10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Mark One)

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

For the quarterly period ended: June 30, 2011

Or

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

For the transition period from ______________ to _______________

Commission File Number:  000-53155

VLOV INC.

(Exact name of registrant as specified in its charter)

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

11/F., 157 Taidong Road Xiamen Guanyin Shan International Commercial Operation Centre, A3-2 Siming District Xiamen, Fujian Province People’s Republic of China	N/A
(Address of principal executive offices)	(Zip code)

(86592) 2345999

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each issuer’s classes of common stock, as of the latest practicable date: 18,627,869 shares issued and outstanding as of August 18, 2011.

EXPLANATORY NOTE

The purpose of this amendment on Form 10-Q/A to VLOV, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2011, filed with the Securities and Exchange Commission on August 22, 2011 (the “Form 10-Q”), is solely to furnish Exhibit 101 to the Form 10-Q, as required by Rule 405 of Regulation S-T. Exhibit 101 provides the financial statements and related notes from the Form 10-Q formatted in eXtensible Business Reporting Language (XBRL).

No other changes have been made to the Form 10-Q. This Form 10-Q/A speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date and does not modify or update in any way disclosure made in the Form 10-Q.

Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Item 6.  Exhibits.

EXHIBIT INDEX

Exhibit Number	Description
2.1	Share Exchange Agreement (1)
3.1	Articles of Incorporation (2)
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 (9)
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 (5)
4.5	Form of Common Stock Purchase Warrant issued to American Capital Ventures, Inc. (15)
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	Form of Securities Purchase Agreement for the Preferred Shares Financing (4)
10.7	Form of Escrow Agreement for the Preferred Shares Financing (4)
10.8	Form of Securities Purchase Agreement for the Common Shares Financing (5)
10.9	Supplemental Agreement dated February 18, 2009 (7)
10.10	Form of Director Offer Letter entered into with Ying Zhang and Jianwei Shen (10)
10.11	Bridge Loan and Financing Agreement dated June 11, 2008 (14)
10.12	Form of Securities Purchase Agreement dated February 13, 2009 (11)
10.13	Form of Securities Purchase Agreement dated February 12, 2009 (11)
10.14	Loanout Agreement with Worldwide Officers, Inc. dated April 27, 2010 (12)
10.15	Director Offer Letter with Jianhui Wang dated June 1, 2010 (13)
14.1	Code of Ethics (6)
21.1	List of Subsidiaries (11)
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 **
99.1	Trademark License Contract for serial number 3871951 dated February 12, 2009 (11)
99.2	Trademark License Contract for serial number 3884844 dated February 12, 2009 (11)
99.3	Trademark License Contract for serial number 3884845 dated February 12, 2009 (11)
99.4	Trademark License Contract for serial number 4247545 dated February 12, 2009 (11)
99.5	Regional Distributorship Agreement between Yinglin Jinduren and C-002 of Mingzhu 100 Market dated May 25, 2009 (15)
99.6	Regional Distributorship Agreement between Yinglin Jinduren and Jinyang Commerce Co., Ltd. dated May 25, 2009 (15)
99.7	Regional Distributorship Agreement between Yinglin Jinduren and Jinduren Store, Tianqiao District, Jinan dated May 25, 2009 (15)
99.8	Regional Distributorship Agreement between Yinglin Jinduren and Clothwork Apparel, Wanma Plaza dated May 25, 2009 (15)
99.9	Land Use Right and Building Transfer Agreement between Yinglin Jinduren and Zhimeng Wu dated February 20, 2011 (16)
99.10	Property Transfer Agreement between Yinglin Jinduren and Zhimeng Wu dated January 25, 2011 (16)
99.11	Purchase Agreements between Yinglin Jinduren and its major suppliers for 2010 (16)
99.12	Purchase Agreements between China Dong Rong and its major suppliers for 2011 (16)
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

*  Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes ofSection 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

**  Previously filed as an Exhibit to the original Form 10-Q for the period ending June 30, 2011, as filed with the Securities and Exchange Commission on August 22, 2011.

(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 December 2, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(6)  Filed on March 7, 2008 as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.

(7)  Filed on February 20, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(8)  Filed on April 15, 2009, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(9)  Filed on December 17, 2009, as an exhibit to our Registration Statement on Form S-1, and incorporated herein by reference.

(10)  Filed on March 16, 2010, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

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

(12)  Filed on May 3, 2010, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(13)  Filed on June 3, 2010, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(14)  Filed on August 27, 2010, as an exhibit to our Amendment to Registration Statement on Form S-1/A, and incorporated herein by reference.

(15)  Filed on October 27, 2010, as an exhibit to our Amendment No. 3 to Registration Statement on Form S-1/A, and incorporated herein by reference.

(16)  Filed on March 31, 2011, as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.

