ITEM 1. BUSINESS
Corporate History
We were originally incorporated in the State of Delaware on March 7, 2001 under the name Wentworth II, Inc. We were formed as a vehicle to pursue a business combination, which we effected through our recent reverse acquisition of Omnia BVI (“Omnia BVI”), a company organized under the law of British Virgin Islands through a reverse acquisition as described below. We had no material operations or revenue from operations prior to the reverse acquisition described below. Our corporate name changed to OmniaLuo, Inc. in November 2007, subsequent to the acquisition.
On October 9, 2007, we entered into a share exchange agreement with Omnia BVI, the shareholders of Omnia BVI and certain of our principal stockholders. Pursuant to the share exchange agreement, we issued to the shareholders of Omnia BVI 16,800,000 shares of our common stock in exchange for all of the issued and outstanding shares of Omnia BVI. As a result, Omnia BVI and its wholly-owned subsidiary Shenzhen Oriental Fashion Co., Ltd., a company organized under the laws of the PRC (“Oriental Fashion”) became our direct and indirect wholly-owned subsidiaries, respectively, and the former shareholders of Omnia BVI became our Company’s controlling stockholders. We amended our Certificate of Incorporation in November 2007 to change our name from Wentworth II, Inc. to OmniaLuo, Inc.
For accounting purposes, the share exchange transaction was treated as a reverse acquisition with Omnia BVI as the acquirer and the Company as the acquired party. When we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of Omnia BVI on a consolidated basis unless the context suggests otherwise.
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Concurrently with the consummation of the reverse acquisition, we issued 4,920,000 shares of the Company’s common stock and warrants to purchase an aggregate of 4,920,000 shares of the Company’s common stock for an aggregate purchase price of $6.15 million, to a total of 38 investors (of whom 29 were accredited investors and nine were non-US residents who purchased shares and warrants in off-shore transactions) in a private placement pursuant to Regulation D and a simultaneous off-shore offering pursuant to Regulation S (collectively, the “2007 Private Placement”). In connection with that private placement, we also issued warrants to purchase 492,000 shares of the Company’s common stock to Keating Securities, LLC (“Keating Securities”), as a financial advisory fee in partial consideration of their services in connection with the private placement. Prior to consummation of the reverse acquisition and 2007 Private Placement, we may be deemed to have been an affiliate of Keating Securities by reason of the ownership of shares of our common stock by principals and executives of Keating Securities.
We conduct all of our business operations through our indirectly wholly-owned operating subsidiary Shenzhen Oriental Fashion Co., Ltd.
Description of Business
Through our operating subsidiary in China, Shenzhen Oriental Fashion Co., Ltd., we are engaged in the business of designing, marketing, distributing and selling women’s clothing, with an emphasis on fashionable business casual wear. All our apparel is marketed under the brand names of OMNIALO and OMNIALUO (collectively referred to herein as the “OMNIALUO Brands” or “OMNIALUO brand names”) through a network of 108 retail stores across China. We offer a complete line of business casual women’s wear, including bottoms, tops, and outerwear, as well as accessories, under the OMNIALUO brand names.
There are three different types of retail stores that carry the OMNIALUO brands: (i) company-owned stores, which stores are owned exclusively by the Company and carry only the OMNIALUO brands, (ii) independent distributor stores, which stores are owned exclusively by third parties and carry the OMNIALUO brands exclusively, and (iii) co-owned stores, which stores are owned jointly by the Company and a third party, and carry the OMNIALUO brands exclusively. All three types of stores are located throughout China. As of December 31, 2009 and 2008, our network of retail stores across China consisted of 108 and 208 stores, respectively. Out of the 208 stores we had as of December 31, 2008, there were 27 Company-owned stores, 31 co-owned stores and 150 independent stores. Out of the 108 stores we had as of December 31, 2009, there were 27 Company-owned stores, 8 co-owned stores and 73 independent distributor stores.
Our current target customers are “white-collar” and “pink-collar” urban females between the ages of 25 to 35. In China, generally, “white-collar” individuals are described as working professionals with after-tax annual income ranging from $2,500 to $7,500 and “pink- collar” individuals are female working professionals with after-tax annual income ranging from $7,500 to $22,500.
The OMNIALUO brand of apparel has been awarded “China’s Best Women’s Wear Design” by China Fashion Designers Association (“CFDA”) every year from 2002-2006. Ms. Zheng Luo, a prominent designer in China, is our chief executive officer, chief designer and the originator of the OMNIALUO brands. Ms. Zheng Luo was also the founder and principal shareholder of Omnia BVI prior to our reverse acquisition with Omnia BVI described above. Ms. Zheng Luo is currently our largest individual shareholder. Ms. Zheng Luo has won numerous prestigious awards and was recently named by Cosmopolitan Magazine the "2008 Chinese Fashion Designer of the Year". Under the leadership of Ms. Zheng Luo OMNIALUO sets its goal to become the Chinese brand equivalent of Ralph Lauren, Vera Wang and Anna Sui. The OMNIALUO brands benefit significantly from Ms. Zheng Luo’s professional reputation.
Development of the OMNIALUO Brands and Formation of Omnia BVI and Oriental Fashion
In 1996, Ms. Zheng Luo created the OMNIALO brand and founded Green’s Apparel Co., Ltd. (“Green’s Apparel”) in Shenzhen, China, in which she owned a 95% equity interest. Green’s Apparel manufactured women’s clothing.
In 1997, the OMNIALO trademark was registered with the Chinese National Trademark Bureau in both Chinese and English. The registrant and initial owner of such trademark was Green’s Apparel.
In March 2003, Shenzhen Oumeng Industrial Co., Ltd. (“Oumeng”) was established. Ms. Zheng Luo was the CEO and 50% equity owner of Oumeng. Also in March 2003, Oumeng purchased inventory from Green’s Apparel, consisting of women’s apparel. Green’s Apparel has not conducted any business after the transfer of inventory to Oumeng in March 2003, and upon such transfer, Oumeng entered into all contracts with Green’s Apparel’s existing suppliers, manufacturers and distributors, and acquired the OMNIALO trademark in August 2003. In addition to marketing and selling products under the OMNIALUO name, Oumeng also engaged in various other businesses such as marketing and selling other apparel, electronics, kitchenware and hardware. Oumeng also managed C-Luo Intuition, a luxury, made-to-order evening dress brand, which brand was previously owned by Ms. Zheng Luo prior to the sale of such brand to an independent third party. By the end of August 2006, OMNIALUO brand apparel, under the management of Oumeng, was being distributed through 100 retail stores in China.
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In early 2006, Ms. Zheng Luo determined that the growth and development of the OMNIALUO brands and its associated women’s apparel products could best be achieved by the formation of a new company which would focus on the design, marketing, distribution and sale of women’s business casual wear, without the potential distraction and costs of operating other businesses. Therefore, in August 2006, Ms. Zheng Luo, together with several other individual shareholders, formed Omnia BVI under the laws of the British Virgin Islands. Shortly thereafter, in September 2006, Omnia BVI formed a wholly owned subsidiary, Shenzhen Oriental Fashion Co., Ltd., under the laws of the PRC. All rights in the OMNIALO trademark were transferred from Oumeng to Ms. Zheng Luo, and Ms. Zheng Luo resigned from her CEO position at Oumeng to devote her effort to Oriental Fashion and Omnia BVI on a full-time basis. Subsequently, in April 2007, Ms. Zheng Luo and her sister Ms. Xiaoyin Luo transferred their ownership of Oumeng to their mother, Ms. Yuhua Sun, and to Ms. Yujuan Sun, an unrelated party.
Principal Products and Pricing Strategy
Principal Products
We offer a complete line of business casual women’s wear including bottoms, tops and outerwear as well as accessories. All apparel is marketed under the OMNIALUO brands through a network of retail stores across China. Our main product line is “fashionable business casual,” which is suitable for both business and casual environments. Fashionable business casual is clothing that can be worn to work as well as outside the office environment. In recent years, fashionable business casual has gained significant market share in the fashion industry. We also have a smaller “business casual” product line.
Apparel under the OMNIALUO brands is made of high quality materials, and many pieces contain intricate and delicate craftwork. The designs are made to accentuate a woman’s figure while providing a unique cut and stitching to the material, which provide a slimming look. The majority of materials used are composed of tatting and knitwear. Tatting and knitwear are soft fabrics and allow women’s skin to “breathe” thus providing comfort in addition to style.
OMNIALUO brand apparel and our chief designer, Ms. Zheng Luo, have consistently won top fashion design awards in China since 2002. Most recently, Ms. Zheng Luo was recognized by the Cosmopolitan Magazine as the “China Designer of the Year” in 2008.
With respect to accessories, we released our accessories products in the third quarter of 2007 and plan to release expanded new accessories products in the next several fiscal quarters. Accessories have been identified as an important product line for us and we have dedicated research and development efforts to the creation of accessories. We believe that customers in China are interested in purchasing a complete outfit, which includes clothing, accessories, and shoes. As such, the availability of accessories coordinated with the clothing line can effectively increase a customer’s total spending.
In the fourth quarter of 2007, we started designing and developing “Omnialuo Collections” to target “golden collar” female professionals in China. The garments are generally priced from US$250 to US$400. We plan to produce only 100 to 200 pieces per style, so as to create a sense of exclusivity. We initially introduced “Omnialuo Collections” to the market on a small scale in the fourth quarter of 2007, we fully launched the product line in the third quarter of 2008.
Pricing
Our design, marketing, and sales divisions are responsible for pricing our products. The design, marketing, and sales divisions make internal evaluations of apparel based on predicted market acceptance and then price the items accordingly. The final price also takes into consideration competitive apparel price levels.
Current Pricing Strategy
The retail price range of our products is between $40 to $300 per item, with the majority of items priced between $60 and $150. In China, this price range is considered the middle to upper-middle price range. The CGIR (or China Garment Industry Report) released by CFDA (or China Fashion Designer Association) in 2006 forecasts that this middle to upper-middle price range will be the fastest growing segment in the next five years, with an annual growth rate more than 25%.
Our full retail price of apparel is typically five to six times our actual production cost. For example, if a shirt costs $15 in raw materials and manufacturing, full retail price will be $83, or 5.5 times production cost. However, only “new arrival” apparel sells at full retail price. The “new arrival” period usually lasts for two months. After such time, various discounts and promotions reduce the actual selling price to between 60% to 80% of the full retail price, which is equivalent to 3 to 4 times production cost.
In China, the average selling price for similar apparel after the new arrival period is 60% to 70% of the full retail price. Our average is better than this average, as we do not discount our products as much as other manufacturers, in part to support our image as a premium brand. Our independent distributors do have some latitude to deviate from our discount policies, but our experience to date is that we provide greater discounts than do our independent distributors.
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New Pricing Strategy
Over the course of the next three years, we will be implementing our new pricing strategy to increase the full retail price to eight to ten times our production cost, and increase our average selling price to six to eight times our production cost. We do not expect the price increase to result in a net reduction in sales as we believe that (i) the price increase is in line with industry trends, and (ii) our enhanced advertising campaign will raise brand recognition, thereby increasing sales. The current average gross profit margin across all ranges of our products is 50% and we expect to improve this gross profit margin to 55% within the next three years.
Customers
In China, professional women are generally divided into three categories, “white-collar”, “pink-collar” and “golden-collar” (when accounting for purchasing-power parity, the lifestyle of a household with annual income of $12,500 in China is similar to the lifestyle of a household earning $40,000 annually in the United States). (Source: National Bureau of Statistics of China; McKinsey Global Institute Analysis 2006. Both the individual income and household income referred to here are on an after-tax basis.)
Pink-collar workers usually work in high-paying industries such as finance, consulting, legal services, or assume senior positions in government agencies. Our business casual collections as well as our fashionable business casual collection appeal to pink-collar women.
White collar workers usually work in junior or middle positions in an office environment. This includes positions such as secretaries, administrators, operators, IT staff, accounting staff and junior saleswomen. Usually, there is no strict dress code for “white-collar” professionals in the office. “White-collar” professionals can wear “relaxed” business style apparel instead of business suits in their workplaces. In this sense, our fashionable business casual can be worn by “white-collar” females both in and out of the work environment.
“Golden-collar” refers to the class of professionals with annual incomes over $22,500. They typically hold executive positions in corporations or operate their own businesses. “Golden-collar” females usually like to wear luxury brands. Our brands will eventually target “golden-collar” females as well.
Our current target customers are “white-collar” and “pink-collar” urban females between the ages of 25 to 35. In China, “pink-collar” refers to women who typically earn $7,500 to $22,500 annually “White-collar” refers to women who typically earn $2,500 to $ 7,500 annually.
Our plan has been to expand our target demographic to 35 to 45 year-old females by offering premium and mature styles of apparel. Since 2007, our designs in the spring/summer wear collection have reflected these new styles. Tapping into the 35 to 45 year-old female market is also intended to develop a large group of loyal customers as well as increase revenues and profits. In China, the wealthiest consumers are the 25 to 45 year-old group, much younger than the highest earning group (45-54 years old) in the United States (McKinsey & Company’s proprietary 2004 personal-financial-services surveys in China). A study by Women’s Wear Daily (“In the Crosshairs”, an article written by Lisa Movius, published in Women’s Wear Daily on March 22, 2005) indicated that urban females aged between 25 to 35 in China demonstrate the highest consumption needs in apparel, spending more than 20% of their disposable income on clothing compared to the national average of 8% to 10%. Our strategy of focusing on the 25 to 45 year-old urban female segment is intended to capitalize on this consumption pattern.
Distribution Network and Methods
Our products are sold in the following types of stores: (i) company-owned stores, which stores are owned exclusively by the Company, (ii) co-owned stores, which stores are owned jointly by the Company and a third party, and (iii) independent distributor stores, stores are owned exclusively by third parties. All three types of stores carry the OMNIALUO brands exclusively. We refer to company-owned stores and co-owned stores collectively as retail stores. All three types of stores are located throughout China. We also run special, limited-time outlet sales in major malls to sell excess inventories at the end of each season. We currently do not have franchisees or franchised stores.
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The table below summarizes the characteristics of our major distribution channels and the number of stores we had as of December 31, 2009:
Sales Channel
Sub Channel
Location
Objective
Characteristics
*Store Level
Net Profit
Margin
Company-owned
Stores (27)
Flagship Stores
Major shopping malls in Tier 1 cities
Showcase brand and attract customers and distributors
Capital outlay: High
Inventory risk: High
Operating expenses: medium
Medium-low
Standard Stores
Key shopping malls in highly competitive Tier 1 & Tier 2 cities
Test market to gauge customer interest and increase sales
Capital outlay: High
Inventory risk: Medium
Operating expenses: Medium
Medium
Co-owned Stores (8)
Co-owned Stores
Tier 1 & Tier 2 cities
Maximize sales and profit
Capital outlay: Medium
Inventory risk: High
Operating expenses: Medium
Medium-high
Independent Distributor Stores (73)
Independent Distributor Stores
Tier 1, Tier 2 & Tier 3 cities
Maximize sales and profit
Capital outlay: Low
Inventory risk: Low
Operating expenses: Low
High
* In calculating the store level net profit margin, we take into consideration related store expenses billed to us, including decoration, rent, payroll, mall management fees, and utilities.
Company-owned Stores
Company-owned stores are retail stores owned 100% by us and which sell the OMNIALUO Brand exclusively. We manage the daily operations of these stores, and pay all operating expenses, including decoration, rent, payroll, and utilities. All company-owned stores are located either within shopping malls or in independent stores located on the street. There are two types of company-owned stores, (1) flagship stores, and (2) standard stores. Flagship stores are high-profile stores, located in key shopping malls of first-tier cities, such as Shanghai, Beijing, and Shenzhen. These stores are extravagantly decorated, display a number of luxurious items and offer the complete OMNIALUO Brand product line. The cost of opening and operating flagship stores is high, thus making them the least profitable among all store types. Standard stores are well decorated, however, they are less extravagant than the flagship stores, and are operated in major shopping malls of the first-tier and second-tier cities. These stores are fashionably decorated and offer the most complete product lines. These stores serve to showcase and promote the OMNIALUO brands. In addition, the Company-owned stores are used to monitor market trends and our products’ performance. Company-owned stores have the lowest profitability among all our distribution channels. Nonetheless, we believe that shopping malls are the best location for our stores as according to the CGIR, in 2005, shopping malls and department stores represented more than 55% of apparel sales in urban cities in China.
Co-owned Stores
Co-owned stores are owned jointly by us and a third party and sell the OMNIALUO Brand exclusively. All co-owned stores are located in key shopping malls in first-tier and second-tier cities. We are obligated to share revenues with the shopping malls in which our stores are located. In some instances there are minimum revenue payments to the landlord, or a threshold before revenue is split, or both. On average, we must turn over 20% of the profits from each store to the shopping mall in which such store is located. The co-ownership partner receives 30% of the revenue from co-owned stores, after deducting the 20% due to the shopping mall. Operating expenses are split evenly between us and the co-ownership partners, however, 70% of the up-front investment is made by us. We retain full ownership of the inventory delivered to the co-owned stores. Co-owned stores serve as good complements to Company-owned stores and independent distributor stores with a relatively high net profit margin of 40%-50%.
As of December 31, 2009 and 2008, we operated 35 and 58 retail stores, respectively, of which there were 27 and 27 company-owned stores, respectively, in key shopping malls in the first-tier and second-tier cities (see below under “Location of Retail Stores - Markets” ), and 8 and 31 co-owned stores, respectively, in key shopping malls located in first-tier and second-tier cities. The two types of stores collectively accounted for approximately 34.9 of our total revenue in 2009 and approximately 44.4% of our total revenue in 2008.
