granted by Mr. Qingqing Wu, a director of the Company.





(12)   COMMON
STOCK





The
Company is authorized to issue 100,000,000 shares of common stock, $0.00001 par
value.  As described in Note 1, the Company had 1,454,421 common
shares outstanding prior to the Share Exchange with PXPF, and issued 14,560,000
common shares to the shareholders of PXPF in connection with the Share
Exchange.  For accounting purposes, the shares issued to the
shareholders of PXPF are assumed to have been outstanding on January 1, 2008 and
the 1,454,421 shares held by the existing shareholders of the Company prior to
the Share Exchange on February 13, 2009 are assumed to have been issued on that
date in exchange for the net assets of the Company.





As
described in Note 9, on December 1, 2009, the Company sold 653,534 shares of
common stock to certain accredited investors.





At
December 31, 2009, 16,667,957 common shares were issued and
outstanding.





(13)   PREFERRED
STOCK





The
Company is authorized to issue 100,000,000 shares of preferred stock, $0.00001
par value, of which 2,800,000 shares have been designated as Series A
Convertible Preferred Stock.





As
described in Note 9, on October 27 and November 17, 2009, the Company sold
1,446,105 and 1,350,616 shares, respectively, of its Series A Convertible
Preferred Stock (the “Preferred Shares”) to certain accredited investors. Each
Preferred Share is convertible into one share of common stock, at a conversion
price of $2.86 per share (subject to certain adjustments) at any time at the
holder’s option, and will automatically convert if the common stock is qualified
for listing on either the Nasdaq Capital Market or the NYSE Amex Equities. The
designation, rights, preferences and other terms and provisions of the Preferred
Shares are set forth in the Certificate of Designation filed with the Nevada
Secretary of State on October 23, 2009. The Preferred Shares are entitled to
participate in any dividends declared and paid on the common stock on an
as-converted basis. Preferred Shares holders are also entitled to notice of any
stockholders’ meeting and vote together with common stock holders on an
as-converted basis. The Preferred Shares have a liquidation preference of $2.86
per share, plus any accrued but unpaid dividends. At December 31, 2009,
2,796,721 Preferred Shares were outstanding, with an aggregate liquidation
preference of $7,998,622.





(14)
              EARNINGS
      PER SHARE





The
following table sets forth the computation of basic and diluted earnings per
share:





(a)
              Basic





Basic
earnings per share is calculated by dividing the profit attributable to equity
holders of the company by the weighted average number of ordinary shares and
participating preferred shares outstanding during the year.





F-19


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009


Year Ended December 31,2009
                    
                    
                    2008Income
      attributable to common shareholders of the Company
                    
                    
                    6,442
                    
                    
                    
                    9,193Weighted
      average number of common shares outstanding
                    
                    
                    15,898,584
                    
                    
                    
                    14,560,000


(b)
              Diluted





Diluted
earnings per share is calculated by adjusting the weighted average number of
common shares outstanding to assume conversion of all dilutive potential common
shares. The Company has one category of dilutive potential common shares: the
Warrants issued in connection with the Preferred Shares Financing and Common
Shares Financing described in Note 9. The Warrants are assumed to have been
converted into common shares and the calculation is done to determine the number
of shares that could have been acquired at fair value (determined as the average
annual market share price of the Company’s common stock) based on the monetary
value of the subscription rights attached to outstanding Warrants.  The
Preferred Shares as converted to common stock have been excluded from the
diluted earnings per share because to do so would be anti-dilutive. The
number of shares calculated as above is compared with the number of shares that
would have been issued assuming the exercise of the Warrants.





Year Ended December 31,2009
                    
                    
                    2008Income
      attributable to common shareholders of the Company
                    
                    
                    6,442
                    
                    
                    
                    9,193Weighted
      average number of common shares outstanding
                    
                    
                    15,898,584
                    
                    
                    
                    14,560,000Adjustment
      for:-
      Warrants
                    
                    
                    50,450
                    
                    
                    
                    -15,949,034
                    
                    
                    
                    14,560,000





(15)   INCOME
TAXES





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





Year Ended December 31,2009
                  
                  
                  2008PRC
      enterprise income tax - current
                  
                  $
                  4,106
                  
                  
                  $
                  3,065





The
Company is mainly subject to income taxes in the PRC and provision for the PRC
corporate income tax was calculated based on the statutory tax rate of 33% on
the assessable income arose in or before year 2007. Pursuant to the PRC
Enterprise Income Tax Law (the “Income Tax Law”) passed by the Tenth National
People’s Congress on 16 March 2007, the PRC income tax rates for domestic and
foreign enterprises are unified at 25% effective from January 1, 2008. The
enactment of the Income Tax Law is not expected to have any significant
financial effect on the amounts accrued in the consolidated balance sheet in
respect of taxation payable and deferred taxation.





F-20


VLOV,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDED DECEMBER 31, 2009


The
applicable rate of Hong Kong profits tax for the years ended December 31, 2009
and 2008 was 16.5%. However, no provision for Hong Kong profits tax has been
made for the years ended December 31, 2009 and 2008 as the Company did not carry
on any business which generates profits chargeable to Hong Kong profits
tax.





PXPF is a
company incorporated as an international company in the BVI and is fully exempt
from Domestic Corporate Tax of the BVI.





