UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D. C. 20549




FORM
10-K/A


(Amendment
No. 2)




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





 ̈
            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  ̈ 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  ̈ 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  ̈




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.  ̈




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    ̈
              Accelerated
      filer    ̈Non-accelerated
      filer    ̈
              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  ̈ 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
                  
                  4Item
      1A.
                  Risk
      Factors
                  
                  17Item
      1B.
                  Unresolved
      Staff Comments
                  
                  31Item
      2.
                  Properties
                  
                  31Item
      3.
                  Legal
      Proceedings
                  
                  32PART
      IIItem
      5.
                  Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  
                  32Item
      6.
                  Selected
      Financial Data
                  
                  33Item
      7.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
                  
                  33Item
      7A.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  40Item
      8.
                  Financial
      Statements and Supplementary Data
                  
                  F-1Item
      9.
                  Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                  
                  41Item
      9A (T).
                  Controls
      and Procedures
                  
                  41Item
      9B.
                  Other
      Information
                  
                  43PART
      IIIItem
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  
                  43Item
      11.
                  Executive
      Compensation
                  
                  47Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  
                  49Item
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  
                  50Item
      14.
                  Principal
      Accounting Fees and Services
                  
                  52PART
      IVItem
      15.
                  Exhibits,
      Financial Statement Schedules
                  
                  52Signatures
                  
                  
                  55


2





EXPLANATORY
NOTE




This
Form 10-K/A (“Amendment No.2”) is being filed by VLOV, Inc. (the “Company”) to
amend the Company’s Annual Report on Form 10-K for the year ended December 31,
2009 filed with the Securities and Exchange Commission (“SEC”) on April 15, 2010
(“Initial 10-K”) and the Company’s Amendment No. 1 of the Initial 10-K
(“Amendment No. 1”) filed with the SEC on October 27, 2010.  This
Amendment No.2 includes the revisions made to the Initial 10-K that were already
included in Amendment No. 1, specifically: (i) amended the disclosures in the
“Management’s Annual Report on Internal Controls over Financial Reporting”
section under Item 9A, and (ii) amended and supplemented the disclosures in the
“Business Experience Descriptions,” “Involvement in Certain Legal Proceedings”
and “Section 16(a) of the Exchange Act” sections under Item 10.  This
Amendment No. 2 also includes additional changes, as follows: (i) amended and
supplemented the disclosures in the “Business” section under Item 1; (ii)
amended and supplemented the risk factors disclosed under the section “Risk
Factors” in Item 1A; (iii) amended and supplemented the disclosures in the
“Overview,” “Critical Accounting Policies,” Results of Operations” and
“Liquidity and Capital Resources” sections under Item 7; (iv) amended the
disclosures under the section titled “Management’s Annual Report on Internal
Control over Financial Reporting” under Item 9A; (v) additional revisions to the
disclosures regarding the biographies of the Company’s directors in the section
titled “Business Experience Descriptions” under Item 10; (v) amended and
supplemented the discussions regarding executive compensation and the section
titled “Employment Agreements” under Item 11; and (vi) amended and supplemented
the discussions regarding related parties and related party transactions under
Item 13 titled “Certain Relationships and Related Transactions and Director
Independence.”




These
changes were made, and this Amendment No. 2 is being filed in connection with,
letters from the SEC dated September 20, 2010 and November 12, 2010 regarding
Amendment No. 2 and Amendment No. 3 of the Company’s Registration Statement on
Form S-1 (333-163803).  Except as required to reflect the changes
noted above, this Amendment No. 2 does not reflect events occurring after the
filing of the Initial 10-K on April 15, 2010, and no other information in the
Initial 10-K is amended hereby.  Other events or circumstances
occurring after the date of the Initial 10-K or other disclosures necessary to
reflect subsequent events have not been updated subsequent to the date of the
Initial 10-K.  Accordingly, this Amendment No. 2 should be read in
conjunction with the Initial 10-K, Amendment No. 1 and the Company’s filings
with the SEC subsequent to the filing of the Initial 10-K.