SIGNATURES

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

	VLOV INC.
	(Registrant)
Date: August 26, 2011	By:	/s/ Qingqing Wu
		Qingqing Wu
		Chief Executive Officer
Date: August 26, 2011	By:	/s/ Bennet P. Tchaikovsky
		Bennet P. Tchaikovsky
		Chief Financial Officer

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Common stock, par value	$ 0.00001	$ 0.00001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	18,605,969	18,444,169
Common stock, shares outstanding	18,605,969	18,444,169
Preferred stock, par value	$ 0.00001	$ 0.00001
Preferred stock, shares authorized	100,000,000	100,000,000
Preferred stock, shares issued	896,959	1,048,759
Preferred stock, shares outstanding	896,959	1,048,759
Preferred stock, liquidation preference	$ 2,565,301	$ 2,999,451

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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $) In Thousands, except Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Net sales	$ 20,588	$ 17,946	$ 41,761	$ 36,013
Cost of sales	11,332	11,109	23,189	22,254
Gross profit	9,256	6,837	18,572	13,759
Operating expenses:
Selling expenses	3,897	2,556	6,100	4,039
General and administrative expenses	992	1,071	2,331	1,901
Operating Expenses, Total	4,889	3,627	8,431	5,940
Income from operations	4,367	3,210	10,141	7,819
Other income (expenses):
Change in fair value of derivative liability	357	2,166	579	(175)
Interest income	22	18	57	44
Interest expense		(16)	(8)	(37)
Nonoperating Income (Expense), Total	379	2,168	628	(168)
Income before provision for income taxes	4,746	5,378	10,769	7,651
Provision for income taxes	984	911	2,536	2,107
Net income	3,762	4,467	8,233	5,544
Other comprehensive income:
Foreign Currency Translation Adjustment	623	101	827	102
Comprehensive income	4,385	4,568	9,060	5,646
Allocation of net income for calculating basic earnings per share:
Net income attributable to common shareholders	3,589	3,911	7,854	4,800
Net income attributable to preferred shareholders	173	556	379	744
Net income	$ 3,762	$ 4,467	$ 8,233	$ 5,544
Basic earnings per share- common	$ 0.19	$ 0.23	$ 0.42	$ 0.28
Diluted earnings per share	$ 0.19	$ 0.22	$ 0.42	$ 0.28
Weighted average number of common shares and participating preferred shares outstanding:
Basic	18,591,582	17,042,685	18,560,703	16,856,357
Diluted	19,502,487	20,070,771	19,497,336	20,070,619

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STATUTORY RESERVES

6 Months Ended

Jun. 30, 2011

STATUTORY RESERVES

(17)           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 June 30, 2011, the registered capital was RMB 10,000,000 ($1,517,036), and the statutory reserves have been fully funded.

Like Yinglin Jinduren, China Dong Rong is also 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 $4 million (based on its registered capital of $8 million). 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 GAAP. As of June 30, 2011, the statutory reserves have not yet been funded as China Dong Rong only commenced operations in December 2010.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 18, 2011
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Trading Symbol	VLOV
Entity Registrant Name	VLOV INC.
Entity Central Index Key	0001388311
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		18,627,869

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BENEFIT PLAN

6 Months Ended

Jun. 30, 2011

BENEFIT PLAN

(20)           BENEFIT PLAN

Pursuant to relevant PRC regulations, Yinglin Jinduren and China Dong Rong participate in a local municipal government retirement benefits scheme (the “Scheme”), whereby each of them 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$9,000 and US$36,000 for the three months ended June 30, 2011 and 2010 respectively, and US$18,000 and US$65,000 for the six months ended June 30, 2011 and 2010, respectively.

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PROPERTY, PLANT AND EQUIPMENT

6 Months Ended

Jun. 30, 2011

PROPERTY, PLANT AND EQUIPMENT

(6)           PROPERTY, PLANT AND EQUIPMENT

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

	June 30,			December 31,
	2011			2010
	(unaudited)
Buildings	$	-		$	946
Furniture, fixtures and equipment		-			86
Motor vehicles		55			202
Office equipment		36			34
Plant and machinery		-			214
Total property, plant and equipment		91			1,482
Less: accumulated depreciation		(45	)		(535	)
Property, plant and equipment, net	$	46		$	947

Depreciation expense was $7 and $15 for the three months ended June 30, 2011 and 2010, respectively and $24 and $30 for the six months ended June 30, 2011 and 2010, respectively.

During the six months ended June 30, 2011, the Company disposed of its manufacturing equipment that had a net book value of $145 on December 31, 2010 for $154, resulting in a gain of $9.

During the six months ended June 30, 2011, the Company disposed of the building that housed its discontinued manufacturing activities and the land use right for the land on which the building sits, which collectively had a net book value of $1,013, for $989, resulting in a loss of $24.

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BUSINESS AND CREDIT CONCENTRATIONS

6 Months Ended

Jun. 30, 2011

BUSINESS AND CREDIT CONCENTRATIONS

(19)           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 had distribution agreements in effect with 11 distributors at June 30, 2011, and with 12 distributors at June 30, 2010. The Company had the following concentrations of business with each distributor (customer) constituting greater than 10% of the Company’s sales:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Distributors
Distributor A		20.21	%		16.94	%		19.67	%		15.89	%
Distributor B		11.06	%		12.25	%		10.76	%		12.99	%
Distributor C		11.49	%		12.27	%		11.18	%		13.01	%

The Company’s concentrations of accounts receivable by distributors (customers) constituting greater than 10% of the Company's accounts receivable were as follows:

	June 30,
	2011			2010
Distributors
Distributor A		12.33	%		12.97	%
Distributor B		*			12.44	%
Distributor C		*			11.20	%
Distributor D		26.82	%		18.58	%