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





Year Ended December 31,2009
                  
                  
                  2008Profit
      before tax
                  
                  
                  14,912
                  
                  
                  
                  12,258Tax
      calculated at domestic tax rate applicable to profits in the respective
      countries
                  
                  
                  3,825
                  
                  
                  
                  3,065Tax
      effect of:-Expenses
      not deductible for tax purposes
                  
                  
                  280
                  
                  
                  
                  -$
                  4,106
                  
                  
                  $
                  3,065




The
Company has analyzed the tax positions taken or expected to be taken in its tax
filings and has concluded it has no material liability related to uncertain tax
positions or unrecognized tax benefits as of December 31, 2009 and 2008. The
Company classifies interest and/or penalties related to income tax matters in
income tax expense. As of December 31, 2009 and 2008, there was no interest and
penalties related to uncertain tax positions. The Company does not anticipate
any significant increases or decreases to its liability for unrecognized tax
benefits within the next 12 months.
 
 According
to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational or other errors
made by the taxpayer or the withholding agent.  The statute of
limitations extends to five years under special circumstances. In the case of
transfer pricing issues, the statute of limitations is ten years. There is no
statute of limitations in the case of tax evasion. Accordingly, the income tax
returns of the Company’s PRC operating subsidiaries for the years ended December
31, 2007 through 2009 are open to examination by the PRC state and local tax
authorities.


(16)   STATUTORY
RESERVES





Under PRC
regulations, Yinglin Jinduren may pay dividends only out of its accumulated
profits, if any, determined in accordance with PRC GAAP.  In addition,
it is required to set aside at least 10% of its after-tax net profits each year,
if any, to fund the statutory reserves until the balance of the reserves reaches
50% of its registered capital.  The statutory reserves are not
distributable in the form of cash dividends to the Company but can be used to
make up prior year cumulative losses. As of December 31, 2009, the registered
capital was RMB 10,000,000 and the statutory reserves have been established
sufficiently.





(17)   LEASE
COMMITMENTS





The
Company leases certain facilities under long-term, non-cancelable leases and
year-to-year leases. These leases are accounted for as operating leases. Rent
expense amounted to US$66,000 and US$36,000 for the years ended December 31,
2009 and 2008 respectively.





Future
minimum payments under long-term, non-cancelable leases as of December 31, 2009
are as follows (in thousands):





Future
                      minimum
                      paymentsYear
      Ending December 31:2010
                    
                    $
                    702011
                    
                    
                    702012
                    
                    
                    54$
                    194





F-21





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEAR ENDED DECEMBER 31, 2009







(18)   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 distribution agreements with 12 distributors at December 31, 2009.
The Company has the following concentrations of business with each customer
constituting greater than 10% of the Company’s sales:




Year ended December 31,2009
                      
                      
                      2008CustomersCustomer
      A
                      
                      
                      18.97
                      %
                      
                      
                      25.76
                      %Customer
      B
                      
                      
                      13.54
                      %
                      
                      
                      12.72
                      %Customer
      C
                      
                      
                      11.20
                      %
                      
                      
                      10.42
                      %Customer
      D
                      
                      
                      10.87
                      %
                      
                      
                      15.25
                      %





The
accounts receivable concentration of the above customers is comparable to the
above sales concentrations.




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





Year ended December 31,2009
                          
                          
                          2008VendorsVendor
      A
                          
                          
                          11.50
                          %
                          
                          
                          38.17
                          %Vendor
      B
                          
                          
                          11.46
                          %
                          
                          
                          15.31
                          %





The above
concentrations make the Company vulnerable to a near-term severe impact should
the relationships be terminated.





(19)   BENEFIT
PLAN





Pursuant
to the relevant regulations of the PRC government, Yinglin Jinduren participates
in a local municipal government retirement benefits scheme (the “Scheme”),
whereby Yinglin Jinduren is required to contribute a certain percentage of the
basic salaries of its employees to the Scheme to fund their retirement benefits.
Contributions under the Scheme are charged to the income statement as incurred.
Contributions to the Scheme were US$177,000 and US$175,000 for the years ended
December 31, 2009 and 2008 respectively.





F-22





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES




None.





ITEM
9A. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





The term
“disclosure controls and procedures” is defined in Rule 13a-14(c) of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  This term refers to the controls and procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of December 31,
2009, and have concluded that as of that date, our disclosure controls and
procedures were not effective at the reasonable assurance level.





Management’s
Annual Report on Internal Control over Financial Reporting





Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America. The Company's internal control over financial
reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.


39


Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be detected
in a timely manner. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.





Our
management assessed the effectiveness of the Company's internal control over
financial reporting based on criteria in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on such evaluation, our management concluded that as of December 31, 2009,
and as of the date that the evaluation of the effectiveness of our internal
control over financial reporting was completed, our internal control over
financial reporting was not effective due to the following material
weakness:





Accounting
and Finance Personnel Weaknesses- The current
accounting staff is relatively inexperienced, and requires substantial training
so as to meet with the higher demands necessary to fulfill the requirements of
U.S. GAAP-based reporting and SEC rules and regulations. In reaching such
conclusion, the following factors were considered:





(a) how appropriately we complied with
U.S. GAAP in accounting for transactions; and





(b) how
accurately we prepared supporting information to provide to our independent
auditors on a quarterly and annual basis.




Remediation
of Material Weaknesses in Internal Control over Financial Reporting





During
the 2010 fiscal year, we intend to take the following remediation
measures:





(1)              Recruit
sufficient qualified accounting personnel;





(2)              Set
up an internal audit department and assign more resources to enhance the
internal audit function, especially in the supervision of complex, non-routine
transactions;





(3)              Involve
both internal accounting and operations personnel and outside contractors with
technical accounting expertise, as needed, early in the evaluation of complex,
non-routine transactions to obtain additional guidance as to the application of
U.S. GAAP to such transactions; and





(4)              Improve
the interaction among our management, audit committee, and other external
advisors.