Independent Distributor Stores
Independent distributor stores are owned 100% by a third party and sell the OMNIALUO Brand exclusively. Our products are sold to independent distributor stores at 35-40% of the full retail price. We average approximately 50-55% net profit margin on sales to the independent distributors. No items are sold on consignment. The independent distributor stores make a 30% down payment upon ordering and pay the balance before any shipment is sent. Hence, the independent distributor store model generates a high profit margin for us, with no upfront investment, minimal inventory risk and minimal cash flow shortage.
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Independent distributor stores are the most important distribution channel for our sales. As of December 31, 2008 and December 31, 2009, we had 150 and 73 independent distributor stores, respectively, across China. The independent distributor stores represented approximately 55.6% of our total revenues in 2008, and represent approximately 65.1% of our total revenues in 2009. Our future success is to a large extent dependent on increasing the number of the independent distributor stores.
During 2009, there was one customer who contributed 10% or more to the Company’s consolidated revenue: Wuxi Langyi(24.78%). During 2008, there was no customer who contributed 10% or more to the Company’s consolidated revenue.
Outlets & Special Sales Promotions
Periodically, we run outlet sales in major malls to dispose of excess inventory at the end of each season. We earn a small profit from the outlet channel.
Dedicated Support for Independent Distributors and Co-ownership Partners
We provide assistance to our independent distributors and co-ownership partners. By helping the independent distributors and co-ownership partners operate efficiently and profitably, and rewarding independent distributors and co-ownership partners that meet or exceed sales targets, we hope to encourage successful distributors and co-ownership partners to open more stores. Many of our top ten distributors have multiple independent or co-ownership stores.
We provide assistance to our independent distributors and co-ownership partners in the following areas of operations.
(i) Setting up: retail site selection, construction, provision of our retail infrastructure, image conformity and organization of the operational systems.
(ii) Training: continuing support on visual display, customer service and store administration.
(iv) Advertisement and promotion: coordinating system-wide advertising and promotional activities to increase independent distributors’ and co-partners’ sales and profits. Beyond discounts, promotional activities consist of loyalty clubs and members’ only events, store and Company anniversary promotions, limited editions, gift items and sales promotions coordinated with other suppliers of accessories.
(v) Inventory liquidation: helping independent distributors to move excess inventory by exchanging inventories among stores and selling through outlets.
(vii) Financial analysis and support: Our finance department can analyze each store’s financial situation and recommend specific performance adjustments. It also administers incentive systems to reward successful independent distributors and maintain the highest standards of quality control.
Growth Plan for Distribution Channels
Since our formation in the third quarter of 2006, one of our growth strategies is to open new stores, especially independent distributor stores and co-owned stores which generally have higher margins than company-owned stores. As of November 12, 2008, we had 245 stores altogether. However, as a result of the global economic recession and the presumed temporary but nonetheless marked decrease in Chinese consumer spending, particularly in the fourth quarter 2008, we were forced to close certain stores that did not make their pre-determined sales requirements. We believe that it was necessary to remove non-performers from an otherwise strong network of retail outlets. While formerly on pace to meets our goal of 250 stores by year-end 2008, it became necessary in the fourth quarter to cease pursuit of this goal and trim store count for the long-term good of the Company. As such, we closed 37stores by December 31, 2008.
In January 2009, additional stores that did not meet performance requirements were subsequently closed. As of January 31, 2009, we had 178 stores in total, including 27 company-owned stores, 31 co-owned stores, and 120 independent distributor stores. In February 2009, we closed another 13 stores that did not meet performance requirements. As of February 28, 2009, we had 165 stores in total, including 27 company-owned stores, 31 co-owned stores and 107 independent distributor stores. We continued to close non-performing stores in the remaining period of 2009 in order to better face global economic crisis. As of September 30, 2009 we had 135 stores in total, including 27 company-owned stores, 15 co-owned stores, and 93 independent distributor stores. As of December 31, 2009, we had 108 stores in total, including 27 company-owned stores, 8 co-owned stores and 73 independent distributor stores. The total store count is still subject to change based on prevailing market conditions. Nevertheless, we believe that there has been indication that the deterioration of the Chinese consumer market has slowed down in recent months. If the market condition improves, we expect that no more stores will be closed except those that need to be replaced by new stores. Our goal is to have 150 stores in total by the end of 2010.
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We believe our focus in expanding independent distributor stores and co-owned stores is generally feasible because we structure our independent distributor stores and co-owned stores to require low startup costs. We are also prepared to launch advertising campaigns and market promotions to boost our brand recognition, when necessary, in conjunction with our expansion plan. We launched advertising campaigns and market promotions of OmniaLuo in October 2007 that continued into 2009. The advertising campaign features Ms. Zheng Luo and the OMNIALUO brands in major fashion magazines in China such as Vogue, Harper’s Bazaar and Cosmopolitan. We believe that the increased publicity will enhance our brand image and result in increased interest from independent distributors and co-partners.
Franchising
We will be eligible to enter into franchise arrangements one year after our application for a retail license is approved. However, we have no existing plans to enter into such arrangements.
Location of Our Stores - Markets
There is significant regional disparity in China with respect to per capita GDP. China is divided into five regions, the Eastern, Southern, Western, Northern and Central regions. Eastern and Southern China are the richest regions and historically represent approximately 36% of China’s population and approximately 56% of China’s GDP.
In the Eastern and Southern regions, the population had an average per capita GDP of $2,400, above the national average of $1,000 in 2005 (National Bureau of Statistics of China, 2006). In the Northern region, the per capita GDP averaged $2,100, in the Central region, the per capita GDP averaged $1,100 and in the Western region the per capita GDP averaged $680.
Our OMNIALUO Brand apparel has been well-received in the Southern region, and also has a certain level of market penetration in the Eastern and Central regions. We are currently making efforts to strengthen our foothold in existing markets, increase our sales in the Eastern and Southern regions, and develop a market in the Northern region.
Cities in China where Retail Stores are Located
Our products are marketed and sold in cities in China that have the highest levels of average disposable income. For marketing purposes, we classify cities into five groups as follows:
(i)
First-tier cities are cosmopolitan cities located in the center of each of the five geographic regions. Shanghai and Hangzhou (Eastern China), Shenzhen and Guangzhou (Southern China), Xi’an, Chengdu, and Chongqing (Western China), Beijing and Shenyang (Northern China), and Wuhan and Changsha (Central China) are first-tier cities.
(ii)
Second-tier cities are typically provincial capitals excluding the cities in tier one. In China, there are approximately 25 second-tier cities.
(iii)
Third-tier cities are major towns outside the provincial capitals. In China, there are over 265 third-tier cities, of which 50 have populations of over 1 million.
(iv)
Fourth-tier cities are small cities distributed in hundreds of small counties.
(v)
Fifth-tier cities are small cities in rural and remote areas.
The cities in the first three tiers account for less than 40% of the population in China but more than 70% of the national disposable income.
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Our products are currently sold in first-, second- and third-tier cities. The tables below provide geographical distribution of our sales channels as of December 31, 2008.
Product Design, Research and Development
Designers
One of our main strengths is our artistic design team led by Ms. Zheng Luo, who is our chief designer, founder and chief executive officer. Ms. Zheng Luo is a prominent designer in China’s fashion industry. Our design team consists of 14 designers, many of whom have been working with Ms. Zheng Luo for several years. Ms. Zheng Luo’s ability to retain her design team provides for consistent designs and greater brand loyalty.
Ms. Zheng Luo and the OMNIALUO brands have been featured frequently in various popular fashion magazines such as Harper’s Bazaar, L’Official, Marie Claire, Vogue, Jessica and Cosmopolitan. Ms. Zheng Luo has also been interviewed by many leading domestic and international media, including China Central Television (“CCTV”), the largest TV network in China, Hong Kong Phoenix TV, French Fashion TV, Italian Orbit TV, Vogue UK and Washington Daily. In 2003, Ms. Luo was invited to present her design and hold a fashion show for Fashion China Seminar in the Museum of Louvre. In September 2008, Ms Luo, as the only designer invited from China, held a fashion show at the New York Fashion Week. Recently, Ms. Zheng Luo was acknowledged by the Cosmopolitan Magazine as the “China Designer of the Year” for 2008.
Ms. Zheng Luo’s designs have been worn by several Chinese media celebrities. In 2006, the well-known Chinese movie star Ms. Ziyi Zhang, who starred in films such as Memoirs of a Geisha, House of Flying Daggers , and Hero, wore one of her evening dresses while attending a celebrity charity banquet. Ms. Luo’s fashion show held in Beijing in November 2006 was attended by, among other notable attendees, Ms. Bingbing Fan, who ranked as the 7th most famous person in China according to Forbes . Ms Bingbing Fan wore Ms. Zheng Luo’s design to that Beijing show.
We conduct active training programs for our designers. Each of our designers attends, on average, more than 10 training sessions ever year and visits the Hong Kong SAR and other major cities in China regularly to see the latest fashion trends and understand local tastes. Training sessions take various forms, including attendance of fashion shows, fashion salons and fashion seminars.
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The table below lists some of the awards Ms. Zheng Luo, her team members and the OMNIALUO brand have received.
Awards to Ms. Zheng Luo
Product Design Process
New collections in the Chinese fashion industry are usually introduced twice each year, one collection for Spring/Summer and one collection for Fall/Winter.
In order to stay on top of the latest fashion trends, starting in late 2006 we began introducing new collections at trade shows or fashion shows four times a year. Specifically, we now introduce our (i) spring collection in November, (ii) summer collection in March, (iii) fall collection in May, and (iv) winter collection in August.
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We typically receive, on average, 80% of our orders during these trade events. This percentage is expected to be lower going forward due to our enhanced marketing efforts outside of the trade events and we expect to obtain more orders from other distributors who do not participate in the trade events. We completed the implementation of a new information management system for product order placements, to enhance our overall business process management, in Company-owned and co-owned stores in 2007. We have also selected 20 independent distributors for implementation of the system.
Our design team currently develops more than 1,600 new products per year, but only releases about 550 new products after careful selection of what to release to the market. We constantly focus on improving the design and quality of the garments we produce.
The design process for each season requires approximately fifty to sixty days from conceptualization to finalization, and can be roughly divided into three stages, planning, design and sample making. The design process of one season will start while that of the preceding season is still in progress.
(i)
Planning. In the planning stage, our design team forecasts the upcoming seasons’ fashion trends for Chinese women’s apparel. The goal is to integrate the latest North American fashion trends with the Chinese woman’s aesthetic sense. The design teams then develop four themes per collection. After deciding on the main themes, the design team decides how many product lines to introduce under each theme. The planning stage lasts approximately 20 days.
(ii)
Design. In the design stage, our designers collect original fabrics and accessories. The designers then prepare drawings for the individual items in each product line. The design process takes approximately 30 to 40 days.
(iii)
Sample Making. Sample making is the last stage of the design process where pattern making, cutting, sewing, fitting and revision take place and usually lasts for approximately 2 days.
Procurement, Suppliers, Manufacturing, and Quality Control
Procurement
We have a purchasing department currently comprised of five employees. This department is engaged in all procurement activities, such as specification and sample testing, production capability verification, order placement, contract management, and price and quantity negotiations. Final pricing for all orders are approved by both our chief executive officer Ms. Zheng Luo and our vice president.
We do not use independent agents in our procurement activities. We believe that our in-house personnel are better equipped to focus on and represent our interests, to respond to our needs and, are more likely to build long-term relationships with key vendors. We believe that these relationships will improve our access to raw materials at favorable prices over the long-term.
The entire process from searching for suppliers to reaching a procurement agreement usually takes one week. In most cases, it takes 20 to 30 days to receive the purchased raw materials. In case inventory is lower than required, we remedy shortfalls by purchasing from the same suppliers to ensure the consistency of quality. Manufacturers’ delivery dates are generally specified by contract to ensure that products will be available in our warehouses when we need them. We believe we have good relationships with our suppliers and, generally, there are adequate sources to enable us to produce sufficient supply of apparel in a timely manner. Once we purchase the material, those materials are delivered to independent manufacturers for further processing and/or decoration.
Suppliers
The raw materials required by us can be divided into two categories: (i) tatting and knitwear, and (ii) woolen and leather-made garments. For tatting and knitwear made garments, we purchase raw materials which are delivered to independent manufacturers for further processing. For woolen and leather-made garments, we purchase ready-to-wear clothes which require further design work and are also delivered to independent manufactures for further processing and decoration.
We currently purchase a variety of materials from more than fifty vendors. We believe that there is a sufficient number of suppliers for such materials in the market. In 2009, Yi Sheng Fabric was the only supplier that accounted for more than 5% of our total raw material and finished goods purchases. No supplier accounted for more than 5% of our total raw material and finished goods purchases in 2008.
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Outsourced Manufacturing
We do not operate any manufacturing facilities, and we do not currently have any plans to do so. Our apparel is produced by independent manufacturers that are selected, monitored and coordinated by our quality control department to assure conformity to our quality standards. We believe that the use of independent manufacturers increases our production flexibility, enables us to focus on higher margin business, and, at the same time substantially reduces capital expenditures and avoids the costs of maintaining a large production workforce. We maintain ownership of the raw materials and finished goods while such items are at our independent manufacturers.
We believe that our long-term, reliable and cooperative relationships with many of our manufacturers provide a competitive advantage over many of our competitors. Our merchandise is produced by approximately 15 independent manufacturers located in Guangdong Province, China with close proximity to our headquarters in Shenzhen, China. Xin Cai, one of the 15 contract manufacturers, currently produces approximately 10.8% of our annual manufactured garments in terms of dollar amount.
Although there are no long-term agreements between us and any of our contractors or suppliers, we believe our relationships with our suppliers and contract manufacturers are excellent. In addition, we receive preferential treatment from Yin Hu as the products manufactured by Yin Hu for us usually account for over 90% of Yin Hu's production capacity. Yin Hu was 80% owned by Ms. Zheng Luo, our founder and chief executive officer, until January 2007, at which time she transferred her entire interest in Yin Hu to unrelated third parties.
Quality Control
We monitor the quality of fabrics ordered and inspect samples of each product before production begins. We also perform random quality control checks during and after production before the garments leave our manufacturers. Our quality control personnel visit all independent manufacturers’ facilities at least three times a week. Final inspections occur when the garments are received in our warehouse. After that, we distribute finished garments to retail stores nation-wide. We employ two full-time quality control personnel, as well as an additional three inspectors at our warehouse. Our quality control program is designed to ensure that our products meet our high quality standards and that we deliver high quality products to retail stores. As we further expand our stores and increase our sales, we plan to hire more quality control personnel.
Information Management Systems
Since January 2007, we have been implementing a new information management system. This system is intended to enable us to procure raw materials on an economic purchase order basis, keep track of raw materials stock on a real time basis and monitor the production process. This system is intended to improve production efficiency and reduce purchasing and storage costs. We have applied the distribution function of the new system to our Company-owned stores and some of our co-owned stores. By implementing the distribution function, we are able to check our apparel stock in different categories, different sizes and colors on a real-time basis. For example, if one company-owned store is in need of certain inventory, we are able to immediately communicate to the other company-owned store with excess inventory in that category and ensure a prompt redistribution of inventory among both stores within one or two days. This new distribution function is expected to reduce lost sales arising from inventory shortages in particular stores and better allocate resources among different stores across different regions. Currently, we are satisfied with the implementation results of the new distribution function in the Company-owned stores and our co-owned stores. We have started to extend the application of the new system to selected independent distributor stores. As of December 31, 2009, 55 independent distributors are qualified to have access to the new system, which accounted for more than half of our total independent distributors stores at the end of 2009.
Inventory
We generally receive the bulk of our orders from retail stores in trade or fashion shows and usually fulfill these orders within three months. The orders are non-cancelable, requiring in the case of orders from independent distributors a 30% down payment upon the order placement, with full payment due before delivery of the goods. Once orders are placed, retail stores are allowed to exchange 10% of the merchandise ordered for the first time but no exchanges are allowed in subsequent orders for the same products.
Backlog
On December 31, 2009, our backlog of unfilled firm orders for delivery was approximately $2.5 million, compared with a backlog of unfilled firm orders for delivery of approximately $4.0 million as of December 31, 2008. We believe that our backlog at any specific point in time is not necessarily indicative of sales and business results in the near future.
Employees
All of our employees are employees of our wholly owned PRC operating subsidiary, Oriental Fashion. As of December 31, 2009, we had approximately 150 full-time employees. We consider our employee relationships to be satisfactory. We plan to increase the number and level of our skilled executive management executives.
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Intellectual Property
The Company has two trademarks, OMNIALO and OMNIALUO, that are registered in the PRC. Starting from November 17, 2009, such trademarks have also been registered in the United States.
Omnialo. Oriental Fashion has acquired rights of use to the Chinese and English OMNIALO trademarks, which were assigned to it for nominal cost by Ms. Zheng Luo, until October 6, 2017. The transfer of ownership of the trademarks has been approved by the Trademark Office of State Administration for Industry and Commerce (the “Trademark Office”). Ms. Zheng Luo has licensed use of these trademarks to Oriental Fashion. These trademarks originally expired in September 2007 (for the Chinese trademark) and October 2007 (for the English trademark), and applications to extend their registration until 2013 were filed and were approved in September 2007, resulting in new expiration dates of September 2017 (for the Chinese trademark) and October 2017 (for the English trademark). Both Oumeng and Ms. Zheng Luo have entered into agreements with Oriental Fashion agreeing not to use the OMNIALO trademarks in the future.