3


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. Presently, we employ five
(5) designers.  Our designers typically have a degree in fashion as
well as other industry experience. Our designers are responsible for creating
fall fashions and spring fashions for our various branded lines including,
Richard Wu, VLOV and V9. After identifying our top sales products from the prior
seasons, we review global fashion trends especially in Europe and
Asia.  Then we decide on the overall theme, colors and materials to be
used for our products.  Our designers then create sketches via
Computer Aided Design (CAD) drawings.  Our technicians then prepare
samples according to the designs.  After creating samples, these are
inspected, amended, reviewed and/or approved by our head designer and,
ultimately, by our CEO and Chairman, Mr. Wu.  Clothing samples are
then made from these designs and shown to our distributors.  Our
distributors then order product from these samples.





We market
and distribute our products through independent distributors, each of whom is
granted rights to market and sell our products in a defined market or territory
through a distribution agreement. We maintain and exercise control over brand
advertising and marketing activities from our headquarters in Yinglin, where we
set the tone for integrity, consistency and direction of the V·LOV brand image
throughout China. We also have marketing staff travelling around the country to
help us enforce our visions and provide support and guidelines for our
distributors.  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.


4





History
and Corporate Structure


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





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





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





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





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





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





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





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





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


5




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





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 present intention and that of the equity owners of
Yinglin Jinduren to transfer all of the business operations currently conducted
by Yinglin Jinduren to China Dong Rong for no consideration in the first quarter
of 2011.  Such transfer will provide us with direct control over our
operating assets, which we currently control through the contractual
arrangements with Yinglin Jinduren and its owners as described below. The
Company intends to exit from the contractual arrangements with Yinglin Jinduren
upon at the time of or immediately following the completion of this
transfer.  .  The Company is still in the process of working
on the transfer with PRC authorities and thus such transfer has not been
completed and China Dong Rong currently conducts no business
activities.





Contractual
Arrangements with Yinglin Jinduren and its Owners





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





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





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


6




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





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




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





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





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





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


7




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





However,
control based on these contractual arrangements may ultimately not be as
effective as direct ownership of Yinglin Jinduren, as we will need to enforce
our rights through quasi-judicial proceeding in the event Yinglin Jinduren fails
to perform its contractual obligations. In the event the outcome of such
proceeding is unfavorable to us, we may effectively lose control over Yinglin
Jinduren. Please see “Our
contractual arrangements with Yinglin Jinduren and its owners as well as our
ability to enforce our rights thereunder may not be as effective in providing
control over Yinglin Jinduren as direct ownership ”  in the “Risk Factors”
section beginning on page22of this
Form 10-K. Our chief executive officer, Mr. Qingqing Wu, holds
approximately 57.57% of our issued and outstanding common stock as of the date
of April 6, 2010 and is also the majority owner of Yinglin Jinduren (65.91%),
along with his brother Mr. Zhifan Wu (34.09%), who previously served on our
board of directors.  As such, we believe that our interests are
aligned with those of Yinglin Jinduren and its owners.  However, we
cannot give assurance that such interests will always be aligned, or that we can
effectively control Yinglin Jinduren if and when such interests are no longer
aligned. Please see “Management members of Yinglin
Jinduren have potential conflicts of interest with us, which may adversely
affect our business and your ability for recourse.” in the “Risk Factors”
section beginning on page23of this
Form 10-K.





Our
Current Corporate Structure




The
following diagram illustrates our current corporate structure:











(1)
            Through the Exchange
      Transaction, we became the parent company of PXPF, thereby enabling
      Yinglin Jinduren, through PXPF and HK Dong Rong, to raise capital in the
      United States. Our management includes: Mr. Qingqing Wu as Chairman
      and Chief Executive Officer, Mr. Bennet P. Tchaikovsky as Chief Financial
      Officer, and Dr. Jianwei Shen, Mr. Yuzhen Wu, Ms. Ying Zhang and Mr.
      Jianhui Wang as members of the board of directors. As of April 6,
      2010: Mr. Qingqing Wu owns approximately 57.57% of our
      issued and outstanding common stock; Mr. Bennet P. Tchaikovsky, Dr.
      Jianwei Shen, Mr. Yuzhan Wu, Ms. Ying Zhang and Mr. Jianhui Wang do not
      own any shares of common
stock.