The
effectiveness of these remediation efforts will not be known until the Company
performs a test of these controls in connection with management’s tests of
internal controls over financial reporting that the Company will undertake as of
December 31, 2010.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only this management’s report in this annual
report.


Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the year ended December 31, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.





40




ITEM
9B. OTHER INFORMATION





None.




PART
III




ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




Our
directors and executive officers, their ages, their respective offices and
positions, and their respective dates of election or appointment are as
follows:





Name
                    
                    Age
                    
                    Position Held
                    
                    Officer/Director sinceQingqing
      Wu
                    
                    39
                    
                    Chairman
      of the Board, President, and Chief Executive
                      Officer
                    
                    February
      23, 2009Yushan
      Zheng
                    
                    47
                    
                    Chief
      Financial Officer
                    
                    February
      23, 2009Jianwei
      Shen
                    
                    53
                    
                    Director
                    
                    March
      7, 2009Zhifan
      Wu
                    
                    43
                    
                    Director
                    
                    March
      7, 2009Yuzhen
      Wu
                    
                    31
                    
                    Director
                    
                    March
      7, 2009Congming
      Xie
                    
                    29
                    
                    Director
                    
                    March
      11, 2009Ying
      Zhang
                    
                    31
                    
                    Director
                    
                    March
      10, 2010





Business
Experience Descriptions





Set forth
below is a summary of our executive officers’ and directors’ business experience
for the past 5 years.





Qingqing Wu graduated from
Xiamen Jimei School of Light Industry in 1990 with a major in apparel design and
received a Masters in Business Administration degree from Tsing-Hua University
in 2007. Mr. Wu worked as a designer at Huacai Apparel Factory in Jinjiang
County from 1990-1992. Between 1992 and 1994, Mr. Wu served as the Director of
Design and Assistant to the General Manager at Shidali Apparel Co., Ltd. in
Jinjiang City. In November 1994, Mr. Wu founded Yinglin Jinduren. Mr. Wu also
serves as the Standing Director of the First Committee of the Association of
Fabric & Apparel in Jinjiang City.





Yushan Zheng graduated from
Jiangxi University of Finance & Economics in 1987 with a major in industrial
economics.  Mr. Zheng worked as the Director of Finance Department and
served as the Chief Accounting Officer of Xianyou Electrical Machine Co., Ltd.
in Fujian Province from 1987 till 2000. Between 2000 and 2004, Mr. Zheng served
as the Manager of Auditors at Huada Certified Tax Agent Firm in Putian
City.  From 2004 to 2009, Mr. Zheng served as the Manager of Finance
Department and acted as the Chief Financial Officer of Sanyuan Metal Co., Ltd.
and Sanchuan Aluminum Co., Ltd., respectively, in Fujian
Province.  Beginning in February 2009, Mr. Zheng has been serving as
the Chief Financial Officer of Yinglin Jinduren.  Mr. Zheng is a Chinese
Certified Public Accountant and a Certified Tax Agent.





Dr. Jianwei Shen holds a
Doctorate of Economics and Management from China Agricultural University, a
Doctorate of Philosophy from Hohenheim University in Germany, a Masters Degree
in Economics and Management from Beijing Agricultural University, and a
Bachelor’s Degree in Agricultural Economics from Beijing Agricultural
University.  Since 2006, Dr. Shen is an independent director and a
member of the Audit Committee of the China Essence Group Ltd., a company listed
on the Singapore Exchange (Main Board).  From 2002 to 2005, he served
as a project manager at Fujian Fuma Foods Group Co., and he worked as a project
manager at Beijing Dasbro Co. Ltd from 1993 to 2000.  Dr. Shen is also
a member of the Specialist Advisors to the City of Jinjiang,
Fujian.  Dr. Shen also provides strategic corporate advisory services
to Yinglin Jinduren.


41


Zhifan Wu serves as the
manager of Yinglin Jinduren’s Purchasing Department, a position he has held
since March 2006.  Mr. Wu worked as the purchasing assistant at
Huangbao Apparel Co., Ltd. from 1996 to 2000.  From March 2000 to
2005, Mr. Wu served as the manager of the Purchasing Department in Huangbao
Apparel Co., Ltd.





Yuzhen Wu graduated from
Huaqiao University in 1998 with a major in Business Management. Mr. Wu has been
working at Yinglin Jingduren since 1998. From 1998 to 2001, Mr. Wu worked as the
workshop director. From 2001 to 2003, Mr. Wu worked as the production manager
overseeing all production arrangements and process. Mr. Wu served as the vice
general manager between 2003 and 2006, and as director of the general production
management since 2006.





Congming Xie graduated with a
bachelor’s degree in Economic Science from Huaqiao University in
2002.   From July 2002 through December 2004, Mr. Xie acted as
the General Manager of Meilun Textile Trade Co., Ltd. in Xiamen City, Fujian
Province.  Mr. Xie has been working as the Assistant General Manager
of Yinglin Jinduren since January 2005.





Ying (Teresa) Zhang is
currently the chief financial officer and a director of China Wind Systems, Inc.
She was an auditing manager at GC Alliance HK CPA in Beijing from July 2005
until January 2010.  From January 2003 through June 2005, Ms. Zhang
served as a liaison officer for the Australian-Chinese Friendship Business
Association, and from July 2000 to September 2002 she was an auditor at Ernst
& Young in Beijing.  Ms. Zhang is a certified practicing
accountant in Australia.  She received a bachelor’s degree in
international accounting from Renmin University in China and a master’s
degree in accounting from Macquarie University in Australia.