Omnialuo. Oriental Fashion has licensed, at nominal cost, rights of use to the Chinese and English OMNIALUO trademarks, the registration of which Ms. Zheng Luo had initially applied for in March 2005. These applications were approved by the trademark office on January 19, 2009. Ms. Zheng Luo transferred the Chinese and English OMNIALUO trademarks to Oriental Fashion at nominal cost subsequent to registration of the OMNIALUO trademarks by the Trademark Office. Both Oumeng and Ms. Zheng Luo have entered into agreements with Oriental Fashion agreeing not to use the OMNIALUO trademarks in the future.
Competition
The women’s apparel market is highly fragmented in China. It is estimated by the China Garment Industry Report that in 2005, the top ten women’s wear brands, including international brands and domestic ones, totaled only 13.36% of the total market. The market is extremely sensitive to fashion swings and diversified consumer preferences.
Honoring commitments made the World Trade Organization agreements, on December 11, 2004, the Chinese government lifted all restrictions imposed on foreign enterprises regarding their entry into China. Foreign retailers are allowed to establish wholly owned foreign enterprises in China with no restrictions on registered capital. Further, foreign retailers are allowed to open stores in any geographic areas in China. Therefore, in addition to domestic competition, the Company is subject to increasing competition from international brands.
Among our competitors are well established domestic brands such as Moiselle and Pink Mary and well established international brands such as Ports 1961 and others, most of which have the same demographic focus as us. Many of our domestic competitors, and most or all of our international competitors, are significantly larger and have substantially greater distribution and marketing capabilities, capital resources and brand recognition. We believe we can effectively compete with other brands based on our attention to Chinese customers’ aesthetic tastes, reflected through our design and use of materials, and the role in and commitment to the Company of our chief designer, founder and principal stockholder, Ms. Zheng Luo.
Growth Strategy
We plan to grow our sales and net profit margin based on the following strategies:
Selectively Expand Distribution Channels
Since our formation in the third quarter of 2006, one of our growth strategies is to open new stores, especially independent distributor stores and co-owned stores which generally have higher margins than company-owned stores. As of November 12, 2008, we had 245 stores altogether. However, as a result of the global economic recession and the presumed temporary but nonetheless marked decrease in Chinese consumer spending, particularly in the fourth quarter 2008, we were forced to close certain stores that did not make their pre-determined sales requirements. We believe that it was necessary to remove non-performers from an otherwise strong network of retail outlets. While formerly on pace to meets our goal of 250 stores by year-end 2008, it became necessary in the fourth quarter to cease pursuit of this goal and trim store count for the long-term good of the Company. As such, we closed 37stores by December 31, 2008. In 2009, we continued to close non-performing stores in order to better better face global economic crisis. As of December 31, 2009, we had 108 stores in total, including 27 company-owned stores, 8 co-owned stores and 73 independent distributor stores. The total store count is still subject to change based on prevailing market conditions. Nevertheless, we believe that there has been indication that the deterioration of the Chinese consumer market has slowed down in recent months. If the market condition improves, we expect that no more stores will be closed except those that need to be replaced by new stores. Our goal is to have 150 stores in total by the end of 2010.
We believe our focus in expanding independent distributor stores and co-owned stores is generally feasible because we structure our independent distributor stores and co-owned stores to require low startup costs. We are also prepared to launch advertising campaigns and market promotions to boost our brand recognition, when necessary, in conjunction with our expansion plan. We launched advertising campaigns and market promotions of OmniaLuo in October 2007 that continued into 2009. The advertising campaign features Ms. Zheng Luo and the OMNIALUO brands in major fashion magazines in China such as Vogue, Harper’s Bazaar and Cosmopolitan. We believe that the increased publicity will enhance our brand image and result in increased interest from independent distributors and co-partners.
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Develop New Merchandise Categories
Accessories have been identified as an important future product line for the OMNIALUO Brand. The new expanded accessories product line was released in the third quarter of 2007. In addition, in the first quarter of 2009, we applied to the Trademark Office for a new trademark, OM WEEKEND. The products with this trademark will target female professionals in China who are 18-30 years old. We intend for OM WEEKEND and OMNIALUO to develop into a more perfect brand system, which we will then take “up market”.
Expand our Market Vertically and Horizontally
We aim to continue to target the 25 to 35 year old female demographic and vertically extend into the 35 to 45 age group by offering premium and mature styled apparel. The 35 to 45 year old female age group generally has higher brand loyalty and purchasing power. Penetrating this age group is intended to develop a large group of loyal customers and increase our profits. We will also seek to expand our market horizontally by increasing our visibility in northern China by offering apparel tailored to the local consumers’ dressing tastes. This is being implemented by our designers who have an understanding of local northern China preferences. These designs were included in our spring/summer 2009 product line that was released in December 2008.
Regulatory Matters
Franchise Regulation
We will be eligible to enter into franchise arrangements one year after our application for a retail license is approved. However, we have no existing plans to enter into such arrangements. Should we enter into such arrangements, we would be required to comply with certain legal requirements, including owning at least two Company-owned or co-owned stores in China for more than one year, having the ability to provide long-term training services to the franchisee, having a goods supply system that is stable and that can guarantee quality, and having a good reputation in business operations, and we would be required to submit an application to the relevant Chinese authorities. Should we chose to enter into franchise arrangements, we believe there would be little difficulty in meeting these requirements.
Elimination of Restrictions on International Competitors in China
Honoring commitments in WTO agreements, on December 11, 2004, the Chinese government lifted all restrictions imposed on foreign enterprises regarding their entry into the retail market in China. Foreign retailers are allowed to establish a wholly owned foreign enterprise in China with no restrictions on registered capital. Further, foreign retailers are allowed to open any number of stores in any geographic areas in China. This opens the door for substantial competition from a number of larger international apparel retailing brands and companies. See “Competition” above.
Industry Overview
Economy in China
According to the China Garment Industry Report, China has sustained 9%+ GDP growth for the last 25 years and is likely to continue at 7% GDP growth in the next five years. In 2005, China achieved a GDP of $2,314 billion and total consumption of $852 billion. The report further revealed that the Chinese people, in general, spend 8% to 10% of their disposable income on garments, and that the garment industry in China saw overall sales of $87 billion. The report forecasted that the garment industry in China will continue at more than a 20% annual growth rate for the next 5 years.
Segments
The garment industry in China can be divided into seven major categories, which are women’s outerwear, men’s outerwear, kids’ outerwear, knitwear, underwear/nightwear, accessories, and socks. Women’s outerwear is the biggest sector in the Chinese garment industry and accounted for approximately 36% of garment industry sales by dollar amount in 2005. In contrast, men’s outerwear only represented approximately 22% of industry sales in the same period. Underwear/nightwear is also a significant sector in garment industry in China.
The below diagram illustrates the percentage of sales for each garment category in 2005 in China. Overall garment industry sales in China in 2005 were $87 billion (Source: Chinese Garment Industry Report, 2005-2006).
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Concentration
Rates of concentration differ from one garment sector to another. Men’s wear in China was the most concentrated sector, with the top 10 sellers (both international brands and Chinese domestic ones) occupying approximately 50% of collective sales in men’s wear. Kids’ wear follows as the second most concentrated sector, with the top 10 sellers representing approximately 35% of overall sales of kids’ wear. Women’s wear is the most fragmented sector, with then top ten sellers only accounting for approximately 13.36% of sales. The garment industry is not experiencing a major consolidation. Instead, it is undergoing a reshuffling with quality brands, existing or new, taking market share from low quality and non-branded products.
Distribution Channels
In China, urban dwellers do most of their shopping in shopping malls or department stores because they feel brands displayed in big stores are more trustworthy with high quality guarantees. CGIR indicated that, in 2005, 55% of garment purchases were made in shopping malls or department stores, 23% in specialty stores such as franchised stores, 13% in grocery stores, 6% in outlets and the remaining 3% in other channels.
The diagram below illustrated the percentage of Garment Sales in China by Distribution Channels in 2005. Overall garment industry sales in 2005 in China were $87 billion. (Source: Chinese Garment Industry Report, 2005-2006.)
Structural Changes
The Chinese apparel industry has experienced three stages. Before 1990, apparel was purchased primarily for functional purpose and people were very price conscious when making purchase decisions. From 1990 to 1999, people were shifting their attention from being mainly price conscious to being more quality aware; they liked to purchase clothes which were comfortable and durable. Since 1999, people are increasingly brand aware and more inclined to purchase quality brand apparel. This is especially true for young and middle aged urban females who like to wear personalized and distinctive brands to appear unique.
Market Analysis
Market Segments
The Chinese women’s apparel market can be segmented into different categories by price, age, and style as indicated in the following tables.
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Segments by Garment Price
Note: all income figures are after tax.
In 2005, the upper-middle class and mass affluent class accounted for 9.4% and 0.5% of the total urban population respectively. However, they represent 24.2% and 2.4% of total urban disposable income. With the growing economy in China, the Chinese urban population is undergoing structural changes. The McKinsey report projected that by 2015, the percentage of upper-middle class could grow to 21.2% from 12.6% in 2005 and the mass affluent class could grow to 5.6% from 0.5% in 2005. The report also projected that the two groups collectively would occupy 44.3% of urban disposable income, compared to 26% in 2005.
Segments by Consumer Age Group
Source: National Bureau of Statistics of China, 2005
The 25 to 45 year-old female group is the most heavily populated group in China. By the end of 2004, this group had a population of 215 million, accounting for 35% of the total Chinese female population, which is the wealthiest group in China. The McKinsey report revealed that in China, the wealthiest consumers are in the 25 to 45 year-old group, much younger than the highest earners in the United States who are in the 45 to 54 year-old group. Furthermore, 25 to 35 year-old females have the strongest purchasing desire for apparel. It is reported that 25 to 35 year-old females spend more than 20% of their disposable income on clothing, while average Chinese spend 8% to 10% (“In the Crosshairs”, an article written by Lisa Movius, published in Women’s Wear Daily on March 22, 2005).
Market Size
In China, women’s outerwear accounts for around 36% of total apparel consumption. In shopping malls and department stores, women’s wear occupies 2 to 4 floors, while men’s wear can hardly fill one floor. In 2005, the women’s apparel market in China was $25 billion. In 2005, branded women’s apparel accounted for 12% of all women apparel sales, or $3 billion in dollar terms, which is the market we are addressing. The size of the market in 2005 is described in the following chart.
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Source: Chinese Garment Industry Report 2005-2006
Target Market Growth
China’s GDP growth is expected to be 7% in the next five years as China is emerging as a major economic power. The increasing urbanization rate and a substantial annual increase in per capita consumption are expected to fuel the growth in apparel market. The CGIR forecasts that the apparel industry will continue to grow for the next few years and the women’s apparel market is expected to outpace the overall apparel industry. As consumption in the Chinese apparel industry is undertaking structural changes from quality focus to quality brand focus, the fastest growth segment will likely to take place in branded products like the OMNIALUO brands.
The Company targets white-collar and pink-collar females in China in the upper-middle class and mass affluent class. As the economic growth continues, growth in both of these classes and their disposable income is expected.
Source: National Bureau of Statistics of China; McKinsey Global Institute analysis
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Source: National Bureau of Statistics of China; McKinsey Global Institute analysis
ITEM 1A.
ITEM 1A. RISK FACTORS
Investing in our securities involves a material degree of risk. Before making an investment decision, you should carefully consider the risk factors set forth in this Annual Report, as well as other information we include in this Annual Report. Although every effort has been made to anticipate possible risks, unforeseen conditions and unexpected events may arise, and this list may not be all-inclusive.
Risks Related to Our Business
The recent global financial crisis could negatively affect our business, results of operations, and financial condition.
The recent credit crisis and turmoil in the global financial system may have an adverse impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, these economic conditions also impact levels of commercial and consumer spending, which have recently deteriorated significantly and may remain depressed for the foreseeable future. It is uncertain how long the global crisis in the financial services and credit markets will continue and how much of an impact it will have on the global economy in general or the Chinese economy in particular. If demand for our products and services fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed.
Our business is highly sensitive to economic conditions and consumer spending and an economic downturn could have a material adverse impact on us.
The retail and apparel industries historically have been subject to substantial cyclical variation. A recession in the general economy or a decline in consumer spending in the apparel industry could have a material adverse effect on our financial performance. Purchases of apparel and related merchandise tend to decline during recessionary periods and may decline at other times. There can be no assurance that a prolonged economic downturn would not have a material adverse impact on us or that our customers could continue to make purchases during a recession.
We are highly dependent on our chief executive officer, founder and principal stockholder and other key personnel and if we lose other key management or other personnel, our business will suffer.
Our future success will depend in part on the continued service of certain key management and other personnel, particularly Ms. Zheng Luo, our chief executive officer and chief designer, who is closely associated with our brand names. Although Ms. Zheng Luo is our principal shareholder, and has entered into non-competition agreements with us and our Chinese operating subsidiary, none of these factors and arrangements ensure the continued availability of Ms. Zheng Luo’s services to us. We currently have not obtained key-person life insurance with respect to Ms. Zheng Luo. Even if we are to obtain such key-person life insurance for Ms. Zheng Luo, such such insurance will only cover certain risks relating to our dependency on Ms. Zheng Luo, and the amount of such insurance may not be adequate to compensate for any loss of Ms. Zheng Luo’s services.
In addition, success will also depend on our ability to attract and retain qualified managers, design, sales and marketing personnel. Competition for these employees is intense. There is no assurance that we can retain our existing key personnel or attract and retain sufficient numbers of qualified employees in the future. The loss of key employees or the inability to hire or retain qualified personnel in the future would have a material adverse effect on the development of our business and our ability to develop, market and sell our products.
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The relative lack of public company experience of our management team may put us at a competitive disadvantage.
Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley. Aside from our chief financial officer, David Xuguo Wang, our senior management does not have experience managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may be unable to implement programs and policies in an effective and timely manner that adequately respond to the increased legal, regulatory and reporting requirements associated with being a publicly traded company. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties, distract our management from attending to the management and growth of our business, result in a loss of investor confidence in our financial reports and have an adverse effect on our business and stock price.
As a public company, we are obligated to maintain effective internal controls over financial reporting. Our internal controls may not be determined to be effective, which may adversely affect investor confidence in us and, as a result, decrease the value of our Common Stock.
The PRC has not adopted management and financial reporting concepts and practices similar to those in the United States. We may have difficulty in hiring and retaining a sufficient number of qualified finance and management employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing and maintaining accounting and financial controls, collecting financial data, budgeting, managing our funds and preparing financial statements, books of account and corporate records and instituting business practices that meet investors’ expectations in the United States.
Rules adopted by the Securities and Exchange Commission, or the Commission, pursuant to Section 404 of Sarbanes-Oxley require annual assessment of our internal controls over financial reporting, and attestation of this assessment by our independent registered public accountants. This requirement first applied to our annual report on Form 10-K for the fiscal year ended December 31, 2008 and the attestation requirement of management’s assessment by our independent registered public accountants will first apply to our annual report on Form 10-K for the fiscal year ended December 31, 2010. The standards that must be met for management to assess the internal controls over financial reporting as effective are relatively new and complex and require significant documentation, testing and possible remediation to meet the detailed standards. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404 is costly and challenging. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to conclude that our internal control over financial reporting is effective. We could lose investor confidence in the accuracy and completeness of our financial reports, which could harm our business and cause the price of our Common Stock to decline.
If we are unable to anticipate fashion trends in a timely manner and respond to such trends, our reputation could be harmed and profitability could decrease.
The women’s apparel industry has many characteristics including changing consumer preferences and shifting fashion trends. We believe that our success depends in substantial part on our ability to anticipate emerging fashion trends and design and customize our products to meet new trends and changing consumer demands in a timely manner. There can be no assurance that we will continue to be successful in this regard. Our failure to anticipate and respond to these changes could result in lower sales, excess inventories and lower margins, which would have a material adverse effect on our operations, business and financial condition.
Our business is highly seasonal and if we fall significantly short of our anticipated earnings in one or more quarters, it will significantly decrease the working capital available to us in the following quarters, which may adversely affect our purchasing abilities.
Our business is highly seasonal, with the highest proportion of sales and operating income generally being generated in the fourth quarter of each year, lesser proportions in the second and third quarter of each year, and the lowest proportion of sales and operating income being generated in the first quarter of each year. Our working capital requirements are likely to fluctuate during the year, increasing substantially during one or more quarters as a result of higher planned seasonal inventory levels and higher receivables. If we fall significantly short of our anticipated earnings in one or more quarters, it will significantly decrease the working capital available to us in the following quarters. Due to limitations on borrowing levels, a decrease in working capital may adversely affect our purchasing abilities which would have a material adverse effect on our revenues.
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Product branding is important to us and if our brands are misappropriated our reputation could be harmed, which could result in lower sales having a negative impact on our financial results.
We rely upon a combination of trademark, licensing and contractual covenants to establish and protect the brand names of our products. We have registered two of our trademarks and applied for registration of a third trademark in the Trademark Office of China. In our market segments, our reputation is closely related to our brand names. Monitoring unauthorized use of our brand names is difficult, and we cannot be certain that the steps we have taken will prevent their unauthorized use, particularly in foreign countries. Our brand names may be misappropriated or utilized without our consent and such actions may have a material adverse effect on our reputation and on the results of our operations.