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





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





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





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


8





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





Financing
Transactions





Preferred
Shares Financing


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





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




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





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




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





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





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





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


9





Common
Shares Financing





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





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





Other
than their issuance date, the Warrants issued to the Common Shares Purchasers
are identical to those issued to the Preferred Shares Purchasers, and entitle
their holders to purchase one share of common stock at an exercise price of
$3.43 per share (subject to certain adjustments) for a period of three
years.





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 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


10




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





Our
goal is to provide stylish, fashion-forward clothing, to our target customer,
the male Chinese consumer aged 20 to 45. To achieve this goal, we must maintain
our brand image and make our brand more exclusive. We, along with our
distributors, believe that certain types of POS (counters and concessions)
lessen our overall brand value. Accordingly, since the beginning of this year,
our distributors have closed over 200 counters and concessions. Conversely, we
believe that certain POS, mainly stand-alone stores, enhance brand value. Thus,
our distributors plan to open 30 to 40 stand-alone locations by the end of this
year. To date, our distributors have been willing to make such investments
because we have increased our marketing budget significantly as a percentage of
our revenue and because of our ability to produce clothing that we believe is
reflective of our brand image. Ultimately, our goal is for our distributors to
move towards stand-alone stores as this will continue to enhance our brand value
amongst our target consumer base.





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





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





·
            the relevant experience in the
      management and operation of casual wear retail
      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 have continued to upscale our product offerings
to our distributors and have been working with our distributors to sell our
products primarily via free standing store and store-in-store POS and not
through counter and concession POS as we believe that free standing stores and
store-in-stores strengthen our brand image with consumers. We anticipate
that our distributors will open between 30 and 40 stand alone stores that
reflect VLOV’s upscale brand image by December 31, 2010.  We allow our
distributors to use authorized third-party retail store operators to operate
V·LOV POS.  Distributors must obtain our prior written approval before
appointing such retail store operators.





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





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


11




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. Instead, we currently 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 the costs of maintaining what would
otherwise be a massive workforce.





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





Our
outsourcing varies seasonally depending upon such factors as current factory
capacity and customer demand. We currently work with 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 purchasing raw materials or finished products.





Our
Sales and Marketing





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





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





Our
advertising expenses were 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.


12




Production
and Quality Control




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





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


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


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


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


·
            audit the final products
      before products are
delivered.




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




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





Logistics
and Inventory





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





Competition





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





We
believe that our chief competitive strength is our in-depth and thorough
understanding of our targeted customer groups in China. 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 are also
competing in the same space as V·LOV.


13




Intellectual
Properties and Licenses





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





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




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





Governmental
Regulations





Fabric
Safety





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





Enterprise
Taxation





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





Value
Added Tax





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





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


14




Environmental
Protection Regulations





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




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




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




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





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.


15




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


16




·
            variation in the expenditure
      necessary to support our
business.





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




Employees





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





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





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




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





Compliance
with Environmental Laws





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





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.


17




Risks
Relating to Our Industry





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





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





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





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





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





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.


18


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





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





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




For
the 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;




19


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





We
rely on our distributors to operate our retail network.





Our
distributors operate, directly or indirectly via 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.


20


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





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





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





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





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





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





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





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





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


21


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 delivery of products by our
distributors could negatively impact our net sales and results of operations for
any given quarter.  The timing of new POS openings by our distributors
and the amount of revenue contributed by such new POS could also impact our net
sales and results of operations for any given quarter.  As a result of
these specific and other general factors, our operating results will likely vary
from quarter to quarter and the results for any particular quarter may not be
necessarily indicative of results for the full year.  Any shortfall in
revenues or net income from levels expected by securities analysts and investors
could cause a decrease in the trading price of our common
stock.