Family
Relationships





Other
than Mr. Qingqing Wu and Mr. Zhifan Wu, who are brothers, there are no family
relationships between or among any of our directors or executive
officers.





Involvement
in Certain Legal Proceedings





None of
our directors or executive officers has, during the past five
years:


·
                  Had
      any petition under the federal bankruptcy laws or any state insolvency law
      filed by or against, or had a receiver, fiscal agent, or similar officer
      appointed by a court for the business or property of such person, or any
      partnership in which he was a general partner at or within two years
      before the time of such filing, or any corporation or business association
      of which he was an executive officer at or within two years before the
      time of such
filing;




·
            Been convicted in a criminal
      proceeding or a named subject of a pending criminal proceeding (excluding
      traffic violations and other minor
  offenses);





(i)
              Acting as a futures commission
      merchant, introducing broker, commodity trading advisor, commodity pool
      operator, floor broker, leverage transaction merchant, any other person
      regulated by the Commodity Futures Trading Commission, or an associated
      person of any of the foregoing, or as an investment adviser, underwriter,
      broker or dealer in securities, or as an affiliated person, director or
      employee of any investment company, bank, savings and loan association or
      insurance company, or engaging in or continuing any conduct or practice in
      connection with such
activity;





(ii)
            Engaging in any type of business
      practice; or





(iii)
            Engaging in any activity in
      connection with the purchase or sale of any security or commodity or in
      connection with any violation of federal or state securities laws or
      federal commodities laws;


·
                Been
      the subject of any order, judgment, or decree, not subsequently reversed,
      suspended, or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining him from, or otherwise limiting, the following
      activities:
 42


·
            Been the subject of any order,
      judgment, or decree, not subsequently reversed, suspended, or vacated, of
      any federal or state authority barring, suspending, or otherwise limiting
      for more than 60 days the right of such person to engage in any activity
      described in (i) above, or to be associated with persons engaged in any
      such activity;





·
            Been found by a court of
      competent jurisdiction in a civil action or by the SEC to have violated
      any federal or state securities law, where the judgment in such civil
      action or finding by the SEC has not been subsequently reversed,
      suspended, or vacated; or





·
            Been found by a court of
      competent jurisdiction in a civil action or by the Commodity Futures
      Trading Commission to have violated any federal commodities law, where the
      judgment in such civil action or finding by the Commodity Futures Trading
      Commission has not been subsequently reversed, suspended, or
      vacated.





Board
of Directors and Board Committees





Our board
of directors is currently composed of six members. All members of our board of
directors serve in this capacity until their terms expire or until their
successors are duly elected and qualified. Our bylaws provide that the
authorized number of directors will be not less than one and not more than
thirteen.





Our board
of directors formally established separate audit, nominating and compensation
committees on March 10, 2010.





Audit
Committee





Two
independent directors are currently appointed to the audit committee: Ms. Ying
Zhang and Dr. Jianwei Shen. Our board of directors has determined, based on
information furnished by Ms. Zhang and other available information, that she
meets the requirements of an “audit committee financial expert” as such term is
defined in the rules promulgated under the Securities Act and the Exchange Act,
and has accordingly designated her as such as well as chairperson of the
committee.





The
responsibilities of our audit committee include:





·
            meeting
      with our management periodically to consider the adequacy of our internal
      control over financial reporting and the objectivity of our financial
      reporting;





·
            appointing
      the independent registered public accounting firm, determining the
      compensation of the independent registered public accounting firm and
      pre-approving the engagement of the independent registered public
      accounting firm for audit and non-audit
  services;





·
            overseeing
      the independent registered public accounting firm, including reviewing
      independence and quality control procedures and experience and
      qualifications of audit personnel that are providing us audit
      services;





·
            meeting
      with the independent registered public accounting firm and reviewing the
      scope and significant findings of the audits performed by them, and
      meeting with management and internal financial personnel regarding these
      matters; and





·
            reviewing
      our financing plans, the adequacy and sufficiency of our financial and
      accounting controls, practices and procedures, the activities and
      recommendations of the auditors and our reporting policies and practices,
      and reporting recommendations to our full board of directors for
      approval.


43


Compensation
Committee





Two
independent directors are currently appointed to the compensation committee: Ms.
Ying Zhang and Dr. Jianwei Shen. Dr. Shen is chairperson of the committee. Our
compensation committee will oversee and, as appropriate, make recommendations to
the board of directors regarding the annual salaries and other compensation of
our executive officers and our employees, and other policies, and provide
assistance and recommendations with respect to our compensation policies and
practices.





Nominating
Committee





Two
independent directors are currently appointed to the nominating committee: Ms.
Ying Zhang and Dr. Jianwei Shen. Ms. Zhang is chairperson of the committee. Our
nominating committee will assist in the selection of director nominees, approves
director nominations to be presented for stockholder approval at our annual
general meeting and assist in filling any vacancies on our board of directors,
and consider any nomination of director candidates validly made by
stockholders.





Director
Independence





Based
upon information submitted by Ms. Ying Zhang and Dr. Jianwei Shen, the board of
directors has determined that each of them is “independent” under Rule
5605(a)(2) of The NASDAQ Listing Rules, even though such definition does not
currently apply to us because we are not listed on The NASDAQ Capital
Market.





Compensation
Committee Interlocks and Insider Participation





No
interlocking relationship exists between our board of directors and the board of
directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.