The legal regime in China for the protection of intellectual property rights is still at its early stage of development. Intellectual property protection became an effort in China in 1979 when China began the registration of trademarks nationwide, and also adopted the Criminal Law on the protection of trademarks. Since then, China has adopted its Patent Law, Trademark Law and Copyright Law and promulgated related regulations such as Regulation on Computer Software Protection, Regulation on the Protection of Layout Designs of Integrated Circuits and Regulation on Internet Domain Names. China has also acceded to various international treaties and conventions in this area, such as the Paris Convention for the Protection of Industrial Property, Patent Cooperation Treaty, Madrid Agreement and its Protocol Concerning the International Registration of Marks. In addition, when China became a party to the World Trade Organization in 2001, China amended many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many laws and regulations promulgated and other efforts made by China over the years with a view to tightening up its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many Western countries, including the United States, and enforcement of such laws and regulations in China have not achieved the levels reached in those countries. Both the administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities between compliant innovation and non-compliant infringement.
Many of our competitors have substantially greater capabilities and resources and may be able to market products more effectively, which would limit our ability to generate revenue and cash flow.
Competition in the women’s apparel industry is intense and we face increasing domestic and international competition from several companies. Many of our competitors are significantly larger and have substantially greater distribution and marketing capabilities, capital resources and brand recognition. There is no assurance that we will be able to compete successfully against present or future competitors. Such failure to compete would have a material adverse effect on our business and results of operations.
We are uncertain as to our ability to effectively implement and manage our growth strategy.
As part of our growth strategy, we seek to expand our distribution network and introduce new product lines like Omnia Collections and accessories. The success of our growth strategy will depend on brand management, competitive conditions, our ability to manage increased sales and distribution and, in the future, franchise store expansion, the availability of desirable locations and the negotiation of terms with distributor and franchise stores. There is no assurance that we will be able to obtain terms as favorable to us as those under which we now operate or that such terms will not adversely affect our ability to manage inventory risk. There is also no assurance that our growth strategy will be successful or that our sales or net income will increase as a result of the implementation of such strategy.
Our management and internal systems might be inadequate to handle our potential growth.
Successful implementation of our business strategy will require us to develop our operations and effectively manage growth. Any growth will place a significant strain on our systems, management, financial, product design, marketing, distribution and other resources, which would cause us to face operational difficulties. To manage future growth, our management must build operational and financial systems and expand, train, retain and manage our employee base. For instance, we will need to enhance our information systems and operations and attract and retain qualified personnel. Our management may not be able to manage our growth effectively if our systems, procedures, controls and resources are inadequate to support operations. In such case, our expansion would be halted or delayed and we may lose our opportunity to gain significant market share or the timing advantage with which we would otherwise gain significant market share. Any inability to manage growth effectively may harm our ability to implement and execute out current or any subsequent business plans.
If we are unable to effectively implement our new information management system and data networks, our ability to mange our inventory would be disrupted.
We are implementing a new information management system and data networks. The system has been fully operational in Company-owned stores and co-owned stores since the end of 2007, and we have selected 60 independent distributor stores for implementation of the system by December 31, 2009. Delays or other difficulties in implementing this system could disrupt our ability to manage our inventory effectively. In addition, we plan to establish five regional centers to better monitor each region’s market dynamics, facilitate traffic flows, ensure rapid response and provide partner support and supervision. There is no assurance that this expansion will be completed on time or that it will be successful. Any failure to manage growth effectively could have a material adverse effect on our results of operations and financial condition.
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We depend on others to manufacture our products and any disruption in manufacturing could have a material adverse effect on our business.
Our products are manufactured by approximately 15 independent manufacturers. We do not operate any production facilities. One manufacturer engaged by us, Yin Hu Company (“Yin Hu”), formerly a related party to us but unaffiliated with us since early 2007, currently produces approximately 40% of our annual manufactured garments in terms of dollar amount.. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss our customers’ delivery requirements for those items. As a result, cancellation of orders, refusal to accept deliveries or a reduction in purchase prices could have a material adverse effect on us.
We enter into purchase order commitments each season specifying a time frame for delivery, method of payment, design and quality specifications and other standard industry provisions. We do not have long-term contracts with any manufacturer. In addition, we compete with other companies for the production capacity of independent manufacturers and import quota capacity. Some of these competing companies have substantially greater brand recognition, financials, and other resources than we do and thus may have an advantage in the competition for production and import quota capacities. Although Yin Hu has recently committed 90% of its capacities to the production of OMNIALUO brand products, none of our manufacturers produces our products exclusively.
We require our independent manufacturers to operate in compliance with applicable laws and regulations. While we do not control our manufacturers or their labor practices, our internal and vendor operating guidelines promote compliance with laws and our sourcing personnel periodically visits and monitors the operations of our independent manufacturers. The violation of labor or other laws by one of our independent manufacturers, or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical, could result in adverse publicity for us and could have a material adverse effect on us.
We may be unable to effectively manage our inventory.
We place orders for our products with our manufacturers prior to the time we have received all of our customers’ orders and maintain an inventory of certain products that we anticipate will be in greater demand. There is no assurance, however, that we will be able to sell the products we have ordered from manufacturers or our existing inventory at a profit or at all. Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which would have a material adverse effect on us and our results of operations.
We depend to some extent on a high volume of mall traffic and the availability of suitable lease space.
Many of our stores are located in shopping malls. Sales at these stores are derived, in part, from the volume of traffic in those malls. Our stores benefit from the ability of the mall’s “anchor” tenants, generally large department stores, and other area attractions to generate consumer traffic in the vicinity of our stores and the continuing popularity of malls as shopping destinations. Sales volume and mall traffic may be adversely affected by economic downturns in a particular area, competition from non-mall retailers and other malls where we do not have stores and the closing of anchor department stores. In addition, a decline in the desirability of the shopping environment in a particular mall, or a decline in the popularity of mall shopping among our target consumers, would adversely affect our business.
Part of our future growth is significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs that allow us to earn a reasonable return. We cannot be sure as to when or whether such desirable locations will become available at reasonable costs.
We have closed a significant number of stores in 2009 and cannot be certain that we will be able to execute our plan to open additional stores or that such store openings will be successful.
Since our formation in the third quarter of 2006, one of our growth strategies is to open new stores, especially independent distributor stores and co-owned stores which generally have higher margins than company-owned stores. As of November 12, 2008, we had 245 stores altogether. However, as a result of the global economic recession and the presumed temporary but nonetheless marked decrease in Chinese consumer spending, particularly in the fourth quarter 2008, we were forced to close certain stores that did not make their pre-determined sales requirements. As of December 31, 2009, we had 108 stores in total, which is still subject to change based on prevailing market conditions. Nevertheless, we believe that there has been indication that the deterioration of the Chinese consumer market may have slowed down in recent months. If the market condition improves, we expect that no more stores will be closed except those that need to be replaced by new stores. Our goal is to have 150 stores in total by the end of 2010.
However, successful implementation of our company’s growth strategy depends on a number of factors including, but not limited to, favorable economic conditions, obtaining desirable store locations, negotiating acceptable leases, completing projects on budget, supplying proper levels of merchandise and the hiring and training of store managers and sales associates. We cannot assure you that all these factors would exist in our favor for us to be able to execute our plan to open additional stores.
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In addition, new stores may place increased demands on our company’s operational, managerial and administrative resources, which could cause our company to operate less effectively. Furthermore, there is a possibility that new stores that are opened in existing markets may have an adverse effect on future sales of previously existing stores in such markets. In addition, our failure to predict accurately the demographic or retail environment at any future store location could have a material adverse effect on our business, financial condition and results of operations.
Our expansion into new markets could adversely affect our financial condition and results of operations.
Some of our new stores will be opened in areas of China in which we currently have few or no stores. The expansion into new markets may present competitive, merchandising and administrative challenges that are different from those currently encountered in our existing markets. Any of these challenges could adversely affect our business, financial condition and results of operations. To the extent our new store openings are in existing markets, we may experience reduced net sales volumes in existing stores in those markets.
We depend upon the success of our advertising and marketing programs.
Our business depends on high customer traffic in our stores and effective marketing. We have many initiatives in this area, and we frequently change our advertising and marketing programs. There can be no assurance as to our continued ability to effectively execute our advertising and marketing programs, and any failure to do so could have a material adverse effect on our business and results of operations.
We may face labor shortages or increased labor costs which could adversely affect our growth and operating results.
Labor is a significant component in the cost of operating our stores. If we face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, increases in wages or increases in other employee benefits costs, our operating expenses could increase and our growth could be adversely affected. Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees.
We rely on third parties to distribute our merchandise. If these third parties do not adequately perform this function, our business would be disrupted.
The efficient operation of our business depends on our ability to ship merchandise through third-party carriers directly to our stores. Due to our reliance on these parties for our shipments, interruptions in the ability of our vendors to ship our merchandise or the ability of carriers to fulfill the distribution of merchandise to our stores could adversely affect our business, financial condition and results of operations. An increase in fuel prices may also increase our shipping costs, which could adversely affect our business, financial condition and results of operations.
Risks Related to Doing Business in China
Changes in China’s political or economic situation could harm us and our operational results.
We conduct all of our operations and generate all our revenues in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Some of the things that could have this effect are:
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Level of government involvement in the economy;
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Control of foreign exchange;
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Methods of allocating resources;
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Changes in the development, or rate of development, of the market-oriented sector of the economy;
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Changes in the rapid growth rate of the overall economy;
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Balance of payments position;
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International trade restrictions; and
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International conflict.
The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.
Our business is largely subject to the uncertain legal environment in China and our investors’ legal protection could be limited.
The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign invested enterprises (of which we are one) to hold licenses and permits such as requisite business licenses. In addition, all of our executive officers and all of our directors are residents of China and not of the U.S., and substantially all the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.
China only recently has permitted provincial and local economic autonomy and private economic activities. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Future inflation in China may inhibit our ability to conduct business profitably in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could harm our operations.
A renewed outbreak of SARS or another widespread public health problem in China, where our operations are conducted, could have a negative effect on our operations. Our operations may be impacted by a number of health-related factors, including the following:
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quarantines or closures of some of our offices which would severely disrupt our operations,
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the sickness or death of our key officers and employees, and
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a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public health problems could damage our operations.
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Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
The majority of our revenues are and will be settled in RMB and U.S. Dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside China on the strength of domestic PRC assets originally held by those residents. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations. In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006. Failure to comply with the requirements of Circular 75, as applied by SAFE, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.
We believe our stockholders who are PRC residents as defined in Circular 75 have registered with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiary. However, we cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
If the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency, determines that CSRC approval was required in connection with our recent private placement, we may become subject to penalties.
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, has certain provisions that require SPVs formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. In our case, theformation in September 2006 by Omnia BVI of Oriental Fashion, and Oriental Fashion's subsequent, limited acquisition of discrete assets from Oumeng, should not be seen as an acquisition of a PRC domestic company as contemplated by the new regulation and we therefore have not applied to the CSRC for approval under this regulation. Nonetheless, if the CSRC or another PRC regulatory agency subsequently determines that the CSRC’s approval was required for our recent private placement or quotation on OTCBB, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from that private placement into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.
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Recent Chinese merger and acquisition regulations may limit our ability as to acquire assets and equity interests of Chinese companies, which could hinder our ability to expand in China and adversely affect our long-term profitability.
The new regulations which became effective on September 8, 2006 cover all acquisitions of assets and equity interests of Chinese companies by foreign investors, including overseas companies under the de facto control of Chinese persons or entities. Depending on the structure of the transaction, these regulations will require the target Chinese companies to make a series of applications to the aforementioned agencies, some of which must be made within strict time limits and depend on approvals from one or the other of the aforementioned agencies. If obtained, approvals will have expiration dates by which a transaction must be completed. It is expected that compliance with the regulations will be more time consuming than in the past, will be more costly and will permit the government much more extensive scrutiny and control over the terms of the transaction. Therefore acquisitions in China may not be able to be completed because the terms of the transaction may not satisfy aspects of the approval process and may not be completed, even if approved, if they are not consummated within the time permitted by the approvals granted. This may restrict our ability to implement any acquisition we may decide to pursue and adversely affect our business and prospects.
New corporate income tax law could adversely affect our business and our net income.
On March 16, 2007, the National People's Congress passed a new corporate income tax law, which became effective on January 1, 2008. This new corporate income tax unifies the corporate income tax rate, cost deductions and tax incentive policies for both domestic and foreign-invested enterprises in China. According to the new corporate income tax law, the applicable corporate income tax rate of Oriental Fashion and any other future Chinese subsidiaries will incrementally increase to 25% over a five-year period. According to the Circular on the Implementation of Preferential Policies concerning the EIT Transition issued by the State Council on December 26, 2007, the enterprise income tax rate for companies established in Shenzhen shall be 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% from 2012 onwards. By virtue of the New CIT Law and the foregoing tax reduction, Oriental Fashion was subject to EIT rate of 10% during 2009. During 2008, Oriental Fashion was subject to EIT rate of 18%, with full tax exemption.
The discontinuation of any special or preferential tax treatment or other incentives could adversely affect our business and our net income.
Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.
China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the New EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operation reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) ½ directors with voting rights or senior management often resident in China. Such resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
However, as our case substantially meets the foregoing criteria, there is a likelihood that we are deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2008 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.
The value of our securities will be affected by the foreign exchange rate between U.S. dollars and RMB.
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and RMB, and between those currencies and other currencies in which our sales may be denominated. For example, to the extent that we need to convert U.S. dollars into RMB for our operational needs and should the RMB appreciate against the U.S. dollar at that time, our financial position, the business of the company, and the price of our common stock may be harmed. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
Risks Related to Our Common Stock
The current market price of the common stock may not be indicative of future market prices.
We anticipate that the market price of our shares will fluctuate significantly in response to numerous factors, many of which are beyond our control, including, without limitation:
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the announcement of new products or product enhancements by our competitors;
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quarterly variations in our and our competitors’ results of operations;
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changes in financial estimates or recommendations by securities analysts;
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speculation about our business in the press or investment community;
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expiration of lock-up agreements; and
·
general market conditions and other factors, including factors wholly unrelated to our own operations or performance.
There is not now and there may never be an active liquid market for our common stock.
We are providing no assurances of any kind or nature whatsoever that an active liquid market for our common stock will ever develop, on the OTCBB or elsewhere. Investors should understand that there may be no alternative exit strategy for them to recover or liquidate their investments in our common stock. Accordingly, investors must be prepared to bear the entire economic risk of an investment in the common stock for an indefinite period of time. If our revenues do not grow or grow more slowly than we anticipate, if operating or capital expenditures exceed our expectations and cannot be adjusted accordingly, or if some other event adversely affects us, the market price of our common stock will decline.
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We are subject to the reporting requirements of the United States securities laws, which will require expenditure of capital and other resources.
We are a public reporting company subject to the information and reporting requirements of the Securities Exchange Act of 1934 and other federal securities laws, including, without limitation, compliance with the Sarbanes-Oxley Act (“Sarbanes”). The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be substantially higher than they would otherwise be if we were privately-held. It will be difficult, costly, and time-consuming for us to develop and implement internal controls and reporting procedures required by Sarbanes, and we will require additional staff and third-party assistance to develop and implement appropriate internal controls and procedures. If we fail to or are unable to comply with Sarbanes, we will not be able to obtain independent accountant certifications that the Sarbanes requires publicly-traded companies to obtain.
Investor confidence and market price of our shares may be adversely impacted if we or our independent registered public accountants are unable to attest to the operating effectiveness of our internal controls as of December 31, 2009, as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002.
The SEC, as directed by Section 404 of Sarbanes, adopted rules requiring public companies, including us, to include a report of management of their internal control structure and procedures for financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of their internal controls over financial reporting. We are subject to this requirement commencing with our fiscal year ended December 31, 2010 and a report of our management is included in this Annual Report on Form 10-K. In addition, independent registered public accountants of these public companies must attest to and report on the operating effectiveness of their internal controls. However, this annual report does not include an attestation report because under current law, we will not be subject to these requirements until our annual report for the fiscal year ending December 31, 2009. Our management may conclude that our internal controls over financial reporting are not effective. Moreover, even if our management concludes otherwise, if our independent registered public accountants are not satisfied with our internal control structure and procedures, the level at which our internal controls are documented, designed, operated or reviewed, or if the independent registered public accountants interpret the requirements, rules or regulations differently from us, they may decline to attest to our management’s assessment or may issue a report that is qualified. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which could negatively impact the market price of our shares.
We may not be able to attract the attention of major brokerage firms or securities analysts.
Security analysts and major brokerage houses may not provide coverage of us, given that our OTC Bulletin Board status provides little or no incentive to recommend the purchase of our common stock. We may also not be able to attract any brokerage houses to conduct secondary offerings with respect to our securities.
We are making no representations and are providing no assurances that our common stock will become listed on NASDAQ, the American Stock Exchange or any other securities exchange.
We anticipate that we may seek to list our common stock on NASDAQ or the American Stock Exchange. We are making no representations nor providing any assurances that we will be able to meet the initial listing standards of either of those or any other stock exchange. Therefore, investors may find it difficult to dispose of shares or to obtain accurate quotations as to the market value of the common stock. In addition, we will be subject to an SEC rule (Rule 15c2-11) that imposes various requirements on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors. The requirement that broker-dealers comply with this rule will deter broker-dealers from recommending or selling our Company’s common stock, thus further adversely affecting the liquidity and share price of the common stock, as well as our ability to raise additional capital.