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





Presently
we have distribution agreements with 12 distributors. For the year ended
December 31, 2009, four of our distributors each accounted for 10% or more of
our total net sales, or 54.58% of our total net sales in the aggregate. 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. 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.


22


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 to our
brand.





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





Risks
Related to Our Corporate Structure





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





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


23


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





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





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





·
            discontinuing or restricting
      the operations of Yinglin
Jinduren;





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





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





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





·
            imposing fines or other forms
      of economic penalties.




As all
of our business operations are conducted by Yinglin Jinduren to which we have no
direct ownership, the imposition of any of these penalties would severely
disrupt our ability to conduct business and have a material adverse effect on
our financial condition, results of operations and prospects.





Our
contractual arrangements with Yinglin Jinduren and its owners as well as our
ability to enforce our rights thereunder may not be as effective in providing
control over Yinglin Jinduren as direct ownership.





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





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





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


24


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




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





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





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





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





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





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





Our
principle shareholder may be subject to registration requirement under current
regulations relating to offshore investment activities by PRC residents, the
non-compliance of which may subject us to fines and sanctions that could
adversely affect our business.





In
October 2005, the State Administration of Foreign Exchange (“SAFE”) promulgated
Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’
Corporate Financing and Roundtrip Investment Through Offshore Special Purpose
Vehicles, or Circular 75, that states that if PRC citizens residing in the
PRC, or PRC residents, 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.


25


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.


26


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





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





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





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


27


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.


28


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.


29


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.


30


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)


31


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.


32


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 annual
report on Form 10-K.  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.





Our
goal is to provide stylish, fashion-forward clothing, to our target customer,
the male Chinese consumer aged 20 to 45. To achieve this goal, we must maintain
our brand image and make our brand more exclusive. We, along with our
distributors, believe that certain types of POS (counters and concessions)
lessen our overall brand value. Accordingly, since the beginning of this year,
our distributors have closed over 200 counters and concessions. Conversely, we
believe that certain POS, mainly stand-alone stores, enhance brand value. Thus,
our distributors plan to open 30 to 40 stand-alone locations by the end of this
year. To date, our distributors have been willing to make such investments
because we have increased our marketing budget significantly as a percentage of
our revenue and because of our ability to produce clothing that we believe is
reflective of our brand image. Ultimately, our goal is for our distributors to
move towards stand-alone stores as this will continue to enhance our brand value
amongst our target consumer base.





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





We
also have a wholly-owned PRC subsidiary through HK Dong Rong called Dong Rong
(China) Co., Ltd. (“China Dong Rong”). It is our present intention and that of
the equity owners of Yinglin Jinduren to transfer all of the business operations
currently conducted by Yinglin Jinduren to China Dong Rong for no consideration
in the first quarter of 2011.  The Company intends to exit from the
contractual arrangements with Yinglin Jinduren upon at the time of or
immediately following the completion of this transfer. The Company is still
in the process of working on the transfer with PRC authorities and thus such
transfer has not been completed and China Dong Rong currently conducts no
business activities.


33


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. 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. Historically, our credit losses have not
been significant and within our expectations; however, we cannot guarantee that
we will continue to experience the same credit loss rates that have been
experienced in the past.


34


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
                %





Net
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 design and create samples, which
are presented to our distributors at our biannual previews for their selection
and purchase based on what they believe will sell most effectively in their POS.
Additionally, we set guidelines for our distributors as to how our products are
to be advertised and displayed. We believe that our sales are driven by
marketing and advertising as well as by creating fashionable designs. 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.


35


The
following table sets forth the geographical breakdown of our total net sales
revenue 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 based on the
clothing samples we design and create. 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.