Section
16(a) of the Exchange Act





Based
solely on review of the copies of such forms furnished to us, or written
representations that no reports were required, we believe that for the fiscal
year ended December 31, 2009, our directors, executive officers and persons who
beneficially own more than 10% of a registered class of our equity securities
complied with Section 16(a) filing requirements applicable to them, except for
Matthew Hayden.




Code
of Business Conduct and Ethics





We have
adopted a code of ethics that applies to all directors, officers, and employees,
including our chief executive officer and chief financial officer. A copy of the
code of ethics is attached as Exhibit 14.1 to our annual report on Form 10-K
filed with the Securities and Exchange Commission on March 7, 2008.




ITEM
11. EXECUTIVE COMPENSATION





Executive
Compensation





The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended December 31, 2009 and
2008 by our chief executive officer (principal executive officer) and each of
our other two highest paid executives at the end of our last completed fiscal
year whose total compensation exceeded $100,000 during the fiscal years ended
December 31, 2009 and 2008, if any.


44


SUMMARY
COMPENSATION TABLE





Name and principal position
                                                    
                                                    Year
                                                    
                                                    Salary
                                                      ($)
                                                    
                                                    Bonus
                                                      ($)
                                                    
                                                    Stock
                                                      Awards
                                                      ($)
                                                    
                                                    Option
                                                      Awards
                                                      ($)
                                                    
                                                    Non-Equity
                                                      Incentive Plan
                                                      Compensation
                                                      ($)
                                                    
                                                    Nonqualified
                                                      Deferred
                                                      Compensation
                                                      Earnings
                                                      ($)
                                                    
                                                    All Other
                                                      Compensation
                                                      ($)
                                                    
                                                    Total
                                                      ($)Qingqing
      Wu, current President,
                                                    
                                                    2009
                                                    
                                                    8,856
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    $
                                                    8,856CEO,
      Secretary and COO (1)
                                                    
                                                    2008
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    $
                                                    0Matthew
      Hayden, former President,
                                                    
                                                    2009
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    $
                                                    0CEO,
      Secretary, CFO and Treasurer (2)
                                                    
                                                    2008
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    $
                                                    0Bradley
      Miller, former President,
                                                    
                                                    2009
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    $
                                                    0CEO,
      Secretary, CFO and Treasurer(3)
                                                    
                                                    2008
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    
                                                    0
                                                    
                                                    0
                                                    
                                                    $
                                                    0





(1)
            Mr. Wu became our president,
      chief executive officer, chief operating officer and secretary on February
      23, 2009, in connection with our acquisition of PXPF (further described
      above under the heading “History and Corporate Structure”). Mr. Wu’s
      compensation for the periods indicated was paid by Yinglin Jinduren, and
      is based on interbank exchange rate of RMB 1 to $0.1466 on December 31,
      2009. Other than compensation that he received from Yinglin Jinduren, Mr.
      Wu did not receive any compensation from us during
      2009.





(2)
            Mr. Matthew Hayden became the
      Company’s president, chief executive officer, secretary, chief financial
      officer, and treasurer on August 1, 2008, and resigned from all of
      these positions on February 23, 2009, in connection with our acquisition
      of PXPF.





(3)
            Mr. Bradley Miller became the
      Company’s president, chief executive officer, secretary, chief financial
      officer, and treasurer on October 30, 2006, and resigned from all of
      these positions on August 1,
2008.





Outstanding
Equity Awards





There are
no unexercised options, stock that has not vested, or equity incentive plan
awards for any of our named executive officers outstanding as of the end of our
last completed fiscal year.





Retirement
Plans





We
currently have no plans that provide for the payment of retirement benefits, or
benefits that will be paid primarily following retirement, including but not
limited to tax-qualified defined benefit plans, supplemental executive
retirement plans, tax-qualified defined contribution plans and nonqualified
defined contribution plans.





Potential
Payments upon Termination or Change-in-Control





We
currently have no contract, agreement, plan or arrangement, whether written or
unwritten, that provides for payments to a named executive officer at,
following, or in connection with any termination, including without limitation
resignation, severance, retirement or a constructive termination of a named
executive officer, or a change in control of the registrant or a change in the
named executive officer’s responsibilities, with respect to each named executive
officer





Employment
Agreements





We
currently have no employment agreements, whether written or unwritten, with a
named executive officer.





Director
Compensation





Five of
our current directors were appointed on or after February 23, 2009 in connection
with the Exchange Transaction, none of whom received compensation as directors
in 2009. Ms. Ying Zhang became our director on March 10, 2010, and so did not
receive compensation as a director in 2009. Our sole director prior to the
Exchange Transaction did not receive compensation as a director during
2009.


45


Agreements
with Directors




We
entered into a written agreement with Ms. Ying Zhang dated March 10, 2010,
pursuant to which she will, in addition to her duties as a director, serve on
the audit committee as chairperson and be designated as the audit committee
financial expert, serve on the compensation committee as a member, and serve on
the nominating committee as chairperson. For her services, Ms. Zhang will
receive annual compensation of $30,000 in cash and 10,000 restricted shares of
our common stock, payable in four quarterly installments of $7,500 and 2,500
shares each beginning with the quarter ending June 30, 2010. Additionally, we
are obligated to obtain a directors and officers insurance policy, and to
include Ms. Zhang as an insured under such policy.