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We have never paid dividends and have no plans to pay dividends at any time in the near or distant future.
We have never paid dividends on our capital stock, and we do not anticipate paying any dividends for the foreseeable or distant future. Our present business plan does not include, for the foreseeable future and beyond, any payments of dividends to stockholders. Stockholders’ sole strategy for any return on their investments must therefore be the potential for the increase in the value of their stock and the possibility of liquidating their stock positions at a gain.
You may experience immediate and substantial dilution if we obtain additional financing.
If we obtain additional financing, that financing may have a dilutive effect on the holders of our securities.
The Company adopted in the first quarter of 2008 an employee equity incentive plan under which the Company’s officers, directors, consultants, and employees will be eligible to receive, in relevant part, either securities or stock options exercisable for the Company’s securities at exercise prices that must generally be no less than the then prevailing fair market value of the Company’s common stock on the date of grant. The Company has reserved five million (5,000,000) shares of common stock for issuance under this plan. Any issuance under this equity incentive plan will have dilutive effect on the holders of our securities.
We will need to raise additional capital in order to achieve our long-term goals, but as yet have not identified any sources for such capital.
We have not yet identified sources for additional financing, and we may be unable to raise sufficient funds on terms that are acceptable to us, or at all. If those funds are not raised, the development of our products would be delayed, and the scope of our operations would be substantially curtailed or completely eliminated.
The existence of the Warrants may adversely affect the market price of our shares, and any future Warrant exercises may result in further dilution.
We currently have issued outstanding warrants to purchase up to 5,704,752 shares of our common stock, of which (i) warrants for up to 5,412,000 shares may be exercised at $1.5625 per share at any time or from time to time until October 9, 2012, including warrants for 492,000 shares which may be exercised on a cashless exercise basis, and (ii) warrants for up to 292,752 shares may be exercised at $1.25 per share at any time or from time to time for a two-year period commencing December 17, 2007. The total number of shares issuable upon exercise of warrants is relatively high compared to the number of shares of our common stock issued and outstanding. Therefore, the existence of these warrants, and the continuing likelihood that they may exercised and the shares acquired upon exercise sold from time to time in the public trading market for our common stock, may have an adverse effect on the market price of our common stock.
Any of the above-identified risks, even if borne out only partially and not fully, will adversely affect our business, our financial condition and our operating results. If any of the events we have identified occur, in whole or in part, the value of our common stock will likely decline, and an investor will lose all or part of the funds paid to acquire our common stock with no opportunity to regain any portion of those funds in return.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
Properties and Leases
As of December 31, 2009, we have the following leased properties:
(1) we operate our executive offices and showrooms in a leased location at No. E6 101# Industrial District, Huaqiao City, Nanshan District, Shenzhen, China, with approximately 11,132 square feet of space, under a lease expiring in 2011. The expected payments under the lease are $7,893 per month from January 1, 2007 to September 15, 2008, $8,287 per month from September 16, 2008 to September 15, 2009, $8,701 per month from September 16, 2009 to September 15, 2010, and $9,137 per month from September 16, 2010 to September 15, 2011.
(2) we operate another office and showroom in another leased location at No.6 6101#, 1718 Tianshan Road, Shishang Yuan, Shanghai, China, with approximately 2,960 square feet of space, under a lease expiring on October 31, 2013. The payments under the lease are $30,377 per annum from 2005 to 2008. From 2009 to 2013, the payment for each following year will increase by 5% based on the rent for the immediately preceding year.
(3) We operate our warehouse in a leased location at the 1st floor of No. 525, Bagualing Industrial District, Bagua Er Road, Futian District, Shenzhen, China, with approximately 1,399 square feet of space, under a lease expiring on December 31, 2010. The payments under the lease are $1,931 per month.
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(4) We rent an area in the Helen Shopping Mall located on the 2nd floor of sister building of No. 3 and No. 4 of Baolicheng Garden, Nanhai Avenue, Nanshan District, Shenzhen, China, with approximately 1,722 square feet of space, under a lease expiring on July 14, 2011. The payments under the lease are $4,958 per month. From 2007 to 2011, and from 2009 to 2011, respectively, the payment for each following year will increase by 5% based on the rent for the immediately preceding year.
Total rental expenses under operating leases of office and showroom space were $452,256 for the period ended December 31, 2009, and $462,658 for the period ended December 31, 2008.
We also operate 27 company-owned stores and, jointly with third parties, 8 co-owned stores in leased locations in various geographic areas in China.
We believe that our existing facilities are adequate for our current needs and that additional space will be available as needed.
We maintain reasonable and customary property and disaster insurance coverage for our properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
ITEM 4.
ITEM 4. RESERVED
PART II
ITEM 5.
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is quoted under the symbol “OLOU.OB” on the Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc., but has not been traded in the Over-The- Counter market except on a limited and sporadic basis. The CUSIP number is 68215N 107.
The following table sets forth, for the periods indicated, the high and low closing prices of our common stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Prior to January 2008, our stock was not trade, quoted or listed. The following table reflects this absence of trading and the prices on recorded on low trading volumes.
*
The above table sets forth the range of high and low closing prices per share of our common stock as reported by www.quotemedia.com for the period indicated.
Approximate Number of Holders of Our Common Stock
On March 25, 2009, there were approximately 92 stockholders of record of our common stock. The number of record holders does not include persons who held our common stock in nominee or “street name” accounts through brokers.
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Dividend Policy
The holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our board of directors. We have never declared or paid cash dividends. Our board of directors does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiary, Oriental Fashion, from time to time may be subject to restrictions on its ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net assets available to stockholders after payment of all creditors.
Securities Authorized for Issuance under Equity Compensation Plans
The Company adopted in the first quarter of 2008 an employee equity incentive plan under which the Company’s officers, directors, consultants, and employees will be eligible to receive, in relevant part, either securities or stock options exercisable for the Company’s securities at exercise prices that must generally be no less than the then prevailing fair market value of the Company’s common stock on the date of grant. The Company has reserved five million (5,000,000) shares of common stock for issuance under this plan.
Purchase of Our Equity Securities
No repurchases of our common stock were made during the fiscal year
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following selected consolidated statements of operations and comprehensive (loss) income data for the years ended December 31, 2008 and 2009, and the consolidated balance sheet data as of December 31, 2008 and 2009 are derived from the audited consolidated financial statements of the Company included in this Annual Report. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this report. Our historical results are not necessarily indicative of our results for any future periods.
(All amounts, other than per share data, in U.S. dollars)
(1)
Oriental Fashion is the Company’s only operating subsidiary and is engaged in woman apparel design, manufacturing and distribution in China.
For 2009, this number is net income before deducting general and administrative expenses for $418,395 and Stock-based compensation for $304,642.
(2)
Adjusted to reflect the recapitalization of the Company following the consummation of the share exchange with Omnia BVI.
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BALANCE SHEET DATA
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those statements included elsewhere in this Annual Report. In addition to the historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report.
Overview
OmniaLuo, Inc., the name of which was changed from Wentworth II, Inc. on November 16, 2007, is a holding company that conducts all of its business operations through its direct wholly-owned subsidiary, Omnia BVI, established in August 2006, and Omnia BVI’s Chinese subsidiary, Oriental Fashion, established in September 2006. Oriental Fashion designs, develops, markets and distributes women’s apparel under the brand names of OMNIALO and OMNIALUO through its network of retail stores across the People’s Republic of China (“PRC” or “China”), which consisted of 84 stores as of December 31, 2006, 103 stores as of March 31, 2007, 135 stores as of June 30, 2007, 154 stores as of September 30, 2007, 184 stores as of December 31, 2007, 208 stores as of December 31, 2008, and 108 stores as of December 31, 2009 in 29 provinces throughout China. Until our acquisition of Omnia BVI on October 9, 2007, our operations were very limited.
Our Background and History
Our corporate name changed to OmniaLuo, Inc. in November 2007. We were originally incorporated in the State of Delaware on March 7, 2001 under the name Wentworth II, Inc. We were formed as a vehicle to pursue a business combination. For information regarding Wentworth II, Inc.’s corporate financing transactions prior to our recent reverse acquisition with Omnia BVI, see Part II of our registration statement on Form SB-2 filed with the Securities and Exchange Commission on December 17, 2007.
Background and History of Omnia BVI and Oriental Fashion
Development of the OMNIALUO Brands
In 1996, Ms. Zheng Luo, our chief executive officer and chief designer, the founder and principal shareholder of Omnia BVI prior to our reverse acquisition with Omnia BVI, and currently our largest individual shareholder, created the OMNIALO brand and founded Green’s Apparel Co., Ltd. (“Green’s Apparel”) in Shenzhen, China, in which she owned a 95% equity interest. Green’s Apparel manufactured women’s clothing.
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In 1997 the trademark OMNIALO trademark was registered with the Chinese National Trademark Bureau in both Chinese and English. The registrant and initial owner of such trademark was Green’s Apparel.
In March 2003, Shenzhen Oumeng Industrial Co., Ltd. (“Oumeng”) was established. Ms. Zheng Luo was the CEO and 50% equity and controlling owner of Oumeng. Also in March 2003, Oumeng purchased inventory from Green’s Apparel, consisting of women’s apparel. Green’s Apparel has not conducted any business after the transfer of inventory to Oumeng in March 2003, and upon such transfer, Oumeng entered into all contracts with Green’s Apparel’s existing suppliers, manufacturers and distributors, and acquired the OMNIALO trademark in August 2003. In addition to marketing and selling products under the OMNIALUO name, Oumeng also engaged in various other businesses such as other apparel, electronics, kitchenware and other hardware. Oumeng also managed C-Luo Intuition, a luxury made-to-order evening dress brand, which brand was previous owned by Ms. Zheng Luo prior to the sale of such brand to an independent third party. By the end of August 2006, OMNIALUO brand apparel, under the management of Oumeng, was being distributed through 100 retail stores in China.
Ms. Zheng Luo personally applied for the registration of the trademark OMNIALUO in March 2005 pending the approval of the Trademark Office.
Formation of Omnia BVI and Oriental Fashion
In early 2006 Ms. Zheng Luo determined that the growth and development of the OMNIALUO brands and its associated women’s apparel products could best be achieved by the formation of a new company which would focus on the design, marketing, distribution and sale of women’s business casual wear, without the potential distraction and costs of operating other businesses. Therefore: (i) in August 2006, Ms. Zheng Luo, together with several other individual shareholders, formed Omnia BVI; and (ii) in September 2006, Oriental Fashion was incorporated in Shenzhen, China, with ownership held 100% by Omnia BVI, all rights in the OMNIALO trademark were transferred from Oumeng to Ms. Zheng Luo, and Ms. Zheng Luo resigned from her CEO position at Oumeng to devote her full-time effort to Oriental Fashion and Omnia BVI. In April 2007 Ms. Zheng Luo and her sister Ms. Xiaoyin Luo transferred their ownership of Oumeng to their mother, Ms. Yuhua Sun, and to Ms. Yujuan Sun, an unrelated party.
In October 2006: (i) Ms. Zheng Luo licensed the trademark OMNIALO to Oriental Fashion at nominal cost and executed an agreement assigning the registered OMNIALO trademark to Oriental Fashion, and Ms. Zheng Luo and Oriental Fashion commenced procedures to have the OMNIALO trademark assignments accepted and officially recorded in the Trademark Office; and (ii) Ms. Zheng Luo licensed the trademark OMNIALUO to Oriental Fashion at nominal cost and executed an agreement assigning the registered pending application to register the OMNIALO trademark to Oriental Fashion; Ms. Zheng Luo and Oriental Fashion commenced procedures to have the OMNIALUO trademark assignments accepted and officially recorded in the Chinese National Trademark Bureau once registration of the OMNIALUO trademarks is approved by the Trademark Office.
Financing of Omnia BVI
Pursuant to preferred stock purchase and shareholders agreements dated as of December 17, 2006 and December 20, 2006, Omnia BVI had issued an aggregate of 2,147 convertible preferred shares (the “BVI Preferred Shares”) and detachable warrants to purchase up to $365,940 in 1,074 ordinary shares, based on the offering price in the next financing of Omnia BVI (the “BVI Warrants”), to a private venture capital investment fund (the “Lead Investor”) and several individual investors for a total cash investment of $729,980.
Each BVI Preferred Share was convertible into Omnia BVI’s ordinary shares at any time, initially on a one-for-one basis, subject to “full-ratchet” adjustment for certain issuances of shares less than the applicable conversion price, and to adjustment for share splits, share dividends, subdivisions, or combinations. The conversion price of BVI Preferred Shares held by the Lead Investor was also subject to (i) weighted average adjustment for issuances reflecting a pre-financing Omnia BVI valuation of less than $28 million and to (ii) adjustment to yield an internal rate of return of 51% if the Qualified Listing and Qualified Offering (each as defined below) occurred more than 12 months after a “First Round Financing” and the then prevailing conversion price would not otherwise provide such internal rate of return.
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Each BVI Preferred Share was to be automatically converted upon the later to occur of a “Qualified Listing” and “Qualified Offering.” A “Qualified Listing” was defined to mean (a) a firmly committed underwritten public offering of Omnia BVI’s shares registered under the U.S. Securities Act, or (b) a firm commitment of a registered market-maker who shall undertake responsibilities for the quotation of Omnia BVI’s shares on the OTC Bulletin Board in the U.S. and/or other comparable over-the-counter market overseas, in both cases, representing at least 10% of Omnia BVI (post-offering) at an implied pre-offering valuation of at least $28,000,000. A “Qualified Offering” was defined as a public or private offering of Omnia BVI raising at least $3,000,000 following the First Round Financing. “First Round Financing” meant the completion of issuance of up to 4,413 BVI Preferred Shares pursuant to the agreements signed with investors not later than six weeks after the date of the December 2006 agreements based on a pre-money valuation of $17 million. The issuance of the BVI Preferred Shares constituted a First Round Financing., and the 2007 Private Placement constituted a Qualified Offering.
The BVI Preferred Shares had certain preferential rights upon liquidation of Omnia BVI and certain preferential rights to dividends. The BVI Preferred Shares held by the Lead Investor also had certain redemption rights.
Each of the BVI Warrants issued in connection with the issuance of BVI Preferred Shares was exercisable, at any time, commencing with the later to occur of a Qualified Listing and Qualified Offering, for a two-year period, in cash for the purchase of Omnia BVI’s ordinary shares, at a per share exercise price equal to the per share price paid pursuant to the next equity financing round of Omnia BVI following completion of the First Round Financing. The exercise price of the BVI Warrants was subject to adjustment for share subdivisions, share combinations or mergers or consolidations.
Omnia BVI reimbursed the Lead Investor for certain expenses incurred by them, in addition to its own costs in connection with this placement.
By agreements dated as of October 9, 2007 (a) among Omnia BVI, the Lead Investor, Ms. Zheng Luo and another of our shareholders, and (b) among Omnia BVI, Ms. Zheng Luo and each of the other holders of BVI Preferred Shares and Warrants, effective upon the closing of the reverse acquisition:
(1)
each BVI Preferred Share was converted into a specified number of ordinary shares of Omnia BVI, with each such ordinary share of Omnia BVI then being exchanged for 319.8294 shares of our common stock; and
(2)
each BVI Warrant was exchanged for warrants to purchase our common stock, exercisable at any time during, for a two-year period, commencing on December 17, 2007, at a per share price of $1.25;
(3)
the former holders of BVI Preferred Shares and BVI Warrants were granted certain rights to liquidated damages payments from Omnia BVI, if Omnia BVI (or, following the reverse acquisition, we) failed to have a registration statement covering the resale of their shares of our common stock effective within 180 days of the closing of the reverse acquisition, or if Omnia BVI (or, following the reverse acquisition, we) failed to meet our reporting obligations under the federal securities laws and as a consequence thereof the holders were unable to utilize SEC Rule 144 for resales of their shares;
(4)
the reverse acquisition of the Company with Omnia BVI and the 2007 Private Placement were collectively deemed to constitute both a Qualified Offering and a Qualified Listing, notwithstanding the absence of a public market price quotation for our common stock; and
(5)
the Lead Investor, in consideration of its relinquishing certain rights, (a) retains certain put rights with respect to its shares as against Ms. Zheng Luo (but not as against us) if we do not obtain an OTCBB quotation or the Lead Investor’s shares are not registered for resale or otherwise eligible to be publicly resold by July 1, 2008 (update based on post-July 1 activity), (b) received an additional 149,884 shares of our common stock from Ms. Zheng Luo and one or more other former Omnia BVI shareholders as part of the reverse acquisition, and (c) may be entitled to additional shares of our common stock if the make good or anti-dilution provisions applicable to investors in the 2007 Private Placement result in additional shares being transferred or issued to those investors.
The exercise price of the warrants issued in exchange for the BVI Warrants is subject to adjustment for share subdivisions, share combinations or mergers or consolidations.
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Reverse Acquisition with Omnia BVI and Related Equity Financing
On October 9, 2007, we entered into a share exchange agreement with Omnia BVI, the shareholders of Omnia BVI and certain of our principal shareholders. Pursuant to the share exchange agreement, we agreed, among other things, to issue to the shareholders of Omnia BVI 16,800,000 shares of our common stock in exchange for all of the issued and outstanding shares of Omnia BVI, which became our wholly-owned subsidiary.