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Vendors
Vendor A		14.94	%		12.53	%		*			14.39	%
Vendor B		21.43	%		10.32	%		12.44	%		11.75	%
Vendor C		*			*			12.24	%		*
Vendor D		13.05	%		*			*			10.13	%

The Company has the following concentrations of business with each creditor constituting greater than 10% of the Company’s trade payables:

	June 30,
	2011			2010
Creditors
Creditor A		13.13	%		*
Creditor B		*			21.61	%
Creditor C		36.85	%		*
Creditor D		*			12.35	%
Creditor E		*			13.71	%
Creditor F		10.04	%		*
Creditor G		17.30	%		*
Creditor H		15.44	%		*

* The concentration is less than 10%

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

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DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2011

DERIVATIVE FINANCIAL INSTRUMENTS

(11)  DERIVATIVE FINANCIAL INSTRUMENTS

(Amounts in thousands except share data.)

On October 27, November 17 and December 1, 2009, the Company issued 723,052, 675,308 and 326,767 common stock purchase warrants (the “Warrants”) in connection with the Preferred Shares Financing and the Common Shares Financing, 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 June 30, 2011, 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.

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 65%, is based on a review of the volatility of entities considered by management as comparable. The risk-free rates of return used ranged from 0.28% to 0.30%, based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining life of the Warrants.

At June 30, 2011, the following derivative liabilities related to common stock warrants were outstanding (in thousands except price per share and number of warrants):

Issue Date	Expiration Date	# of Warrants		Exercise Price Per Share		Value - December 31, 2010		Value - June 30, 2011
October 27, 2009	October 27, 2012		723,052	$	3.43	$	547	$	311
November 17 2009	November 17, 2012		667,058		3.43		512		288
December 1, 2009	December 1, 2012		326,767		3.43		253		144
			1,716,877			$	1,312	$	733

During the three months ended June 30, 2011 and 2010, the Company recognized gains of $357 and $2,166, respectively. During the six months ended June 30, 2011 and 2010, the Company recognized a gain of $579 and a loss of $175 from the change in fair value of the warrant liability, respectively.

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 six months ended June 30, 2011 and 2010:

	Warrants (in thousands)
Balance – January 1, 2010	$	3,684
Issued		-
Exercised		(18	)
Fair value adjustments		174
Balance- June 30, 2010		3,840
Issued		-
Exercised		(3	)
Fair value adjustments		(2,525	)
Balance- December 31, 2010		1,312
Issued		-
Exercised		-
Fair value adjustments		(579	)
Balance June 30, 2011		733

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.

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TIME DEPOSITS

6 Months Ended

Jun. 30, 2011

TIME DEPOSITS

(2) TIME DEPOSITS

Time deposits (in thousands):

	December 31,
	2010
Time deposits	$	3,020
	$	3,020

Time deposits represent amounts deposited with Xiamen International Bank and that matured on March 31, 2011.

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ACCRUED EXPENSES AND OTHER PAYABLES

6 Months Ended

Jun. 30, 2011

ACCRUED EXPENSES AND OTHER PAYABLES

(8) ACCRUED EXPENSES AND OTHER PAYABLES

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

	June 30,		December 31,
	2011		2010
	(unaudited)
Accrued salaries and wages	$	40	$	36
Accrued expenses		1,197		1,215
Advertising subsidies payables		200		195
	$	1,437	$	1,446

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COMMON STOCK

6 Months Ended

Jun. 30, 2011

COMMON STOCK

(13) COMMON STOCK

The following amounts are in thousands except for share data (shares, par value and price per share):

The Company is authorized to issue 100,000,000 shares of common stock, $0.00001 par value. The Company had 1,454,421 common shares outstanding prior to the Share Exchange with PXPF, and, as described in Note 1, 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.

On December 1, 2009, the Company sold 653,536 shares of common stock to certain accredited investors.

During the year ended December 31, 2010, 8,250 warrants were exercised and 1,747,962 shares of convertible preferred stock were converted into 8,250 and 1,747,962 shares of common stock, respectively.

During the six months ended June 30, 2011, 151,800 shares of convertible preferred stock were converted into 151,800 shares of common stock.

On March 10, 2010, the Company’s board of directors agreed to issue 10,000 restricted shares of common stock annually to a director in quarterly installments of 2,500 shares beginning with the quarter ending June 30, 2010. The trading value of the granted shares on March 10, 2010 was $6.00 per share for a total value of $60. $11 and $0 were recognized as compensation expense for the three months ended June 30, 2011 and 2010, respectively. $16 and $0 were recognized as compensation expense for the six months ended June 30, 2011 and 2010, respectively.

 

On April 27, 2010, the Company’s board of directors agreed to issue 20,000 shares of common stock to its chief financial officer (“CFO”) during the term of a one-year agreement, which would vest as follows: 3,562 shares on June 30, 2010, 5,041 shares on September 30, 2010, 5,041 shares on December 31, 2010, 4,932 shares on March 31, 2011 and 1,424 shares on April 26, 2011. The trading value of the granted shares on April 27, 2010 was $5.00 per share for a total value of $100. $20 and $18 were recognized as compensation expense for the three months ended June 30, 2011 and 2010, respectively. $45 and $18 were recognized as compensation expense for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, the agreement with the CFO had not been renewed. The Company has accrued for the CFO’s stock compensation based on an assumption that the CFO’s annual stock compensation will be $80 per year.