36


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. In order to increase our brand image and awareness, we
anticipate that our selling expenses will continue to increase in absolute
dollars and as a greater percentage of total revenue, as we continue our
marketing efforts to support our existing distribution network as well as to
penetrate potential new markets.
 
 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.  As
we continue to further improve our operating infrastructure and incur expenses
related to being a U.S. public company, we anticipate that our general and
administrative expenses will continue to increase in absolute dollars as well as
a percentage of total revenues.
  37
 
 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.  As a result, we had other
income added to our net income for the year ended December 31, 2009 as opposed
to other expenses for the prior year.  In future periods, we will
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, in the amount of $5,131,000 and $9,389,000 for 2009 and 2008
respectively, 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.
  38
 
 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.
  39
 
 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.
  40
  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 and Comprehensive Income
                    
                    F-4Consolidated
      Statements of Stockholders’ Equity
                    
                    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 and comprehensive income, stockholder’s equity 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 AND COMPREHENSIVE 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 shares  outstanding: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
STATEMENTS OF STOCKHOLDERS’ EQUITY
 (Amounts
in thousands – except for share and per share data)
  Common stock
                                      
                                      Preferred stock
                                      
                                      
                                      Additional
                                        paid-in
                                      
                                      
                                      Statutory
                                      
                                      
                                      Accumulated
                                        other
                                        comprehensive
                                      
                                      
                                      Retained
                                      
                                      
                                      TotalShares
                                      
                                      
                                      Amount
                                      
                                      Shares
                                      
                                      Amount
                                      
                                      
                                      capital
                                      
                                      
                                      reserve
                                      
                                      
                                      income
                                      
                                      
                                      earnings
                                      
                                      
                                      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
                                      )Balance
      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
                                      )Balance
      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.
 
 The
Company evaluates its uncertain tax positions and prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken (or expected to be taken) in a tax
return.
  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.





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 because we did not maintain effective
controls over the preparation, review, presentation and disclosure of amounts
related to our sales of preferred stock, common stock and warrants in November
and December 2009 that were included in our consolidated balance sheets and
consolidated statements of income. Such effective controls were not in place
because the Company’s financial control environment was not designed effectively
to mitigate material misstatement from being prevented or detected. Due to their
relative inexperience, the Company’s accounting staff was not able to properly
account for such complex transactions in a timely manner. Accordingly,
management concluded that this control deficiency constituted a material
weakness.


41


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.


42


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 Master of Business Administration degree from Tsing-Hua University in
2007.  Mr. Wu worked as a designer at Huacai Apparel Factory
(“Huacai”) in Jinjiang County from August 1990 to August
1992.  Between September 1992 and September 1994, Mr. Wu served as the
Director of Design and Assistant to General Manager at Shidali Apparel Co., Ltd.
(“Shidali”) in Jinjiang City.  Neither Huacai nor Shidali is an
affiliate of, or otherwise associated with, the Company.  In November
1994, Mr. Wu founded Yinglin Jinduren, our operating business segment, and is
currently its Chairman, Executive Director, Chief Designer and majority equity
owner.  Since November 2009, Mr. Wu has also served as the Standing
Director of the First Committee of the Association of Fabric & Apparel in
Jinjiang City, a local trade association.  Mr. Wu was chosen to serve
as Chairman of our board of directors because of his extensive experience as
founder, Chairman and Executive Director of our operating business segment and
also because of his prior educational background and work experience as part of
management and as a designer in other Chinese apparel
businesses.





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.,
an automobile electrical parts manufacturer and distributor in Fujian Province,
from August 1987 to February 2000. Between March 2000 and February 2004, Mr.
Zheng served as the Manager of Auditors at Putian-based Huada Certified Tax
Agent Firm, which provides accounting, tax planning, and assets auditing and
evaluation services to PRC enterprises.  From March 2004 to February
2009, Mr. Zheng served as the Manager of Finance Department and acted as the
Chief Financial Officer of Sanyuan Metal Co., Ltd., a steel distributor, and
Sanchuan Aluminum Co., Ltd., an aluminum manufacturer and distributor,
respectively, in Fujian Province.  Beginning in February 2009, Mr.
Zheng has been serving as the Chief Financial Officer of Yinglin Jinduren.
 None of these companies is related to or affiliated with us. Mr. Zheng is
a Chinese Certified Public Accountant and a Certified Tax Agent.