On October 9, 2007, we completed the reverse acquisition transaction with Omnia BVI by issuing to the shareholders of Omnia BVI 16,800,000 shares of our common stock in exchange for all of the issued and outstanding shares of Omnia BVI. As a result, Omnia BVI became our wholly-owned subsidiary and the former shareholders of Omnia BVI became our Company’s controlling stockholders. We amended our Certificate of Incorporation in November 2007 to change our name from Wentworth II, Inc. to OmniaLuo, Inc.
For accounting purposes, the share exchange transaction was treated as a reverse acquisition with Omnia BVI as the acquirer and the Company as the acquired party. When we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of Omnia BVI on a consolidated basis unless the context suggests otherwise.
Concurrently with the consummation of the reverse acquisition, we issued 4,920,000 shares of the Company’s common stock and warrants to purchase an aggregate of 4,920,000 shares of the Company’s common stock for an aggregate purchase price of $6.15 million, to a total of 38 investors (of whom 29 were accredited investors and nine were non-US residents who purchased shares and warrants in off-shore transactions) in a private placement pursuant to Regulation D and a simultaneous off-shore offering pursuant to Regulation S (collectively, the “2007 Private Placement”). In connection with that private placement, we also issued warrants to purchase 492,000 shares of the Company’s common stock to Keating Securities, LLC (“Keating Securities”), as a financial advisory fee in partial consideration of their services in connection with the private placement. Prior to consummation of the reverse acquisition and 2007 Private Placement, we may be deemed to have been an affiliate of Keating Securities by reason of the ownership of shares of our common stock by principals and executives of Keating Securities.
Store opening strategy and its result in 2009
One of our growth strategies is expanding store numbers whilst enlarging sales revenue. Since our formation in the third quarter of 2006, we have continued to open new stores. By December 31, 2007, we had opened 184 stores. In 2008, under the make good escrow provisions we were more aggressive in producing more products and opening new stores, by the end of 2008 we had already had 208 stores. However, some of the stores were not well-perfomed.
In 2009, one of the main tasks in front of us was to cut the number of non-performing stores. As such, we closed 100 stores through the year. As of December 31, 2009, we had 108 stores altogether.
We believe that the stores we have now are all well-performing. We will be more cautious in opening new stores in 2010. We plan our store number to be 150 at the end of 2010 in order to keep pace with our business growth speed.
Factors Relevant to Evaluating Our Business and Financial Performance
We design, develop, and market a diversified selection of women’s wear with focus on fashionable business casual style. We target moderate to premium priced categories of the women’s wear market. In evaluating our performance, management reviews certain key performance indicators, including:
Gross margin - Gross margin measures our ability to control direct costs associated with the manufacturing and selling of our products. Gross margin is the difference between the net sales and cost of sales, which is comprised of direct inventory costs for merchandise sold, including all costs to transport merchandise from third-party suppliers to our distribution center.
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Operating income - Operating income is a measure of our earning power from ongoing operations and is measured as our earnings before interest and income taxes.
Results of Operations for the Years Ended December 31, 2008 and 2009
Since our formation in the third quarter of 2006, we have focused on implementing our strategy of building a design and marketing workforce and an independent distributor and retail store sales network to design, develop, market and distribute “fashionable business casual wear,” our main product line. By the end of December 2009, we had hired and established a design team of 15 designers. By December 31, 2009 we operated or had distribution relationships with 108 stores, comprising 27 Company-owned stores, 8 co-owned stores, and 73 independent distributor stores, compared with 208 such stores as of December 31, 2008.
In 2008, under the make good escrow provisions we needed to fulfill our net income target of $4.3 million. Consequently, we hired a new sales and marketing team to execute this goal. The new sales and marketing team applied opening new distributor stores, expanding production and increasing inventory methods to fulfill this net income goal. As a result, the new store opening speed was very fast. By March 31, 2008, we had 196 stores, and as of October 31, 2008, we already had 245 stores. Due to the expansion of production but low sales speed through those newly opened stores, we had accumulated a huge amount of inventory, amounting to $6,460,621 as of December 31, 2008. This excessive inventory dramatically reduced our inventory turnover speed and impacted our cash flow. The financial crisis exacerbated this position.
In 2009, management took decisive action to handle the slow moving inventories so as to ensure the smooth operation of the Company and such actions included timely disposal of slow moving and obsolete items at high discount of over 60%, i.e. $5.11 million was sold for $2.2 million.
Sales
Sales revenue for the year ended December 31, 2009 was $9,349,878 (among which $2.2 million was from selling the previous year’s inventories), compared with $11,902,404 for the same-year period in 2008, representing 21.45% decrease. This decrease was mainly due to the reason of cutting down all the non-performing stores. Compared with 2008, we had 108 stores left at the end of 2009, 100 non-performing stores were closed. Consequently, the sales was affected to some extent. Besides, selling inventories at high discount also accounted for the reason of low sales revenue. In 2009, on the one hand, we sold our up-to-date products in regular price; on the other hand, we did our best to get cash from those inventories left from 2008 by high discount. As a result, we gained $2.2 million by selling $5.11 million inventories.
Cost of revenues for the year ended December 31, 2009 was $8,774,968 (among which $5.11million was from selling the previous year’s inventories by high discount), compared with $4,838,286 for the same-year period in 2008, representing 81.37% increase. Excluding the previous year inventories selling down of $5.11 million, the cost of revenues should be $3.66 million, which was 25.62% decreased.
Revenue from sales to distributors for the year ended December 31, 2009 was $6,087,807 (or 65.11% of total sales revenue), a decrease of $528,376 (or 7.99%) compared with $6,616,183 for the year ended December 31, 2008. Revenue from retail sales for the year ended December 31, 2009, including sales from Company-owned and co-owned stores, was $3,262,071 (or 34.89% of total sales revenue), a decrease of $2,024,150 (or 38.29%) compared with $5,286,221 for the year ended December 31, 2008. This decrease was mainly because of two reasons: (1) We closed 23 co-owned stores in 2009; (2) In 2009, most of the shopping malls did a lot of sale-off activities in order to stimulate consumption, we had to take part in these activities and sell up-to-date products at high discount, which dropped down our sales revenues from the company-owned and co-owned stores.
As of December 31, 2009, inventories was $2,424,601, a decrease of $4,036,020 (or 62.47%), compared with $6,460,621 as of December 31, 2008 due to a selldown of inventories of 2008. In order to accomplish the 2008 sales revenue target, higher level of inventories had been produced in expectation of higher sales in the fourth quarter of 2008. However, global economic crisis of 2008 caused us to slow sales and the closure of 37 non-performing stores during the second half of 2008. This also caused a substantial built up of ending 2008 inventory of $6,460,621which had to be disposed through deep discount in 2009.
Overall gross profit for the year ended December 31, 2009 was $574,910, compared with $7,064,118 for fiscal year 2008, a decrease of 91.86% due to the same reason as mentioned above of selling those inventories at high discount. If we exclude this factor, our revenue for 2009 was $7.15 million, and the cost of revenues was $3.66 million, the gross profit margin was $3.49 million, represent a gross profit margin of 48.81%, compared with the gross profit margin of 59.35% in 2008, 4.11 percentage dropped. The decrease of gross profit margin was mainly because of the reason that we took part in a lot of activities organized by shopping malls in order to stimulate consumption, which affected our sales of revenue because we had to sell at high discount.
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General and administrative expenses, which include rental expenses for our headquarters, salary expenses for management and headquarters staff, and travel and entertainment expenses, were $3,300,806 for the year ended December 31, 2009, an increase of $480,864 (17.05% increased) compared with $2,819,942 in 2008. This increase was mainly due to two reasons: (1) increase of allowance for doubtful accounts. In 2009, we had $805,319 allowance for doubtful accounts, compared with $3,696 in the previous year. (2) non-cash share-based compensation expense of $304,642. In respect of share options granted on January 6, 2009 and January 20, 2009, $304,642 of non-cash expense was allocated to general and administrative expenses.
Selling and marketing expenses, which include all costs associated with sales, marketing and distribution functions, were $2,794,026 (29.88% of sales revenues) for the year ended December 31, 2009, an increase of $179,833 (6.88% increased) compared with $2,614,193 for the year ended December 31, 2008. Thanks to the reason of closing those non-performing stores, we were abliged to write some of the expense relating to rent, decoration expense into selling and marketing expenses, so that the selling and marketing expenses in 2009 was higher than the previous year even though the sales of revenue dropped.
Loss from operations for the year ended December 31, 2009 was $5,794,023 compared to an income of $1,418,068 in 2008. In 2009, $146,610 government grant income was received for our successful listing on the Over-the-Counter Bulletin Board and private placement. After interest income, other income and finance cost, the net loss for the year ended December 31, 2009 was $5,303,436.
Perspective of
2009 was a challenging year for the management, especially in taking decisive actions in enhancing the continuing operation of the company with emphasis on maintaining the cash flow with measures such as disposing slow moving inventories at deep discounts. With most of the non-performing stores already closed down in 2009, the management has planned for strategic expansion of the operation on both a geographical and product level for 2010. Restructuring of the operation is expected to continue during 2010 with the sole objective of achieving profits and return again for shareholders.
Liquidity and Capital Resources
As of December 31, 2009, the Company’s net cash position was $869,495, compared with $ 1,253,997 as of December 31, 2008, a decrease of $384,502. This decrease was mainly attributed to repayment of a $ 439,830 bank loan in 2009.
As of December 31, 2009, trade receivables were $1,380,180, a decrease of $819,576 compared with trade receivables of $2,199,756 as of December 31, 2008 due to our effort of collecting money faster than the previous year.
Other receivables and deposits as of December 31, 2009 was $3,322,414, a decrease of $962,805 compared with $4,285,219 as of December 31, 2008.
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Net cash flows provided by operating activities for the year ended December 31, 2009 was $62,193. Net cash used in operating activities for 2008 was $1,846,672.
The Company’s investing activities to date have consisted mainly of the purchase of property and equipment. For the year ended December 31, 2009, the net use of cash in investing activities was $6,651 compared to $516,147 for the year ended December 31, 2008.
Our estimated capital expenditure requirements for 2010 are approximately $2.0 million which we would seek bank loans, which will be used mainly for strategic expansions to ensure the business developing in a rapid and stable way, the management believe it would be sufficient for the normal operations of the company in 2010.
Depending upon our future needs and changes and trends in the capital markets affecting our shares and the Company, we may seek additional equity or debt financing in the private or public markets. Additional financing, whether through public or private equity or debt financing, arrangements with stockholders or other sources to fund operations, may not be available, or if available, may be on terms unacceptable to us.
Obligations Under Material Contracts
The following table summarizes our outstanding contractual obligations as of December 31, 200(9) need to update:
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
Use of estimates. In preparing financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of trade and other receivables, inventories, deferred income taxes, provision for warranty and the estimation of useful lives of property, plant and equipment. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.
Concentrations of credit risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. As of December 31, 2008, the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, Hong Kong and the United States, which management believes are of high credit quality. With respect to trade receivables, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade receivables.
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Allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance and the Company considers the historical level of credit losses and applies percentages to aged receivable categories accordingly. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers is to deteriorates, resulting in their inability to make payments, a larger allowance may be required. Bad debts are written off when identified.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined on a FIFO basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition.
Revenue recognition. Revenue is recognized when it is probable that the economic benefits will flow to the Company and when the revenue can be measured reliably, on the following basis:
(i)
revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time of delivery and the sales price is fixed or determinable and collection is reasonably assured; and
In respect of the revenue generated from the co-owned stores, the Company has reviewed FASB ASC 605 and considers itself to fulfill the following indicators for gross revenue reporting: (i) the Company is the primary obligator to the customer as the Company is responsible for fulfillment and customer remedies in the event of dissatisfaction; (ii) the Company retains inventory risk of the unsold inventories in the co-owned stores; and (iii) the Company has complete latitude to set the prices for the products and the net amount to be earned varies with that selling price. Accordingly, the Company is the principal of these transactions according to ASC 605 and reports the revenue from co-owned stores on a gross basis. The payments (or commission) paid to the partners of the co-owned stores are recorded as the Company’s expenses.
(ii)
interest income is recognized on an accrual basis.
Property and Equipment. Property and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its exiting use. Depreciation is provided on a straight-line basis over the assets’ estimated useful lives at the annual rate of 20%.
Maintenance or repairs are charged or credited to the consolidated statements of operations and comprehensive (loss) income as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to the consolidated statement of operations.
Income Taxes. The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations and comprehensive (loss) income in the period that includes the enactment date.
Oriental Fashion is subject to the PRC Enterprise Income Tax (“EIT”). As Oriental Fashion was a wholly-foreign owned enterprise engaged in manufacture industry which was duly approved by the PRC tax authority, it was entitled to two years’ exemption, from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by 50% tax reduction for the immediate next three calendar years. This tax holiday commenced in the fiscal financial year 2007.
On March 16, 2007, the National People’s Congress of the PRC determined to adopt the New corporate income tax law (the “ New CIT Law”). The New CIT Law unifies the application scope, tax rates, tax deduction and preferential policy for both domestic enterprises (“DE”) and foreign investment enterprises (“FIE”). The applicable tax rate of DE and FIE will be 25% after their preferential tax holidays and the transition period have ended. During the transition period, tax rates for the subject entities are 20%, 22% and 24% for the calendar years 2009, 2010 and 2011, respectively, before the application of applicable tax holidays or other tax preferences.
By virtue of the New CIT Law and the above-mentioned tax reduction, Oriental Fashion was subject to EIT rate of 10% during 2009. During 2008, Oriental Fashion was subject to EIT rate of 18% with full tax exemption.
No provision for EIT has been made for the year ended December 31, 2009 since Oriental Fashion had an operating loss.
Comprehensive income. The Company has adopted ASC 220 “Comprehensive Income”, previously SFAS No. 130, which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Components of comprehensive income include net income or loss and foreign currency translation adjustments.
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Foreign currency translation. The functional currencies of the Company and its subsidiaries include USD and RMB. The Company and its subsidiaries maintain their respective financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of income or loss for the respective periods.
For financial reporting purposes, the financial statements of the subsidiaries which are prepared using RMB have been translated into USD. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income or loss, but are included in foreign exchange adjustments to accumulated other comprehensive income, a component of stockholders’ equity. The exchange rates was RMB1 per $0.1467 as of December 31, 2009, and RMB1 per $0.1467 as of December 31, 2008. The average exchange rates for the period ended December 31, 2009 were RMB1 per $0.1466 and for the period ended December 31, 2008 were RMB1 per $0.1442. There was no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.
Seasonality
Our business is likely to be seasonal, with the highest proportion of sales and operating income likely being generated in the fourth quarter of each year, lesser proportions in the second and third quarter of each year, and the lowest proportion of sales and operating income being generated in the first quarter of each year. Our working capital requirements are likely to fluctuate during the year, increasing substantially during one or more quarters as a result of higher planned seasonal inventory levels and higher receivables. If we fall significantly short of our anticipated earnings in one or more quarters, it will significantly decrease the working capital available to us in the following quarters. Due to limitations on borrowing levels, a decrease in working capital may adversely affect our purchasing abilities which would have a material adverse effect on our revenues.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. Changes in interest rates and changes in foreign currency exchange rates have an impact on our results of operations.
Our sales, cost of manufacturing and marketing are transacted in Chinese yuan. Consequently, our costs, revenue and operating margins may be affected by fluctuations in exchange rates, primarily between the U.S. dollar and Chinese currencies. Proceeds from equity financings are one of our major sources of working capital, which is denominated in U.S. dollars. Our financial position and results of operations are also affected by fluctuations in exchange rates between the functional currency (which is in U.S. dollars) and currencies used in our foreign operations. As currency exchange rates change, translation of the statements of operations of our businesses outside the U.S. into U.S. dollars affects year-over-year comparability. We generally have not hedged against these types of currency risks because cash flows from the PRC operations have been reinvested locally.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS
See the index to our financial statements and our financial statements following the Signature Page at the end of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9.
RESERVED
None.
ITEM 9A
ITEM 9A
(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, Ms. Zheng Luo and Mr. David Wang, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our management concluded that as of December 31, 2009, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective in providing reasonable assurance of achieving their objectives for the year ended December 31, 2009.
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Internal Controls Over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal control over financial reporting and include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Securities and Exchange Act of 1934 defines internal control over financial reporting as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including Ms. Zheng Luo and Mr. David Wang, our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective, as of December 31, 2009.
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
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 Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Controls over Financial Reporting.
During the fiscal year ended December 31, 2009, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
Set forth below is information regarding our current directors and current executive officers. Except as set forth below, there are no family relationships between any of our directors or executive officers. Executive officers are elected annually by our Board of Directors. Each executive offer holds his office until he resigns or is removed by the Board or his successor is elected and qualified. Directors are elected each year by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or until resignation or removal.
Name
Age
Title
Zheng Luo
Chairwoman and Chief Executive Officer
David Wang
Acting Chief Financial Officer
Xiaoyin Luo
Director
Qing Huang
Director
Fei Luo
Director
Tianhong Yu
Director
Charles C. Mo
Director
Wenbin Fang
Director
Ms. Zheng Luo, Chairwoman and CEO
Ms. Zheng Luo is our founder, Chairwoman and chief executive officer, and is chief executive officer and chief designer of Oriental Fashion. Before founding Oriental Fashion, Ms. Zheng Luo was chairwoman and chief executive officer of Oumeng (2003 - 2007) and chairwoman and chief executive officer of Green’s Apparel (1996 - 2003). Ms. Zheng Luo has been active in the fashion design and retail business for more than 10 years. She created the OMNIALUO brand in 1996. Ms. Zheng Luo is a renowned designer in the fashion industry who has won various prestigious honors nationally and internationally and received broad media coverage in China, Hong Kong, Paris and Italy. Ms. Zheng Luo earned a Bachelor of Arts degree in International Finance from Shenzhen University in 1991.