We
entered into a written agreement with Dr. Jianwei Shen dated March 10, 2010,
pursuant to which he will, in addition to his duties as a director, serve on the
audit committee as a member, serve on the compensation committee as chairperson,
and serve on the nominating committee as a member. For his services, Dr. Shen
will receive annual compensation of $22,000 in cash, payable in four quarterly
installments of $5,500 beginning with the quarter ending June 30, 2010.
Additionally, we are obligated to obtain a directors and officers insurance
policy, and to include Dr. Shen as an insured under such policy.





ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS




The
following table sets forth information regarding the beneficial ownership of our
common stock as of April 6, 2010, for each of the following
persons:




•
            each of our directors and each of
      the named executive
officers;





•
            all directors and named executive
      officers as a group; and





•
            each person who is known by us to
      own beneficially 5% or more of our common
  stock.




Beneficial
ownership is determined in accordance with the rules of the SEC. Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the stockholder’s name. Unless otherwise indicated, the address of each
beneficial owner listed below is 11/F., Xiamen Guanyin Shan International
Commercial Operation Centre, A3-2 124, Hubin Bei Road, Siming District, Xiamen,
Fujian Province, People’s Republic of China. The percentage beneficially owned
set forth below is based on 16,667,957 shares of common stock outstanding on
April 6, 2010.





Name and Position
                
                Number of
                  Shares
                  of
                  Common
                  Stock
                  Beneficially
                  Owned (1)
                
                
                Percent of
                  Shares
                  of
                  Common
                  Stock
                  Beneficially
                  Owned
                  (1)(2)Qingqing
      Wu, Chairman of the Board, President, and Chief Executive
      Officer
                
                
                9,596,496
                (3)
                
                
                57.57
                %Yushan
      Zheng, Chief Financial Officer
                
                
                0
                
                
                
                0
                %Jianwei
      Shen, Director
                
                
                0
                
                
                
                0
                %Zhifan
      Wu, Director
                
                
                0
                
                
                
                0
                %Yuzhen
      Wu, Director
                
                
                0
                
                
                
                0
                %Congming
      Xie, Director
                
                
                0
                
                
                
                0
                %Ying
      Zhang, Director (4)
                
                
                0
                
                
                
                0
                %All
      Executive Officers and Directors as a Group (7 persons)
                
                
                9,596,496
                
                
                
                57.57
                %5%
      Stockholders:Bestgrain
      Limited
                
                
                9,596,496
                (3)
                
                
                57.57
                %




* Less
than 1%


46





(1)
            Under Rule 13d-3, a beneficial
      owner of a security includes any person who, directly or indirectly,
      through any contract, arrangement, understanding, relationship, or
      otherwise has or shares: (i) voting power, which includes the power to
      vote, or to direct the voting of shares; and (ii) investment power, which
      includes the power to dispose or direct the disposition of shares. Certain
      shares may be deemed to be beneficially owned by more than one person (if,
      for example, persons share the power to vote or the power to dispose of
      the shares). In addition, shares are deemed to be beneficially owned by a
      person if the person has the right to acquire the shares (for example,
      upon exercise of an option) within 60 days of the date as of which the
      information is provided. In computing the percentage ownership of any
      person, the amount of shares outstanding is deemed to include the amount
      of shares beneficially owned by such person (and only such person) by
      reason of these acquisition rights. As a result, the percentage of
      outstanding shares of any person as shown in this table does not
      necessarily reflect the person's actual ownership or voting power with
      respect to the number of shares of common stock actually
      outstanding.





(2)
            Unless otherwise indicated in the
      footnotes to the table, each shareholder shown on the table has sole
      voting and investment power with respect to the shares beneficially owned
      by him, her or it.





(3)
            The address of Bestgrain Limited
      is 18A Man Hing Commercial Building, 79-83 Queen’s Road Central, Hong
      Kong. Mr. Qingqing Wu is the director and sole shareholder of Bestgrain
      Limited, thus Mr. Wu indirectly owns the shares held by Bestgrain Limited
      through his sole ownership of Bestgrain
  Limited.





(4)
            Ying
      Zhang’s address is No. 9 Yanyu Middle Road, Qianzhou Village, Huishan
      District, Wuxi, Jiangsu Province, China
214181.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Set forth
below are our related party transactions since January 1, 2008:





Exchange
Transaction





On
February 13, 2009 (the “Closing Date”), we executed the Exchange Agreement with
PXPF and the BVI Shareholders. PXPF owns 100% of HK Dong Rong (formerly called
Korea Jinduren), which controls Yinglin Jinduren through contractual
arrangements. On the Closing Date, we issued 14,560,000 shares of our
common stock to the BVI Shareholders in exchange for 100% of the issued and
outstanding capital stock of PXPF. As a result of the Exchange Transaction,
the BVI Shareholders became our controlling shareholders and PXPF became our
wholly owned subsidiary.





Bridge
Loan





On June
11, 2008, Korea Jinduren (now called HK Dong Rong) entered into a bridge loan
and financing agreement (“Bridge Loan Agreement”) with Pope Investments II LLC
(“Pope”), Ancora Greater China Fund, LP (“Ancora,” and with Pope, collectively
the “Bridge Loan Investors”) and MMH Group LLC (“MMH”). Under the Bridge Loan
Agreement, the Bridge Loan Investors agreed to loan Korea Jinduren the sum of
$550,000 (the “Bridge Loan”) for payment of professional fees and expenses
incurred in connection with the Exchange Transaction. In return, the Bridge Loan
Investors would be repaid the Bridge Loan and received 174,500 shares of our
common stock (the “Bridge Loan Shares”) on or after October 1, 2009 and only
upon the completion of a financing. The Bridge Loan Shares were issued at the
closing of the Exchange Transaction and have therefore been reflected in the
number of our outstanding common shares since such time. Both the Bridge Loan
and the Bridge Loan Shares were placed in a third-party escrow account, and
payments were made from such account as fees and expenses were incurred, and the
Bridge Loan Shares held in escrow until their release to the Bridge Loan
Investors was required. On October 28, 2009, the entire amount of the Bridge
Loan paid out for fees and expenses was repaid, and the balance of the Bridge
Loan remaining in escrow, if any, returned to the Bridge Loan Investors. The
Bridge Loan Shares were released to the Bridge Loan Investors on December 28,
2009 and on March 15, 2010. The Bridge Loan was not recorded at December 31,
2008 because repayment obligation did not exist at such time, since repayment
would only occur on or after October 1, 2009 and only upon the completion of a
financing.