43


Dr. Jianwei Shen holds a
Doctorate of Economics and Management from China Agricultural University, a
Doctorate of Philosophy from Hohenheim University in Germany, a Master Degree in
Economics and Management from Beijing Agricultural University, and a Bachelor’s
Degree in Agricultural Economics from Beijing Agricultural
University.  Dr. Shen’s vast educational background in economics and
management as well as his experience working with China-based companies,
including companies that are  publicly traded outside of China,
provided the basis for concluding that Dr. Shen should be chosen to serve as a
member of the Company’s board of directors.  Since October 2006, Dr.
Shen has been an independent director and a member of the Audit Committee of the
China Essence Group Ltd., a food processing company listed on the Singapore
Exchange (Main Board).  From January 2002 to January 2005, he served
as a project manager for marketing at Fujian Fuma Foods Group Co., a distributor
of finished food products, and he worked as a project manager for marketing at
Beijing Dasbro Co. Ltd., a maker of potato chips, from November 1993 to December
2000.  None of these companies that Dr. Shen worked with is related to
or affiliated with us.  Dr. Shen is also a member of the Specialist
Advisors to the City of Jinjiang, Fujian, which advises the municipal government
on policy issues, a position he has held since January 2006.  Dr. Shen
also provides strategic corporate advisory services to Yinglin
Jinduren.




Zhifan Wu serves as the
manager of Yinglin Jinduren’s Purchasing Department, a position he has held
since March 2006.  Mr. Wu is also the brother of Qingqing Wu, our
chief executive officer, and has a 34.09% ownership interest in Yinglin
Jinduren. Mr. Wu worked as the purchasing assistant at Huangbao Apparel Co.,
Ltd. (“Huangbao”) from March 1996 to February 2000, and as manager of Huangbao’s
purchasing department  from March 2000 to December 2005. Huangbao is a
manufacturer and distributor of menswear and is not related to or affiliated
with us.





Yuzhen Wu graduated from
Huaqiao University in 1998 with a major in Business Management. Mr. Wu is a
valued management member of Yinglin Jingduren, where he has worked since May
1998.  Mr. Wu was chosen to be a member of our board of directors
because of his extensive work and management experience in the apparel industry
that he has gained as a member of the management team of Yinglin Jinduren, our
operating business segment, as described more fully below.   From
June 1998 to August 2001, Mr. Wu worked as the workshop director supervising all
aspects of our production workshop.  From September 2001 to October
2003, Mr. Wu worked as the production manager overseeing all production
arrangements and process.  Mr. Wu served as the vice general manager
between November 2003 and January 2006, supervising and managing our production,
quality and inventory planning process, and as director of the general
production management since February 2006, coordinating with O.E.M.
manufacturers to ensure that their production volumes and quality meet with our
requirements.





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., a textile manufacturer
and distributor in Xiamen City, Fujian Province which is not related to or
affiliated with us.  Mr. Xie is another valued management member of
Yinglin Jinduren, working as the assistant general manager since January 2005,
where he supervises market information gathering and analysis and fabric
evaluation and sourcing.