Mr. David Wang, Chief Financial Officer
Mr. David Wang has more than 15 years experience in accounting, finance and investment banking. From December 2007 to November 2008, Mr. Wang was Vice President of Maxyee Group, an international company focused on real estate and pharmaceuticals. From August 2006 to November 2007, Mr. Wang was Chief Financial Officer of Sunway Global, Inc. ("Sunway"), a company engaged in the business of designing, manufacturing and selling logistic transport systems and medicine dispensing systems and equipment. Prior to joining Sunway, Mr. Wang served as an accountant for Sinopec and prior to that worked as an investment banker for various investment banking firms. Mr. Wang received a Masters Degree and PhD degree in the field of Finance from Xiamen University in Fujian Province, China.
Ms. Xiaoyin Luo, Director
Ms. Luo Xiaoyin Luo was appointed as a director in January 2008. Ms. Luo serves as Director & General Manager of Hutchison Harbour Ring China, a subsidiary of Hutchison Whampoa Limited (HWL). Ms. Xiaoyin Luo has more than 14 years of service to HWL. Her main responsibilities are commercial property investment, development, operation, and management. Some of her projects include The Center, Westgate Mall, Harbour Ring Plaza and Huangpu Center in Shanghai, Metropolitan Plaza in Chongqing, and Pacific Plaza in Qingdao. Since Hutchison Harbor is the exclusive licensing agent of Warner Brothers Consumer Product Division (WBCP) in China, Ms. Xiaoyin Luo is in charge of the product license and retail license business development for Warner Bros. Studio Store Shanghai Flagship operation management, retail network and distribution channel construction, and sub-licensee development. Ms. Xiaoyin Luo holds a Bachelor of Economics degree from Shenzhen University and holds an EMBA from China Europe International Business School.
Mr. Qing Huang, Director
Mr. Qing Huang was appointed as a director in January 2008. Mr. Huang is engaged in private equity financing activities in China as an investor and advisor. He is currently a general partner of Mingly China Growth Fund, L.P. a private equity fund focused on investing in growth companies in China. Mr. Huang has participated in a large number of international financing transactions by Chinese and non-Chinese companies, including private placement and public offerings of corporate equity and debt. Mr. Huang worked as a lawyer and adviser in the United States, Hong Kong and Shanghai and was associated with international law firms Shearman & Sterling and Linklaters in Hong Kong and Brown & Wood LLP in New York. Mr. Huang graduated from Columbia University School of Law with a J.D. degree, from University of Chicago with a Master’s degree in political science and from Beijing University with a Bachelors’ degree in English and American literatures. He is a member of the New York State Bar Association.
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Mr. Fei Luo, Director
Mr. Fei Luo was appointed as a director in January 2008. He has served as a director of IER Venture Capital Co., Ltd., a venture capital firm in China, since 2000. He founded Beida Zongheng Financial Consulting Co., Ltd. in 1999 and serves as the president and chairman of the board of Beida Zongheng. From 1997 to 1999, he served as the managing director of Shenzhen Yanning Development Co., Ltd., in charge of investment. From 1993 to 1996, he served as the vice chairman of Shenzhen Anxing Financial Consulting Co., Ltd and vice chairman of Shenzhen Anxing investing Co., Ltd. Mr. Fei Luo received his Master degree in Economics from Peking University in 1999 and his BA in Economics from Peking University in 1988.
Mr. Tianhong Yu, Director
Mr. Tianhong Yu was appointed as a director in January 2008. Mr. Yu has served as a vice president and managing director of Huayi Brothers & Taihe Film Investment Co., Ltd., a leading motion picture and television production and distribution company in China, since 2005. From 2003 to 2005, he had planned and supervised a number of movie and TV series. Prior to that, he was the senior manager of TOM Online Inc., a leading wireless internet company in China. Mr. Yu also founded Beijing Modern Art Center and CHINALAW DATABASE, the first law database in China. Mr. Yu received his Bachelor’s Degree in Economic Law from Peking University in 1988.
Mr. Charles Mo, Director
Mr. Charles Mo began serving as a director of our company in January 2008. Mr. Mo is a Certified Public Accountant with over twenty-five years of experience in public and corporate accounting and finance and has held his CPA license since 1980. Since June 2005, Mr. Mo has served as the General Manager of Charles Mo & Co., a corporate consulting company, and focuses on general management duties. From October 1999 to May 2005, Mr. Mo served as Chief Operating Officer and Chief Financial Officer of Coca-Cola Shanghai, a beverage company, and was responsible for sales, finance, logistics, production, and general management. From December 1998 to September 1999, Mr. Mo served as Finance Director of Fisher Rosemount Shanghai. From August 1996 to November 1998, Mr. Mo served as Chief Financial Officer of Nike China, an athletic goods company, and was responsible for overseeing finance, human resources, and logistics. From January 1995 to August 1996, Mr. Mo served as Controller and Acting General Manager for Polaroid China, a camera and consumer electronics company. From August 1982 to December 1994, Mr. Mo served as Audit Manager and held various financial management positions for Wang Laboratories, a computer company. From 1978 to 1982, Mr. Mo served as an Accountant and Auditor for the accounting businesses of Ernst & Young and Thomas Allen, CPA. Mr. Mo has served as an independent director of China Ritar Power Corp. (Nasdaq GM: CRTP), a manufacturer of lead-acid batteries in China, since August 2008, and OmniaLuo, Inc. (OTCBB:OLOU), a manufacturer and seller of women’s clothing in China, since January 2008. Mr. Mo served as an independent director and chairman of the audit committee of Benda Pharmaceutical Inc (BPMA.OB) from September 14, 2007 to February 22, 2008. Mr. Mo resigned from the board of Benda Pharmaceutical on February 22, 2008. Mr. Mo received a Bachelor of Arts degree in Business Administration in 1974 from HK Baptist College and an MBA in accounting in 1976 from California State University-Fullerton. We believe that Mr. Mo’s long and varied career exhibit his qualifications to sit on our Board, including his more than 25 years of experience, expertise and background with respect to accounting matters, his experience as a CPA and chief financial officer of large corporations in China, and his understanding of U.S. GAAP and financial statements.
Mr. Wenbin Fang, Director
Mr. Wenbin Fang was appointed as a director in January 2008. Mr. Fang has served as general manager in Shen Zhen Meng Sa Di Ka Trading Company since 2003. From 2000 to 2002, Mr. Fang worked for ARTLEVA, an Italian company, where he was focused on exportation of household goods and clothing products from China (including Taiwan) to Italy, France and Germany. From 1998 to 2000, he worked for MAX, where he was focused on exportation of household goods and clothing products from China (including Hong Kong) to Italy and France. From 1993 to 1997, he served as business manager for East Asia (including China) of R.P.R. Clothing Machine Manufactory, an Italian Company. He earned his bachelor’s degree in Industrial Design in Shangdong Design and Art College. He then spent a year (1992-1993) in the Department of Industrial Design of Italy’s National Design and Acting College.
Family Relationships
Ms. Xiaoyin Luo is the elder sister of Ms. Zheng Luo and the sister-in-law of Mr. Wenbin Fang. Mr. Wenbin Fang is the husband of Ms. Zheng Luo. There are no other family relationships between any of our directors and executives.
Board Composition and Committees
The board of directors is currently composed of seven members. All Board action requires the approval of a majority of the directors in attendance at a meeting at which a quorum is present.
Each of Qing Huang, Fei Luo, Charles C. Mo and Tianhong Yu (collectively, the “Independent Directors”) were elected to serve on the Board of Directors as an “independent director” as defined by Rule 4200(a)(15) of the Marketplace Rules of The Nasdaq Stock Market, Inc. (the “Nasdaq Marketplace Rules”), and the Board of Directors has confirmed the “independent director” status under the Nasdaq Marketplace Rules of each of the Independent Directors.
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On January 28, 2008, the full Board of Directors, including the Independent Directors:
(1)
approved the establishment of the Audit Committee, Compensation Committee, and Governance and Nominating Committee of the Board of Directors; and
(2)
appointed three of the Independent Directors to each of the Audit Committee, Compensation Committee, and Governance and Nominating Committee and appointed Mr. Mo as the Chair of the Audit Committee, Mr. Huang as the Chair of the Compensation Committee and Mr. Yu as the Chair of the Governance and Nominating Committee.
Our Audit Committee is primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and our system of internal controls. The Nominating Committee is primarily responsible for nominating directors and setting policies and procedures for the nomination of directors. The Nominating Committee will also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures. The Compensation Committee is primarily responsible for reviewing and approving our salary and benefit policies (including stock options), including compensation of executive officers.
Director Compensation
We have not paid our directors fees in the past for attending scheduled and special meetings of our board of directors.
On January 28, 2008, the full Board approved a form of Non-Officer Director’s Contract, which includes indemnification provisions, for each of the Independent Directors, Wenbin Fang and Xiaoyin Luo. Under the terms of the Non-Officer Director’s Contracts, the Company agreed to pay the Independent Directors an annual fee of $12,000 each, as compensation for the services to be provided by them as directors and as chairpersons of various board committees, as applicable. We also reimburse each director for reasonable travel expenses related to such director’s attendance at board of directors and committee meetings.
Under the terms of the Non-Officer Director’s Contracts, the Company agreed to indemnify the Independent Directors, Wenbin Fang and Xiaoyin Luo, against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the directors in connection with any proceeding if such director acted in good faith and in the best interests of the Company. This brief description of the terms of the Non-Officer Director’s Contracts is qualified by reference to the provisions of the form of agreement incorporated by reference as an exhibit to Annual Report. We believe the terms of these agreements are reasonable and customary and comparable to those entered into by other publicly-traded companies in the United States.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the Commission initial reports of ownership and reports of changes in ownership of common stock and our other equity securities. These insiders are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file, including Forms 3, 4 and 5.
Commission rules require disclosure in the Company’s Annual Report on Form 10-K of the failure of an executive officer, director or 10% beneficial owner to file such forms on a timely basis. Based upon a review of the filings made on their behalf during 2009, as well as an examination of the Commission's EDGAR system Form 3, 4, and 5 filings and the Company's records, the following describes exceptions to timely filings: Form 3 for David Wang, to report the appointment of him as our Chief Financial Officer (principal financial and accounting officer) on October 30, 2008; Form 5 for Xiaomei Liu to report her resignation as our Chief Financial Officer on October 30, 2008 and will no longer be subject to Section 16 reporting obligations; Form 5 for all directors and officers for fiscal years 2008 and 2009, and Form 4 for Ms. Zheng Luo for the grant of 456,800 shares of options on January 6th, 2009 and 228400 shares of option on January 20th, 2009.
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Code of Ethics
On January 28, 2008, our board of directors adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. The code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code. A copy of the code of ethics has been filed as Exhibit 14.1 to our current report on Form 8-K filed on February 1, 2008.
Audit Committee and Audit Committee Financial Expert
The Board of Directors has determined that Mr. Mo, an “independent director” as defined by Rule 4200(a)(15) of the Nasdaq Marketplace Rules, possesses accounting or related financial management experience that qualifies him as financially sophisticated within the meaning of Rule 4350(d)(2)(A) of the Nasdaq Marketplace Rules and that he is an “audit committee financial expert” as defined by the rules and regulations of the Securities and Exchange Commission. Mr. Mo is the Chairman of our Audit Committee.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table - 2009 and 2008
The following table sets forth information concerning all compensation awarded to, earned by or paid to each person serving as a principal executive officer for services rendered in all capacities during fiscal years 2009 and 2008. No other executive officers received compensation in excess of $100,000 in either fiscal year.
(1) Calculated on the basis that $1 = RMB 7.7
(2) We failed to meet the 2008 performance threshold under the securities purchase agreement and the make good escrow agreement that we entered into with the investors in the 2007 Private Placement. As a result, shares were released to investors, Ms. Zheng Luo and another stockholder pursuant to the agreed terms and formula. 767,035 shares of the Escrow Shares were estimated to be released back to Ms. Luo. The release of shares from escrow to Ms. Luo constituted a compensatory plan. The per share closing price of the Company’s common stock on December 31, 2008 of $0.54 was used to calculate the compensation expenses. The total expense recognized for the fiscal year 2008 was $414,199. During the year ended December 31, 2009, 711,269 and 111,275 shares of Escrow Shares were released back to Ms. Zheng Luo and the other stockholder. The release of shares from escrow to the other stockholder did not constitute a compensatory plan as this stockholder did not hold and currently does not hold any position in the Company and has no relationship to the Company other than as a stockholder.
(3) Compensation recognized in connection with the options to purchase (i) 456,800 shares of our Common Stock on January 6th, 2009 and (ii) 228400 shares of our Common Stock on January 20th, 2009, each at the exercise price of $0.6 per share.
(4) Mr. David Wang joined the Company in September 2008 and was appointed CFO in November 2008.
(5) Ms. Michelle Xiaomei Liu resigned from her position as the CFO of the Company in October 2008. Compensation recognizeed in connection with the grant of options to purchase: 137,040 shares of our Common Stock on January 6th, 2009 at the exercise price of $1.25 per share.
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Employment Agreements
Each of the executive officers and other individuals named above has entered into a standard PRC form of employment contract with our operating subsidiary, Oriental Fashion except for Mr. David Wang. Mr. David Wang does not currently have an employment agreement with the Company.
The terms of Ms. Zheng Luo’s contract provide for a two year employment term, from January 1, 2009 through December 31, 2010, with an annual salary of $75,000 and monthly deferred compensation payments totaling $4,800 annually. The Company intends to renew Ms. Zheng Luo’s contract in the near future.
Director Compensation
Historically, we have not compensated our directors for their services as directors and we did not compensate our directors during 2006 or 2007.
On January 28, 2008, the full Board approved a form of Non-Officer Director’s Contract, which includes indemnification provisions, for each of the Independent Directors, Wenbin Fang and Xiaoyin Luo. Under the terms of the Non-Officer Director’s Contracts, the Company agreed to pay the Independent Directors an annual fee of $12,000 each, as compensation for the services to be provided by them as directors and as chairpersons of various board committees, as applicable. We also reimburse each director for reasonable travel expenses related to such director’s attendance at board of directors and committee meetings.
Outstanding Equity Awards at Fiscal Year End
None of our executive officers received any equity awards, including, options, restricted stock or other equity incentives, during the fiscal year ended December 31, 2008.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding beneficial ownership of our common stock as of March 25, 2009 (i) by each person who is known by us to beneficially own more than 5% of our common stock or who may otherwise be deemed to be “control persons” and affiliates of us; (ii) by each of our current officers and current and proposed directors; and (iii) by all of our current officers and current and proposed directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, Room 101, Building E6, Huaqiaocheng, East Industrial Park, Nanshan District, Shenzhen, 518053, The People’s Republic of China.
* Less than 1%.
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1 Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock.
2 A total of 22,840,000 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner above, any options exercisable within 60 days have been included in the denominator.
3 Ms. Xiaoyin Luo is the elder sister of Ms. Zheng Luo and sister-in-law of Mr. Wenbin Fang. Mr. Wenbin Fang is the husband of Ms.. Zheng Luo. Each disclaims beneficial ownership of the shares held by the other.
4 The address for each of the individuals shown is c/o Oriental Fashion.
5 Share amounts shown do not include shares held by the individual’s spouse, as to which the individual disclaims beneficial ownership.
6 Reflects the transfer by Ms. Zheng Luo, as part of the reverse acquisition, of 140,891 shares of common stock to JAIC-CROSBY Greater China Investment Fund Limited.
7 Includes warrants to purchase 200,000 shares of our common stock, which may by their terms become exercisable within 60 days of the date of this report.
8 JAIC-CROSBY Greater China Investment Fund Limited was a “control person” and affiliate of Omnia prior to the reverse acquisition and 2007 Private Placement by reason of the existence and its exercise of its contractual rights under its preferred investment documentation, and may now be deemed to be a “control person” and affiliate of the Company.
Make-Good Provision
In connection with the 2007 Private Placement, Ms. Zheng Luo, the principal stockholder and chief executive officer of the Company, and another stockholder agreed to place 41.11% of the shares of Common Stock they collectively own (including 40% of the shares owned by Ms. Luo) in escrow (the “Escrow Shares”). The Escrow Shares represented approximately 19.79% of the Company’s total post-reverse acquisition and pre-2007 Private Placement issued and outstanding shares. If the Company failed to report net income of at least $2.0 million under U.S. GAAP (before adjustments for non-cash and cash charges related to the reverse acquisition and 2007 Private Placement, including any liquidated damages payments under the registration rights agreement with the 2007 Private Placement investors (the “Registration Rights Agreement”) and any expense relating to any issuance of shares by us prior to the reverse acquisition and 2007 Private Placement, and for any charges related to the release of the Escrow Shares, and before accounting for the impact on net income of any equity incentive options or shares granted) for the fiscal year 2007, the escrow agent was to transfer to the investors in the 2007 Private Placement the number of Escrow Shares based on the following formula: (($2.0 million - 2007 adjusted reported net income)/$2.0 million) multiplied by the Escrow Shares, subject to a maximum number of 50% of the Escrow Shares.