47


Pope
beneficially owned more than 5% of our common stock prior to the Exchange
Transaction. MMH also beneficially owned more than 5% of our common stock prior
to the Exchange Transaction. Additionally, Matt Hayden, our former chief
executive officer, is the managing member of MMH. We do not believe that Pope,
Ancora and MMH are “promoters” as such term is defined in Rule 1-02 of
Regulation S-X.





Our
Officers and Directors’ Relationship with Us, Our Subsidiaries and
VIE





As
described in “Business – Our History and Corporate Structure” above, we control
Yinglin Jinduren through contractual arrangements between HK Dong Rong, our
wholly-owned subsidiary, and Yinglin Jinduren. As described below, some of our
officers and directors are also management members of HK Dong Rong and Yinglin
Jinduren:





Mr.
Qingqing Wu, our chairman and chief executive officer, is the director of
PXPF, with which we entered into the Exchange Transaction. He is also the sole
shareholder and director of Bestgrain Limited, which owns approximately 57.57%
of our issued and outstanding common stock.





Mr. Wu is
also a director of HK Dong Rong, which is wholly owned by PXPF.





Mr. Wu is
also a director of Yinglin Jinduren, which we control by contractual
arrangements, as are Mr. Zhifan Wu and Mr. Yuzhen Wu, who are members of our
board of directors. Mr. Qingqing Wu and Mr. Zhifan Wu, who are brothers, hold
65.91% and 34.09%, respectively, of the ownership interests of Yinglin
Jinduren.





Other
Related Transactions





December
      31,2009
                    
                    
                    2008Amounts
      due from a director:Mr. Qingqing Wu 
      (1)
                    
                    $
                    2,428,000
                    
                    
                    $
                    -Amount
      due to a director:Mr. Qingqing
      Wu  (2)
                    
                    $
                    30,000
                    
                    
                    $
                    2,000





(1)
            This
      amount was deposited into a corporate foreign currency account in October
      and November 2009. To avoid translation losses due to the appreciation of
      the RMB, this amount was withdrawn from the corporate account, converted
      into RMB and deposited in a personal RMB account of Mr. Qingqing Wu in
      trust for the Company. The amount was converted back into U.S. dollars and
      deposited back into the corporate foreign currency account in March
      2010.





(2)
            The
      amount due to the director is money he advanced to us for our general
      expenses, and was unsecured, interest free and repayable on
      demand.


We have
been granted the rights to use four trademarks which are owned by Mr. Qingqing
Wu, our chief executive officer, who have perpetually licensed such rights to us
for use in the PRC for free. However, to date, we have not utilized these
trademarks. Mr. Wu is in the process of transferring these trademarks to
us.





48




ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Our
current principal independent auditor is Crowe Horwath LLP (“Crowe”), whom we
engaged on April 9, 2009. The following table shows the fees that were billed
for audit and other services provided by Crowe in relation to our 2009 and 2008
fiscal years:





For
      the Fiscal Years ended
                          December
      31,2009
                        
                        
                        2008Billing
      Firm
                        
                        Crowe
                        
                        
                        CroweAudit
      Fees (1)
                        
                        $
                        205,000
                        
                        
                        $
                        150,000Audit-related
      Fees (2)
                        
                        
                        12,000
                        
                        
                        
                        -Tax
      Fees (3)
                        
                        
                        -
                        
                        
                        
                        -All
      Other Fees (4)
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        $
                        217,000
                        
                        
                        $
                        150,000





(1)
            Audit Fees – This
      category includes the audit of our annual financial statements, review of
      financial statements included in our Quarterly Reports on Form 10-Q, and
      services that are normally provided by independent auditors in connection
      with statutory and regulatory filings or the engagement for fiscal
      years.  This category also includes advice on audit and
      accounting matters that arose during, or as a result of, the audit or the
      review of interim financial
statements.





(2)
            Audit-Related Fees –
      This category consists of assurance and related services by our
      independent auditors that are reasonably related to the performance of the
      audit or review of our financial statements and are not reported above
      under "Audit Fees."  The services for the fees disclosed under
      this category include consultation regarding our correspondence with the
      SEC.





(3)
            Tax Fees – This category
      consists of professional services rendered by our independent auditors for
      tax compliance and tax advice.  The services for the fees
      disclosed under this category include tax return preparation and technical
      tax advice.





(4)
            All Other Fees – This
      category consists of fees for other miscellaneous
  items.





Pre-Approval
Policies and Procedures of the Board of Directors





Our board
of directors approved the engagement of our independent auditors for fiscal 2009
and 2008, as we did not have an audit committee during those periods. Going
forward, our audit committee will approve the engagement of our independent
auditors and will also pre-approve all audit and non-audit
expenses.