A summary of the status of the Company’s non-vested shares as of June 30, 2011, and changes during the year ended December 31, 2010, is presented below:

			Weighted-Average
			Grant Date
Non-vested shares	Shares		Fair Value
Non-vested at January 1, 2010		-		-
Granted		30,000	$	5.33
Vested		6,062	$	5.33
Forfeited		-		-
Non-vested at June 30, 2010		23,938	$	5.33
Granted		-	$	-
Vested		15,082	$	5.33
Forfeited		-		-
Non-vested at December 31, 2010		8,856	$	5.33
Granted		10,000	$	1.57
Vested		8,856	$	5.33
Forfeited		-		-
Non-vested at June 30, 2011		6,667	$	1.57

As of June 30, 2011, there was $0 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted by the board of directors. The total fair value of shares vested during the three months ended June 30, 2011 and 2010 were $31 and $18, respectively. The total fair value of shares vested during the six months ended June 30, 2011 and 2010 were $61 and $18, respectively.

At June 30, 2011, 18,605,969 shares of common stock were issued and outstanding.

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RELATED PARTY TRANSACTIONS

6 Months Ended

Jun. 30, 2011

RELATED PARTY TRANSACTIONS

(9) RELATED PARTY TRANSACTIONS

Related party transactions are summarized as follows (in thousands):

	June 30,		December 31,
	2011		2010
	(unaudited)
Mr. Qingqing Wu (1)	$	769	$	45
Mr. Bennet Tchaikovsky (2)		12		68
Ms. Ying (Teresa) Zhang (2)		10		49
	$	791	$	162

(1) The amount due to this director is unsecured, interest-free and repayable on demand.

(2) Represents cash and share compensation owed.

Mr. 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 Share Exchange on February 13, 2009. 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. Upon completion of the transfer to Yinglin Jinduren, the trademarks will be transferred to China Dong Rong.

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LAND USE RIGHTS

6 Months Ended

Jun. 30, 2011

LAND USE RIGHTS

(7)           LAND USE RIGHTS

The Company’s land use right is summarized as follows (in thousands):

	December 31,
	2010
Land use right	$	325
Less: accumulated amortization		(64	)
Land use right, net	$	261

Amortization expense was $0 and $2 for the three months ended June 30, 2011 and 2010, respectively and $0 and $5 for the six months ended June 30, 2011 and 2010, respectively.

During the six months ended June 30, 2011, the Company disposed of its land use right in connection with the sale of its building (See Note 6).

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows from operating activities:
Net income	$ 8,233	$ 5,544
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	24	35
Loss on disposal of property, plant and equipment	15
Stock compensation expense	61
Change in fair value of derivative liability	(579)	175
(Increase) decrease in assets:
Accounts receivable	4,876	(4,099)
Trade deposits	507	1,710
Inventories	(5,240)	(669)
Prepaid expenses	180	231
Increase (decrease) in liabilities:
Accounts payable	(1,166)	322
Accrued expenses and other payables	5	321
Income and other tax payables	(1,144)	(522)
Net cash provided by operating activities	5,772	3,048
Cash flows from investing activities:
Purchases of property, plant and equipment	(46)	(7)
Acquisition of a business	(6,684)
Disposals of property, plant and equipment	1,179
Amount due from a director	736
Time deposits	3,020	(3,020)
Net cash used in investing activities	(1,795)	(3,027)
Cash flows from financing activities:
Amount due from a director		2,428
Proceeds from debt financing		315
Payments of short-term debt	(612)	(440)
Warrants exercised		22
Net cash provided by (used in) financing activities	(612)	2,325
Effect of exchange rate changes	296	55
Net increase in cash and cash equivalents	3,661	2,401
Cash and cash equivalents, beginning of period	12,013	11,036
Cash and cash equivalents, end of period	15,674	13,437
Supplemental disclosure of cash flow information:
Interest paid	8	37
Income taxes paid	$ 3,333	$ 2,288

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INVENTORIES

6 Months Ended

Jun. 30, 2011

INVENTORIES

(3) INVENTORIES

Inventories consist of the following (in thousands):

	June 30,		December 31,
	2011		2010
	(unaudited)
Finished goods		5,968		654
	$	5,968	$	654

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TRADE DEPOSITS

6 Months Ended

Jun. 30, 2011

TRADE DEPOSITS

(4) TRADE DEPOSITS

Trade deposits (in thousands):

	June 30,		December 31,
	2011		2010
	(unaudited)
Trade deposits		4,389		4,806
	$	4,389	$	4,806

Trade deposits consist of deposits made to third-party manufacturers in order for them to manufacture on behalf of the Company. As of June 30, 2011 and December 31, 2010, the Company had trade deposits with 20 and 24 manufacturers, respectively. 57.6% of the balance as of June 30, 2011 was made to 4 manufacturers, while 57.3% of the balance as of December 31, 2010 was made to 4 manufacturers.