Ying (Teresa) Zhang is
currently the chief financial officer and a director of China Wind Systems, Inc.
(“China Wind”), a U.S. public company (NASDAQ: CWS) that manufactures wind power
equipment in China.   Ms. Zhang was chosen to serve as a member
of the board of directors because of her experience with China Wind, as well as
her extensive prior work experience and educational background in the accounting
field.  Ms. Zhang was previously an auditing manager at GC Alliance HK
CPA in Beijing from July 2005 until January 2010, where she provided
auditing services to China-based companies.  From January 2003 through
June 2005, Ms. Zhang served as a liaison officer for the Australian-Chinese
Friendship Business Association, a trade organization, and from July 2000 to
September 2002 she was an auditor at Ernst & Young in
Beijing.  None of these companies that Ms. Zhang worked with is
related to or affiliated with us. Ms. Zhang is a certified practicing accountant
in Australia.  She received a bachelor’s degree in international
accounting from Renmin University in China in 1996 and a master’s degree in
accounting from Macquarie University in Australia in 2005.  Her
accounting background and her experiences working with China-based companies
both from the inside and as an outside auditor are valuable resources for us in
structuring and managing our own internal control and financial reporting
measures.





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
owned more than 10% of a registered class of the Company's equity securities
complied with Section 16(a) filing requirements applicable to them, except for
the following: (1) Matthew Hayden did not file a Form 4 in connection with his
resignation from his officer positions and directorship; (2) MMH Group, LLC did
not file a Form 4 in connection with the additional shares of the Company’s
common stock it acquired in February 2009; and (3) Ancora Greater China Fund, LP
did not file a Form 4 in connection with the additional shares of the Company’s
common stock it acquired in February 2009.


44


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 ten
years:





(a)
            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;





(b)
            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;





(c)
            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:





(d)
            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;





(e)
            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





(f)
            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.


45


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.


46


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
owned more than 10% of a registered class of the Company's equity securities
complied with Section 16(a) filing requirements applicable to them, except for
the following: (1) Matthew Hayden did not file a Form 4 in connection with his
resignation from his officer positions and directorship; (2) MMH Group, LLC did
not file a Form 4 in connection with the additional shares of the Company’s
common stock it acquired in February 2009; and (3) Ancora Greater China Fund, LP
did not file a Form 4 in connection with the additional shares of the Company’s
common stock it acquired in February 2009.




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 principal executive officer and each of our other two highest paid
executives, if any, whose total compensation exceeded $100,000 during the fiscal
years ended December 31, 2009 and 2008.


47


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 any
of our named executive officers, nor any compensatory plans or arrangements
resulting from the resignation, retirement or any other termination of any of
our executive officers, from a change-in-control, or from a change in any
executive officer’s responsibilities following a
change-in-control.




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.


48


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.  The estimated
amount of expense related to the restricted shares using a $6.00 share price is
$60,000 that will be recognized during the period of service. We used the share
price on the date of grant to value the shares as the number of shares to be
issued was fixed.





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%


49


(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 known as
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, MMH and the Bridge Loan Investors agreed to provide a
U.S. public shell company suitable for the Exchange Transaction, and the Bridge
Loan Investors also agreed to loan Korea Jinduren the sum of $550,000 (the
“Bridge Loan”) for payment of professional fees and expenses incurred in
connection with the Exchange Transaction.  The Bridge Loan Investors
and MMH would collectively receive shares of common stock equal to 4% of our
post-Exchange Transaction total outstanding and issued common stock.
Additionally, the Bridge Loan Investors would be repaid the Bridge Loan and
collectively receive  shares of our common stock equal to 1% of our
post-Exchange Transaction total issued and outstanding common stock (the “Bridge
Loan Shares”) on or after October 1, 2009 and only upon the completion of a
financing.  174,500 shares of common stock were issued at the closing
of the Exchange Transaction 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.


50


Immediately
prior to the Exchange Transaction, Pope, Ancora and MMH beneficially owned
343,840 shares, 147,360 shares and 122,800 shares of our common stock,
respectively, representing 23.6%, 10.1% and 8.4%, respectively, of our then
issued and outstanding common stock. Matt Hayden, our former chief
executive officer, is the managing member of MMH. We believe that Pope, Ancora
and MMH may be deemed “promoters,” as such term is defined in Rule 1-02 of
Regulation S-X, in connection with Sino Charter, Inc., our predecessor entity
immediately prior to the Exchange Transaction, and are providing such disclosure
as required under Item 404(c) of Regulation S-K.   In addition to
the above-described Bridge Loan transaction, MMH also advanced $26,238 that was
used for working capital of the Company’s predecessor business prior to the
closing of the Exchange Transaction.  These advanced funds were
unsecured, non-interest bearing, and due on demand.  These advanced
funds were repaid back to MMH prior to the closing of the Exchange
Transaction.