ITEM 15.   EXHIBITS





(1) Financial
Statements





The
consolidated financial statements of the Company are included in Part II, Item 8
of this Report:





(2)
Financial Statement Schedules





(3)
Exhibits


EXHIBIT
INDEX





Exhibit
                  Number
                
                Description2.1
                
                Share
      Exchange Agreement (1)3.1
                
                Articles
      of Incorporation
(2)


49




3.2
              
              Amendment
      to Articles of Incorporation (for 1-for-100 reverse stock split), filed
      with the Nevada Secretary of State on January 12, 2009
  (10)3.3
              
              Articles
      of Merger filed on March 4, 2009 and effective March 20, 2009
      (3)3.4
              
              Certificate
      of Correction filed on March 6, 2009 (3)3.5
              
              Certificate
      of Designation of Preferences, Rights and Limitations of Series A
      Convertible Preferred Stock, filed with the Nevada Secretary of State on
      October 23, 2009 (4)3.6
              
              Bylaws
      (2)3.7
              
              Amendment
      to the Bylaws (1)4.1
              
              Specimen
      Common Stock Certificate (2)4.2
              
              Specimen
      Series A Convertible Preferred Stock Certificate (4)4.3
              
              Form
      of Common Stock Purchase Warrant for the Preferred Shares Financing
      (4)4.4
              
              Form
      of Common Stock Purchase Warrant for the Common Shares Financing
      (6)10.1
              
              Consulting
      Services Agreement (1)10.2
              
              Operating
      Agreement (1)10.3
              
              Equity
      Pledge Agreement (1)10.4
              
              Option
      Agreement (1)10.5
              
              Voting
      Rights Proxy Agreement (1)10.6
              
              Share
      Purchase Binding Letter of Intent with ARC China, Inc. dated September 29,
      2009 (5)10.7
              
              Form
      of Securities Purchase Agreement for the Preferred Shares Financing
      (4)10.8
              
              Form
      of Escrow Agreement for the Preferred Shares Financing
  (4)10.9
              
              Form
      of Securities Purchase Agreement for the Common Shares Financing
      (6)10.10
              
              Supplemental
      Agreement dated February 18, 2009 (8)10.11
              
              Form
      of Director Offer Letter entered into with Ying Zhang and Jianwei Shen
      (11)10.12
              
              Bridge
      Loan and Financing Agreement dated June 11, 2008 *10.13
              
              Trademark
      License Contract for serial number 3871951 dated February 12, 2009
      *10.14
              
              Trademark
      License Contract for serial number 3884844 dated February 12, 2009
      *10.15
              
              Trademark
      License Contract for serial number 3884845 dated February 12, 2009
      *10.16
              
              Trademark
      License Contract for serial number 4247545 dated February 12, 2009
      *10.17
              
              Form
      of Securities Purchase Agreement dated February 13, 2009
  *


50




10.18
                      
                      Form
      of Securities Purchase Agreement dated February 12, 2009
  *14.1
                      
                      Code
      of Ethics (7)16.1
                      
                      Letter
      from Malone & Bailey CPA dated April 15, 2009 (9)21.1
                      
                      List
      of Subsidiaries *31.1
                      
                      Section
      302 Certification by the Corporation’s Chief Executive Officer
      *31.2
                      
                      Section
      302 Certification by the Corporation’s Chief Financial Officer
      *32.1
                      
                      Section
      906 Certification by the Corporation’s Chief Executive Officer
      *32.2
                      
                      Section
      906 Certification by the Corporation’s Chief Financial Officer
      *





*   
   Filed
herewith.





(1)
                
                Filed
      on February 13, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(2)
                
                Filed
      on February 9, 2007 as an exhibit to our Registration Statement on Form
      SB-2, and incorporated herein by reference.(3)
                
                Filed
      on March 20, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(4)
                
                Filed
      on October 30, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(5)
                
                Filed
      on October 5, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(6)
                
                Filed
      on December 2, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(7)
                
                Filed
      on March 7, 2008 as an exhibit to our Annual Report on Form 10-K, and
      incorporated herein by reference.(8)
                
                Filed
      on February 20, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(9)
                
                Filed
      on April 15, 2009, as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(10)
                
                Filed
      on December 17, 2009, as an exhibit to our Registration Statement on Form
      S-1, and incorporated herein by reference.(11)
                
                Filed
      on March 16, 2010, as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by
reference.


51


SIGNATURES





Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Xiamen, Fujian Province,
on April 15, 2010.





VLOV,
      INC.By:
              /s/ Qingqing WuQingqing
      Wu
                Chief Executive Officer
                (Principal Executive Officer)By:
              /s/ Yushan ZhengYushan
      Zheng
                Chief Financial Officer
                (Principal
      Financial and Accounting
Officer)





Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:





Signature
              
              Title
              
              Date/s/ Qingqing Wu
              
              
              
              April
      15, 2010Qingqing
      Wu
              
              Chairman
      of the Board, President,
                and
      Chief Executive Officer/s/ Yushan Zheng
              
              
              
              April
      15, 2010Yushan
      Zheng
              
              Chief
      Financial Officer/s/ Jianwei Shen
              
              
              
              April
      15, 2010Jianwei
      Shen
              
              Director/s/ Zhifan Wu
              
              
              
              April
      15, 2010Zhifan
      Wu
              
              Director/s/ Yuzhen Wu
              
              
              
              April
      15, 2010Yuzhen
      Wu
              
              Director/s/ Congming Xie
              
              
              
              April
      15, 2010Congming
      Xie
              
              Director/s/ Ying Zhang
              
              
              
              April
      15, 2010Ying
      Zhang
              
              Director


52