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SHORT-TERM BORROWINGS

6 Months Ended

Jun. 30, 2011

SHORT-TERM BORROWINGS

(12)           SHORT-TERM BORROWINGS

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

	December 31 ,2010
	Amount		Interest Rate
Bank loan	$	607		8.153	%

As of December 31, 2010, the short-term borrowing was secured by a personal guarantee from Mr. Qingqing Wu, the Company’s CEO and chairman of the board of directors.

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PAYMENT FOR DISTRIBUTOR ACQUISITION

6 Months Ended

Jun. 30, 2011

PAYMENT FOR DISTRIBUTOR ACQUISITION

(5) PAYMENT FOR DISTRIBUTOR ACQUISITION

Payment for acquisition of a distributor’s business (in thousands):

	June 30,		December 31,
	2011		2010
	(unaudited)
Payment for distributor acquisition		6,684		-
	$	6,684	$	-

In May 2011, the Company entered into an agreement with its Fujian distributor to acquire the distributor’s retail distribution network of 13 stores for $6,684,000 (RMB 44,100,000). The Company believes that operating certain points of sale directly can facilitate the promotion of its brand and brand image, and can benefit at the same time from the higher margins for retail sales. The Company believes that the Fujian distributor’s retail network is ideal as the Company is headquartered in, and operates from, the same province. The Company completed this acquisition on June 30, 2011, and is in the process of determining the allocation of the purchase price.The accompanying unaudited consolidated financial statements include the operating results of the business from the date of acquisition. Pro forma results of operations for the acquisition completed during the six months ended June 30, 2011 have not been presented because the effects of the acquisition were not material to the Company’s financial results.

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EARNINGS PER SHARE

6 Months Ended

Jun. 30, 2011

EARNINGS PER SHARE

(15) EARNINGS PER SHARE

The following tables set forth the computation of basic and diluted earnings per share (in thousands except for share amounts):

(a)           Basic

“Basic earnings per share - common” is calculated by dividing the net income attributable to common shareholders of the Company by the weighted average number of common shares. Using the two class method pursuant to ASC 260-10-45, the Company allocated its net income to preferred and common shareholders during the three and six months ended June 30, 2011 and 2010, based on the number of common shares outstanding during the periods shown (taking into account the number of preferred shares converted into common shares at the end of such periods on a 1-for-1 basis), and participating preferred shares outstanding during the periods shown.

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Income attributable to common shareholders of the Company		3,589		3,911		7,854		4,800
Income attributable to preferred shareholders of the Company		173		556		379		744
Net income	$	3,762	$	4,467	$	8,233	$	5,544
Weighted average number of common shares outstanding		18,591,582		17,042,685		18,560,703		16,856,357

(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 two categories of dilutive potential common shares: the Preferred Shares issued in October and November 2009 in connection with the Preferred Shares Financing, and the Warrants issued in connection with both the Preferred Shares Financing and the Common Shares Financing in December 2009. 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 that were outstanding at the end of the respective periods are assumed to have been converted into common shares on a 1-for-1 basis. Since the Preferred Shares are included in the diluted calculation, net income (attributable to both common and preferred shareholders) is used. 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.

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Net income	$	3,762	$	4,467	$	8,233	$	5,544
Weighted average number of common shares outstanding		18,591,582		17,042,685		18,560,703		16,856,357
Adjustment for:
Preferred stock		910,905		2,424,543		936,633		2,614,527
Warrants				603,543				599,735
		19,502,487		20,070,771		19,497,336		20,070,619

Warrants are excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2011, as the warrant strike price of $3.43 is greater than the share price $1.70 at June 30, 2011.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $) In Thousands, except Share data	Total	Common stock	Preferred stock	Additional paid-in capital	Statutory reserve	Accumulated other comprehensive income	Retained earnings
Beginning Balance at Dec. 31, 2010	$ 33,993	$ 1	$ 1,492	$ 8,873	$ 913	$ 1,555	$ 21,159
Beginning Balance (in shares) at Dec. 31, 2010		18,444,169	1,048,759
Net income	8,233						8,233
Foreign Currency Translation Adjustment	827					827
Conversion of Preferred Stock to Common Stock (in shares)		151,800	(151,800)
Conversion of Preferred Stock to Common Stock			(216)	216
Issuance of shares to director / officer (in shares)		10,000
Issuance of shares to director / officer	117			117
Stock compensation expense	61			61
Ending Balance at Jun. 30, 2011	$ 43,231	$ 1	$ 1,276	$ 9,267	$ 913	$ 2,382	$ 29,392
Ending Balance (in shares) at Jun. 30, 2011		18,605,969	896,959

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INCOME TAXES

6 Months Ended

Jun. 30, 2011

INCOME TAXES

(16) INCOME TAXES

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

	Six Months Ended June 30,
	2011		2010
	(unaudited)		(unaudited)
PRC enterprise income tax - current	$	2,536	$	2,107

As of June 30, 2011 and December 31, 2010, the Company did not have any significant temporary differences and carry forwards that may result in deferred tax.

The Company is mainly subject to income taxes in the PRC and the 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 March 16, 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.