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 is Mr. Yuzhen Wu, who is a member 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.  Because
Mr. Qingqing Wu also owns a majority of our issued and outstanding common stock,
we believe that our interests are aligned with those of Yinglin Jinduren and its
owners. However, please see “Our contractual arrangements with
Yinglin Jinduren and its owners as well as our ability to enforce our rights
thereunder may not be as effective in providing control over Yinglin Jinduren as
direct ownership ” and “Management members of Yinglin
Jinduren have potential conflicts of interest with us, which may adversely
affect our business and your ability for recourse ”  in the “Risk Factors”
section beginning on page 15 of this Form 10-K.





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.





Qingqing
Wu currently has four trademarks registered in his name that were intended to be
transferred to Yinglin Jinduren for no consideration prior to the closing of the
Exchange Transaction. As such transfers could not be timely
effected,  Mr. Wu entered into trademark license contracts with
Yinglin Jinduren on February 12, 2009, pursuant to which he perpetually granted
Yinglin Jinduren the rights to use these trademarks for no
consideration.  Mr. Wu is also in the process of transferring the
trademarks to Yinglin Jinduren for no consideration as originally intended,
although such transfers have not been completed.  To date, Yinglin
Jinduren has not utilized these trademarks, and the Company considers the value
of these trademarks to be de minimis.


51


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)


52





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
  (12)10.13
              
              Trademark
      License Contract for serial number 3871951 dated February 12, 2009
      (12)10.14
              
              Trademark
      License Contract for serial number 3884844 dated February 12, 2009
      (12)10.15
              
              Trademark
      License Contract for serial number 3884845 dated February 12, 2009
      (12)10.16
              
              Trademark
      License Contract for serial number 4247545 dated February 12, 2009
      (12)10.17
              
              Form
      of Securities Purchase Agreement dated February 13, 2009
      (12)


53





10.18
              
              Form
      of Securities Purchase Agreement dated February 12, 2009
      (12)14.1
              
              Code
      of Ethics (7)16.1
              
              Letter
      from Malone & Bailey CPA dated April 15, 2009 (9)21.1
              
              List
      of Subsidiaries (12)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.


(12)
            Filed
      on April 15, 2010, as an exhibit to our Annual Report on Form 10-K, and
      incorporated herein by
reference.


54


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 December 29, 2010.




VLOV,
      INC.By:
              /s/ Qingqing
  WuQingqing
      Wu
                Chief Executive Officer
                (Principal Executive Officer)By:
              /s/ Bennet P.
      TchaikovskyBennet
      P. Tchaikovsky
                Chief Financial Officer
                (Principal
      Financial and Accounting
Officer)





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





Signature
              
              Title
              
              Date/s/ Qingqing Wu
              
              
              
              December
      29, 2010Qingqing
      Wu
              
              Chairman
      of the Board, President,
                and
      Chief Executive Officer/s/ Bennet P.
      Tchaikovsky
              
              
              
              December
      29, 2010Bennet
      P. Tchaikovsky
              
              Chief
      Financial Officer/s/ Jianwei Shen
              
              
              
              December
      29, 2010Jianwei
      Shen
              
              Director/s/ Yuzhen Wu
              
              
              
              December
      29, 2010Yuzhen
      Wu
              
              Director/s/ Jianhui Wang
              
              
              
              December
      29, 2010Jianhui
      Wang
              
              Director/s/ Ying Zhang
              
              
              
              December
      29, 2010Ying
      Zhang
              
              Director