The following table reconciles the U.S. statutory rates to the Company's effective tax rate for six months ended June 30, 2011 and 2010: 

	For Six Months Ended June 30,
	2011			2010
	(Unaudited)			(Unaudited)
U.S. statutory rates		34	%		34	%
Foreign income not recognized in U.S.		(34	)		(34	)
China income tax rate		25			25
Effective tax rate		25	%		25	%

The following table reconciles the theoretical tax expense calculated at the statutory rates to the Company’s effective tax expense for the six months ended June 30, 2011 and 2010 respectively.

Reconciliation of effective tax expense (in thousands):

	For Six Months Ended June 30,
	2011			2010
	(Unaudited)			(Unaudited)
Theoretical tax expense calculated at PRC statutory enterprise income tax rate of 25%	$	2,707		$	1,990
Tax effect of non-deductible expenses		(171	)		117
Effective tax expense	$	2,536		$	2,107

Non-deductible expenses for the six months ended June 30, 2011 and 2010 primarily consisted of expenses incurred outside of the PRC which are not deductible in computing the income tax for the PRC.

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LEASE COMMITMENTS

6 Months Ended

Jun. 30, 2011

LEASE COMMITMENTS

(18)           LEASE COMMITMENTS

The Company leases certain premises under long-term, non-cancelable leases and year-to-year leases. These leases are accounted for as operating leases. Rent expense amounted to $56,000 and $18,000 for the three months ended June 30, 2011 and 2010, respectively. Rent expense amounted to $67,000 and $35,000 for the six months ended June 30, 2011 and 2010, respectively.

Future minimum payments under long-term, non-cancelable leases as of June 30, 2011, are as follows (in thousands):

	Future minimum payments
Six Months Ending December 31:
2011 (1)	$	38
Year Ending December 31:
2012 (1)		56
2013 (1)		-
	$	94

(1) The Company’s lease commitments as of June 30, 2011, do not include the 13 retail store leases that the Company acquired from its Fujian distributor, which leases were assumed by the Company effective July 1, 2011. Once they have been evaluated, such leases will result in additional lease commitments.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2011

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(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 in connection with the stock exchange transaction described below.

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.

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). At the time of the Share Exchange, the Company had no assets or liabilities, and the 1,454,421 shares of its common stock outstanding immediately prior to the Share Exchange have been accounted for at their par value at the time of the Share Exchange.

The Company is the designer of “V·LOV” brand men’s apparel and related products, which are distributed in the People’s Republic of China (“PRC” or “China”). Through December 31, 2010, all of the Company’s business operations were conducted by a variable interest entity (“VIE”), Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which is controlled by the Company’s wholly-owned subsidiary, Dong Rong Capital Investment Limited (“HK Dong Rong”), through a series of contractual arrangements.

In January 2011, however, the Company began transferring its business operations to Dong Rong (China) Co., Ltd. (“China Dong Rong”), which is wholly-owned by HK Dong Rong, including all trademarks, sales contracts and design, marketing, sales and purchasing-related assets under Yinglin Jinduren. As of June 30, 2011, all transfers other than trademarks were completed, and all business operations were carried out by China Dong Rong as of such date. In addition, as the Company’s manufacturing activities were discontinued since the third quarter 2010, such related assets were not transferred. Instead, during the first quarter of 2011, manufacturing equipment, the building that housed such equipment and the land use right for the land on which the building sits were sold to an unrelated third-party. Sales were completed, and all proceeds from such sales paid to Yinglin Jinduren during the first quarter of 2011, with the funds being subsequently transferred to China Dong Rong.

As a result of the foregoing, the accompanying unaudited consolidated financial statements reflect the activities of the Company and each of the following entities:

Name	Background		Ownership
PXPF	·	A British Virgin Islands limited liability company	100%
	·	Incorporated on April 30, 2008
HK Dong Rong	·	A Hong Kong limited liability company	100%
	·	Incorporated on January 5, 2005 originally under the name “Korea Jinduren International Dress Limited”
	·	Acquired by PXPF from the majority shareholders of PXPF on September 22, 2008
China Dong Rong	·	A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)	100%
	·	Incorporated on November 19, 2009
	·	Registered capital of $8 million fully funded
Yinglin Jinduren	· ·	A PRC limited liability company Incorporated on January 19, 2002	VIE by contractual arrangements (1)
	·	Registered capital of RMB 10,000,000 ($1,237,000) fully paid by the majority shareholders of PXPF, Qingqing Wu and Zhifan Wu.
	·	65.91% of equity interests held by Qingqing Wu, the Company’s Chief Executive Officer and Chairman of the Board of Directors, and 34.09% by his brother Zhifan Wu

(1) On December 28, 2005, HK Dong Rong (then known as Korea Jinduren International Dress Limited) entered into certain exclusive agreements with Yinglin Jinduren and its equity owners. 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 Share Exchange, however, certain dividends were declared and paid from Yinglin Jinduren’s net income to the equity owners of Yinglin Jinduren. In addition, Yinglin Jinduren’s equity owners have pledged their equity interests in Yinglin Jinduren to HK Dong Rong, irrevocably granted HK Dong Rong an exclusive option to purchase 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. Additionally, although Yinglin Jinduren has been profitable, in the event that Yinglin Jinduren 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 that 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 non-controlling 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.

Once the transfer of trademarks from Yinglin Jinduren to China Dong Rong is completed, the Company intends to exit from the contractual arrangements with, and to dissolve, Yinglin Jinduren. Until then, however, the Company will operate its business through China Dong Rong (as it currently does) while continuing to control Yinglin Jinduren through the contractual arrangements.

(b)  Basis of presentation and consolidation

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

The consolidated financial statements include the financial statements of the Company, its subsidiaries and the variable interest entity (VIE), Yinglin Jinduren. Yinglin Jinduren is considered a VIE because the Company is deemed to be its primary beneficiary by virtue of the contractual arrangements between HK Dong Rong and Yinglin Jinduren. 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 is at book value. All significant inter-company transactions and balances between the Company, its subsidiaries and the VIE are eliminated upon consolidation. As of June 30, 2011, Yinglin Jinduren had no operations.

In the opinion of management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the consolidated balance sheets as of June 30, 2011 and December 31, 2010, the consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2011 and 2010, and the consolidated statements of cash flows for the six months ended June 30, 2011 and 2010. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. 

(c) Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management 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 that the management is required to make. Estimates that are critical to the accompanying consolidated financial statements relate primarily to returns, sales allowances and customer chargebacks, 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) Revenue Recognition

All 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 revenue 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.

(e) 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.

(f) Time Deposits

The Company, at times, invests excess funds in time deposits with original maturity dates beyond three months. The Company held its held-to-maturity securities to maturity, and carried such investments at amortized cost. The carrying value of time deposits approximated the fair value of securities at December 31, 2010.

(g) Accounts receivable

Accounts receivable, including associated value added taxes, are unsecured, and are stated at the amount the Company expects to collect. The Company may maintain 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. Interest is not normally charged on accounts receivables. As of June 30, 2011 and December 31, 2010, there were no accounts receivable aged greater than 90 days, and management has determined no allowance for uncollectible amounts is necessary.

(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 years
Furniture, fixtures and equipment	5 years
Motor vehicles	5 years
Office equipment	3 to 5 years
Plant 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.

 

(j) Trade deposits

The Company places trade deposits with new third-party manufacturers in order to secure its ability to order production. The trade deposits are recorded at the amount paid to the manufacturers. Trade deposits are applied against the manufacturers’ invoices for inventory purchases. Inventory is recorded when received or title transfers to the Company.

(k) Foreign Currency Translation

The Company has the PRC’s currency, Renminbi (“RMB”), as its functional currency. The accompanying unaudited consolidated financial statements of the Company are translated from RMB into U.S. Dollars (“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. The rates of exchange quoted by the PBOC on June 30, 2011 and December 31, 2010 were US$1.00 to RMB 6.46 and RMB 6.59, respectively. The average translation rates of US$1.00 to RMB 6.49 and RMB 6.82 were applied to the income statement accounts for the three months ended June 30, 2011 and 2010, respectively and US$1.00 to RMB 6.53 and RMB 6.82 were applied to the income statement accounts for the six months ended June 30, 2011 and 2010, respectively.

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.

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.

(l) Land Use Rights

All land in the PRC is state-owned and cannot be sold to any individual or company. However, the government can grant the user a “land use right” to use the land.

At December 31, 2010, land use right was stated at cost less accumulated amortization and impairment losses. Amortization was calculated on the straight-line method over the estimated useful life of 50 years.

In February 2011, the Company entered into an agreement with an unrelated third-party to sell the building that housed its discontinued manufacturing activities and its land use right for the land on which the building occupies for approximately $989,000. 100% of the purchase price was received on or before March 31, 2011.

(m) 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.

(n) 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 three months and six months ended June 30, 2011 were US$623,000 and US$827,000 respectively. The foreign currency translation losses for the three months and six months ended June 30, 2010 were US$101,000 and US$102,000 respectively. Accumulated other comprehensive income is recorded as a separate component of stockholders’ equity.

 

(o) Income Taxes

The Company accounts for income taxes under the liability method. Deferred income taxes are recognized for the estimated tax consequences in future years, as differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when, in management’s opinion, it is more likely than not that some portion of the deferred tax assets will not be realized. The provision for income taxes represents current taxes payable net of the change during the period in deferred tax assets and liabilities.

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, 2008 through 2010 are open to examination by the PRC state and local tax authorities. The Company records interest and penalties as other expense on the consolidated income and other comprehensive income statements. During the three and six months ended June 30, 2011 and the year ended December 31, 2010, the Company did not recognize any amount in interest and penalties.

(p) Advertising Costs

Advertising costs are expensed and reflected in selling expenses on the consolidated statements of income and comprehensive income in the period in which the advertisements are first run. Advertising expense for the three months ended June 30, 2011 and 2010 were approximately US$1.43 million and US$1.37 million, respectively, and approximately US$2.84 million and US$2.74 million for the six months ended June 30, 2011 and 2010, 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.

Advertising subsidy expense is costs that the Company reimburses to a distributor primarily for display structures and large-scaled outdoor advertisings if the distributor makes a certain amount of purchases from the Company. The reimbursement amounts and purchase level requirements vary contractually with each distributor.

(q) Shipping and Handling Costs

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

(r) Research and Development Costs

The Company charges all product design and development costs to expense when incurred and are reflected in general and administrative expenses on the consolidated statements of income and comprehensive income. Such costs aggregated approximately US$0.58 million and US$0.46 million for the three months ended June 30, 2011 and 2010, respectively, and approximately US$1.21 million and US$0.97 million for the six months ended June 30, 2011 and 2010, respectively.

(s) Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

The Company reviews the terms of convertible debt or convertible preferred stock that it issues 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, the Company 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, each such 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, the Company uses a binomial option pricing model to value the derivative instruments.

(t) Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which principally include cash and cash equivalents, time deposits, 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.

 

(u)  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. Equity instruments are excluded from the calculation of diluted earnings per share if the effect of including such instruments is anti-dilutive.

(v) Recent Accounting Pronouncements

In January 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Updates (“ASU”) No. 2011-01 – Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. This deferral will have no material impact on the Company’s consolidated financial statements.

In January 2011, the FASB issued ASU No. 2011-02 – Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this update provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. For public companies, a new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption within those annual periods. Early application is permitted. The adoption of the provisions in ASU 2011-02 will have no material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04 – Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this update intend to converge requirements for how to measure fair value and for disclosing information about fair value measurements in U.S. GAAP with International Financial Reporting Standards. For public entities, this ASU is effective for interim and annual reports beginning after December 15, 2011. The adoption of the provisions in ASU 2011-04 will have no material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 – Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this update require (i) that all non-owner changes in stockholder’s equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements (the current option to present components of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity is eliminated); and (ii) presentation of reclassification adjustments form OCI to net income on the face of the financial statements. For public entities, the amendments in this ASU are effective for years and interim periods within those years, beginning after December 15, 2011. The amendments in this update should be applied retrospectively. Early adoption is permitted. The adoption of the provisions in ASU 2011-05 will have no material impact on the Company’s consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

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SALE OF PREFERRED STOCK, COMMON STOCK AND WARRANTS

6 Months Ended

Jun. 30, 2011

SALE OF PREFERRED STOCK, COMMON STOCK AND WARRANTS

(10)  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 to purchase shares of the Company’s common stock (the "Preferred Shares Financing"). At the initial closing on October 27, 2009, the Company issued 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 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.

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 Company’s 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. Holders of the Preferred Shares 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 its gross proceeds 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.

Gilford Securities, Incorporated acted as the placement agent in connection with the Preferred Shares Financing.

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 file a registration statement to register the common stock underlying the Preferred Shares and Warrants from the Preferred Shares Financing, and the common stock issued in and underlying the warrants from the Common Shares Financing, for resale on or before December 17, 2009, and have it 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 is subject to liquidated damages of 1% of the gross proceeds from both financings per month, up to 10%, and pro-rated for partial periods. The registration statement was filed on December 17, 2009, and was declared effective on March 30, 2011. Accordingly, as of December 31, 2010, the Company accrued the full amount of the liquidated damages or $987,000.

 

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 11).

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.

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PREFERRED STOCK

6 Months Ended

Jun. 30, 2011

PREFERRED STOCK

(14) PREFERRED STOCK

The following amounts are in thousands except for share data (shares, par value and price per share):

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 (the “Preferred Share”).

On October 27 and November 17, 2009, the Company sold 1,446,105 and 1,350,616 Preferred Shares to certain accredited investors in connection with the Preferred Shares Financing, respectively. 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. Each Preferred Share is entitled to participate in any dividends declared and paid on the common stock on an as-converted basis. Holders of the Preferred Shares are also entitled to notice of any stockholders’ meeting and vote together with common stock holders on an as-converted basis. Each Preferred Share has a liquidation preference of $2.86 per share, plus any accrued but unpaid dividends. During the year ended December 31, 2010, 1,747,962 Preferred Shares were converted, and at December 31, 2010, 1,048,759 Preferred Shares were outstanding, with an aggregate liquidation preference of $2,999. During the six months ended June 30, 2011, 151,800 Preferred Shares were converted and at June 30, 2011, 896,958 Preferred Shares were outstanding, with an aggregate liquidation preference of $2,565.

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
Current Assets:
Cash and cash equivalents	$ 15,674	$ 12,013
Time deposits		3,020
Accounts and other receivables	16,711	21,222
Trade deposits	4,389	4,806
Inventories	5,968	654
Prepaid expenses		110
Total current assets	42,742	41,825
Payment for distributor acquisition	6,684
Property, plant and equipment, net	46	947
Land use rights		261
TOTAL ASSETS	49,472	43,033
Current Liabilities:
Accounts payable	2,139	3,254
Accrued expenses and other payables	1,437	1,446
Amount due to a director/officers	791	162
Derivative liability - common stock warrants	733	1,312
Short-term bank loans		607
Income taxes payable	1,141	2,259
Total current liabilities	6,241	9,040
Stockholders' Equity:
Common stock, $0.00001 par value, 100,000,000 shares authorized, 18,605,969 and 18,444,169 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively	1	1
Preferred stock, $0.00001 par value, 100,000,000 shares authorized, 896,959 and 1,048,759 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively (liquidation preference $2,565,301 and $2,999,451)	1,276	1,492
Additional paid-in capital	9,267	8,873
Statutory reserve	913	913
Retained earnings	29,392	21,159
Accumulated other comprehensive income	2,382	1,555
Total stockholders' equity	43,231	33,993
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 49,472	$ 43,033