As the Company’s reported net income under U.S. GAAP (before adjustments for non-cash and cash charges, which include the RTO expenses described below, related to the reverse acquisition and 2007 Private Placement, including any liquidated damages payments under the registration rights agreement with the 2007 Private Placement investors (the “Registration Rights Agreement”) and any expense relating to any issuance of shares by us prior to the reverse acquisition and 2007 Private Placement, and for any charges related to the release of the Escrow Shares, and before accounting for the impact on net income of any equity incentive options or shares granted) for the fiscal year 2007 exceeded $2.0 million, 50% of the Escrow Shares are being returned by the escrow agent to Ms. Luo and the other stockholder. The “RTO Expenses,” which are general and administrative expenses for accounting purposes, totaled $970,320 and were incurred in conjunction with the October 2007 reverse acquisition, the October 2007 PIPE and the related SEC resale registration (the “RTO Expenses”). The RTO expenses consist of shell company related expenses, including certain fees paid to the placement agent and investor relations agency ($218,113), auditing fees ($67,293), legal fees ($301,403), entertainment expenses related to the reverse acquisition and the October 2007 PIPE ($5,123), travel expenses ($63,380), consultancy fees, which include fees paid for RTO and PIPE related market research and consulting services ($233,763), exchange loss relating to the payment of RTO expenses ($19,242) and other expenses ($62,003).
If the Company fails to report net income of at least $4.3 million under U.S. GAAP (before adjustments for non-cash and cash charges related to the reverse acquisition and 2007 Private Placement, including any liquidated damages payments under the Registration Rights Agreement and any expense relating to any issuance of shares by us prior to the reverse acquisition and 2007 Private Placement, and for any charges related to the release of Escrow Shares, and before accounting for the impact on net income of any equity incentive options or shares granted) for the fiscal year 2008, the escrow agent shall transfer to the investors in the 2007 Private Placement the lesser of: (1) the number of Escrow Shares based on the following formula: ($4.3 million - 2008 adjusted reported net income/$4.3 million) multiplied by the Escrow Shares; or (2) the number of Escrow Shares still in escrow.
The Company’s common stock began trading on the Over-the-Counter Bulletin Board on January 10, 2008. The per share closing price of the Company’s common stock on January 10, 2008 of $1.5 was used to calculate the compensation expense. The total expense recognized for fiscal year 2007 was $2,299,893.
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During the year ended December 31, 2008, the Company’s net income (before unallocated expenses relating to the reverse acquisition, the 2007 Private Placement and related SEC resale registration totaling $698,257), was $2,151,132, before the make good provision of $414,199. Accordingly, the Company failed to report the net income threshold for the fiscal year 2008 and the Escrow Shares relating to the 2008 performance threshold will be released to the investors, Ms. Luo and another stockholder pursuant to the agreed terms and formula.
767,035 and 119,999 shares of the Escrow Shares will be released back to Ms. Luo and the other stockholder. The release of shares from escrow to Ms. Luo constitutes a compensatory plan. The per share closing price of the Company’s common stock on December 31, 2008 of $0.54 was used to calculate the compensation expenses. The total expenses recognized for the fiscal year 2008 is $414,199.
The release of shares from escrow to the other stockholder does not constitute a compensatory plan as this stockholder did not hold and currently does not hold any position in the Company and has no relationship to the Company other than as a stockholder. The release of shares held in escrow to the investors constitutes a donation from Ms. Luo and the other stockholder to the Company.
Changes in Control
We do not currently have any arrangements which if consummated may result in a change of control of our Company.
Securities Authorized for Issuance under Equity Compensation Plans
Set forth below is information with respect to our compensation plans as of December 31, 2009 under which our equity securities are authorized for issuance, aggregated as follows:
(1)
The Company adopted in the first quarter of 2008 an employee equity incentive plan under which the Company’s officers, directors, consultants, and employees will be eligible to receive, in relevant part, either securities or stock options exercisable for the Company’s securities at exercise prices that must generally be no less than the then prevailing fair market value of the Company’s common stock on the date of grant. The Company has reserved five million (5,000,000) shares of common stock or issuance under this plan.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
The following includes a summary of transactions since the beginning of fiscal 2009, or any currently proposed transaction, in which we were, or are, to be a participant and the amount involved exceeded or exceeds $120,000, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms obtained, or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
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Bank loan
As of December 31, 2008, there was a bank loan of $440,100 (originally denominated in RMB), which carried interest at 7.623% per annum. The bank loan was (i) guaranteed by Ms. Zheng Luo, who did not receive any compensation for acting as guarantor; and (ii) secured by a guarantee put up by a guaranty company, which received $8,649 from the Company for issuing the guarantee. The loan was fully repaid during the year.
Except as set forth in our discussion above, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Director Independence
Each of Qing Huang, Fei Luo, Charles C. Mo and Tianhong Yu (collectively, the “Independent Directors”) were elected to serve on the Board of Directors as an “independent director” as defined by Rule 4200(a)(15) of the Marketplace Rules of The Nasdaq Stock Market, Inc. (the “Nasdaq Marketplace Rules”), and the Board of Directors has confirmed the “independent director” status under the Nasdaq Marketplace Rules of each of the Independent Directors.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered by PKF, Certified Public Accountants, Hong Kong, a member firm of the PKF International Limited network of legally independent firms, or PKF, for the audit of our annual financial statements and review of the financial statements for the fiscal years ended December 31, 2009 and 2008 were $79,000 and $79,000 respectively.
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Audit-Related Fees
The aggregate fees billed in each of the fiscal years ended December 31, 2009 and 2008 for assurance and related services by PKF that are reasonably related to the performance of the audit or review of the registrant’s financial statements and are not reported under the paragraph captioned “Audit Fees” above are $0 and $0, respectively.
Tax Fees
The aggregate fees billed in each of the fiscal years ended December 31, 2009 and 2008 for professional services rendered by PKF for tax compliance, tax advice, and tax planning were $0 and $0, respectively.
All Other Fees
The aggregate fees billed in each of the fiscal years ended December 31, 2009 and 2008 for products and services provided by PKF, other than the services reported above under other captions of this Item 14 are $0 and $0, respectively.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board pre-approved the audit and non-audit service performed by our auditor for our consolidated financial statements as of and for the years ended December 31, 2009 and 2008, respectively.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATE SCHEDULES
(a) Financial Statements
The following financial statements, including notes thereto and the independent auditors' report with respect thereto, are filed as part of this Annual Report on Form 10-K:
(b) Exhibits
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Exhibit
No.
Description
2.1
Share Exchange Agreement, dated October 9, 2007, among the registrant, certain stockholders of the registrant signatory thereto, Omnia Luo Group Limited, and the shareholders of Omnia Luo Group Limited (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
3.1
Certificate of Incorporation of Wentworth II, Inc. as filed with the Secretary of State of Delaware (filed as an exhibit to the registration statement of Wentworth II, Inc. on Form SB-2, as filed with the SEC on December 12, 2001, and incorporated herein by reference).*
3.2
Bylaws of Wentworth II, Inc. (filed as an exhibit to the registration statement of Wentworth II, Inc. on Form SB-2, as filed with the SEC on December 12, 2001, and incorporated herein by reference).*
4.1
Form of Warrant to Purchase Common Stock issued by the registrant to certain investors, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
4.2
Form of Warrant to Purchase Common Stock issued by the registrant to certain of the former shareholders of Omnia Luo Group Limited in exchange for their warrants to purchase ordinary shares of Omnia Luo Group Limited, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
4.3
Form of Common Stock Placement Agent Warrant issued by the registrant to Keating Securities, LLC, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
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4.4
Form of Registration Rights Agreement by and among the registrant , investors and other stockholders signatory thereto, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
4.5
Form of Lock-up Agreement among the registrant and certain stockholders, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
10.1
Form of Securities Purchase Agreement by and among the registrant, and certain investors, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
10.2
Form of Make Good Escrow Agreement by and among the registrant, Zheng Luo, Kong Amy Wai Man Ng, Keating Securities, LLC, as agent and Corporate Stock Transfer, Inc., as escrow agent, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
10.3
First Amendment Agreement by and among the registrant, Omnia Luo Group Limited, Zheng Luo and JAIC-CROSBY Greater China Investment Fund Limited, dated as of October 4, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
10.4
First Amendment Agreement by and among the registrant, Omnia Luo Group Limited, Zheng Luo and certain holders of Omnia Luo Group Limited preferred shares, dated as of October 4, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
10.5
Agreement with Principal Shareholder, Chief Executive Officer and Director by and between the registrant and Zheng Luo, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
10.6
Assignment and Assumption Agreement by and between Omnia Luo Group Limited and the registrant, dated October 9, 2007 (filed as an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and incorporated herein by reference).*
14.1
Business Ethics Policy and Code of Conduct (Incorporated by reference to Exhibit 14.1 to the registrant’s Current Report on Form 8-K filed on February 1, 2008).*
Subsidiaries of the registrant (Incorporated by reference to Exhibit 21 to the registrant’s Current Report on Form 8-K filed on October 15, 2007).*
31.1
Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
31.2
Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
32.1
Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2
Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
* Incorporated by reference.
** Filed herewith.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Each person whose signature appears below hereby authorizes Zheng Luo or Xiaoyin Luo as attorneys-in-fact to sign on his or her behalf, individually, and in each capacity stated below, and to file all amendments and/or supplements to this annual report on Form 10-K.
Signature
Title
/s/ Zheng Luo
March 31,
Zheng Luo
Chairwoman
/s/ David Wang
Chief Financial Officer (Principal
March 31,
David Wang
Financial and Accounting Officer)
/s/ Wenbin Fang
Director
March 31,
Wenbin Fang
/s/ Qing Huang
Director
March 31,
Qing Huang
/s/ Fei Luo
Director
March 31,
Fei Luo
/s/ Xiaoyin Luo
Director
March 31,
Xiaoyin Luo
/s/ Charles C. Mo
Director
March 31, 2010
Charles C. Mo
/s/ Tianhong Yu
Director
March 31, 2010
Tianhong Yu
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OmniaLuo, Inc.
Consolidated Financial Statements
For the year ended December 31, 2009
(Stated in US dollars)
OmniaLuo, Inc.
Consolidated Financial Statements
For the year ended December 31, 2009
Index to Consolidated Financial Statements
Pages
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations and Comprehensive (Loss) Income
Consolidated Balance Sheets
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
-
Report of Independent Registered Public Accounting Firm
To the Directors and Stockholders of
OmniaLuo, Inc.
We have audited the accompanying consolidated balance sheets of OmniaLuo, Inc. (the “Company”) and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
/s/ PKF
Certified Public Accountants
Hong Kong, China
March 30, 2010
OmniaLuo, Inc.
Consolidated Statements of Operations and Comprehensive (Loss) Income
(Stated in US Dollars)
See the accompanying notes to consolidated financial statements.
OmniaLuo, Inc.
Consolidated Balance Sheets
(Stated in US Dollars)
See the accompanying notes to consolidated financial statements.
OmniaLuo, Inc.
Consolidated Statements of Stockholders’ Equity
(Stated in US Dollars)
See the accompanying notes to consolidated financial statements.
OmniaLuo, Inc.
Consolidated Statements of Cash Flows
(Stated in US Dollars)
See the accompanying notes to consolidated financial statements.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
1.
Corporate information
(a)
OmniaLuo, Inc. (the “Company”) was incorporated in the State of Delaware on March 7, 2001 under the name of Wentworth II, Inc. for the purpose of pursuing a business combination. On November 16, 2007, the Company changed its name to OmniaLuo, Inc.
The Company’s common stock began trading on the Over-the-Counter Bulletin Board under the ticker symbol “OLOU” on January 10, 2008.
(b)
On October 9, 2007, the Company entered into a share exchange agreement with Omnia Luo Group Limited (“Omnia BVI”), the shareholders of Omnia BVI and certain of the then Company’s principal stockholders. Pursuant to the share exchange agreement, the Company agreed to issue to the shareholders of Omnia BVI 16,800,000 shares of the Company’s common stock in exchange for all of the then issued and outstanding shares of Omnia BVI.
The aforesaid share exchange transaction was completed on October 9, 2007 and thereafter Omnia BVI became a wholly-owned subsidiary of the Company and the former shareholders of Omnia BVI became the majority stockholders of the Company. This transaction constituted a reverse takeover transaction (the “RTO”).
Concurrent with the consummation of the RTO, the Company issued 4,920,000 shares of its common stock and five-year warrants to purchase an aggregate of 4,920,000 shares of the Company’s common stock at $1.5625 per share for an aggregate purchase price of $6.15 million, to a total of 38 investors in a private placement (the “2007 Private Placement”). In connection with this private placement, the Company issued five-year warrants to purchase 492,000 shares of the Company’s common stock at $1.5625 per share to Keating Securities, LLC (“Keating Securities”), as a financial advisory fee in partial consideration of their services in connection with the private placement. Prior to the consummation of the RTO and the 2007 Private Placement, the Company was deemed to have been an affiliate of Keating Securities by reason of the ownership of shares of the Company’s common stock by principals and executives of Keating Securities. The warrants issued to the investors and Keating Securities have been classified in equity and were outstanding as of December 31, 2009 and 2008.
Omnia BVI is a business company organized under the laws of the British Virgin Islands (the “BVI”) on August 11, 2006. It has conducted no business and is a holding company whose only asset is a 100% equity interest in Shenzhen Oriental Fashion Co., Ltd. (“Oriental Fashion”). Oriental Fashion was established on September 19, 2006 in the People’s Republic of China (the “PRC”).
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
1.
Corporate information (Cont’d)
(c)
Pursuant to preferred stock purchase and shareholders agreements dated as of December 15, 2006 and December 20, 2006, Omnia BVI had issued an aggregate of 2,147 convertible preferred shares (the “BVI Preferred Shares”) and detachable warrants to purchase up to $365,940 in its ordinary shares, based on the offering price in the next financing of Omnia BVI (the “BVI Warrants”), to a private venture capital investment fund (the “Lead Investor”) and several individual investors for a total cash investment of $729,980.
By agreements dated as of October 9, 2007: (i) among Omnia BVI, the Lead Investor, Ms. Zheng Luo (the principal stockholder and chief executive officer of the Company) and another of the Company’s stockholders, and (ii) among Omnia BVI, Ms. Zheng Luo and each of the other holders of BVI Preferred Shares and Warrants, effective upon the closing of the RTO, each BVI Preferred Shares was converted into a specified number of ordinary shares of Omnia BVI, with each such ordinary share of Omnia BVI then being exchanged for 319.8294 shares of the Company’s common stock and each BVI Warrant was exchanged for warrants to purchase the Company’s common stock, exercisable at any time during a two-year period commencing on December 17, 2007, at a per share price of $1.25.
292,752 warrants were issued in exchange for the BVI Warrants. Their exercise price is subject to adjustment for share subdivisions, share combinations, mergers or consolidation. These warrants have been classified in equity and were outstanding as of December 31, 2008, and expired during the current year.
The Company’s common stock issuable under the aforementioned agreements were included in the 16,800,000 shares of the Company’s common stock issued in relation to the RTO as detailed in note 1(b) to the consolidated financial statements.
2.
Description of business
Following the RTO, the Company commenced to be engaged in the design, marketing, distribution and sales of women’s apparel under the brand names of “OMNIALUO” and “OMNIALO” (collectively referred to herein as the “OMNIALUO Brands”) through a network of over 108 retail stores across the PRC. The Company offers a complete line of business casual women’s wear, including bottoms, tops and outerwear, as well as accessories.
There are currently three different types of retail stores that carry the OMNIALUO Brands: (i) Company-owned stores, which stores are owned exclusively by the Company and carry only the OMNIALUO Brands, (ii) co-owned stores, which stores are owned jointly by the Company and a third party, and carry the OMNIALUO Brands exclusively, and (iii) independent distributor stores, which stores are owned exclusively by third parties and carry the OMNIALUO Brands exclusively.
3.
Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3.
Summary of significant accounting policies (Cont’d)
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of estimates
In preparing financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of trade and other receivables, inventories and deferred income taxes and share-based compensation, provision for warranty and the estimation on useful lives of property and equipment. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. As of December 31, 2009, the Company’s cash and cash equivalents were held by major financial institutions located in the PRC and Hong Kong, which management believes are of high credit quality. With respect to trade receivables, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade receivables.
During the year ended December 31, 2009, there was a customer whose revenue represented approximately 24% of the Company’s total revenue. As of December 31, 2009, there were three suppliers whose trade deposits represented approximately 41%, 38% and 11% of the Company’s total trade deposits paid to suppliers.
During the year ended December 31, 2008, there was no customer who contributed 10% or more to the Company’s total revenue. As of December 31, 2008, there were five suppliers whose trade deposits represented approximately 25%, 20%, 15%, 14% and 13% of the Company’s total trade deposits paid to suppliers.
Cash and cash equivalents
Cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months or less. As of December 31, 2009, approximately 80% of the cash and cash equivalents were denominated in Renminbi (“RMB”), which were not freely convertible into foreign currencies and the remittance of these funds out of the PRC was subject to exchange control restrictions imposed by the PRC government. The remaining balances of cash and cash equivalents denominated in United States dollars and Hong Kong dollars were 2% and 18% respectively.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3.
Summary of significant accounting policies (Cont’d)
Allowance for doubtful accounts
The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectibility of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance and the Company considers the historical level of credit losses and applies percentages to aged receivables categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers is to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
Bad debts are written off when identified. The Company extends unsecured credit to customers ranging from 30 to 45 days in the normal course of business. The Company does not accrue interest on trade receivables.
Allowance for doubtful accounts amounting to $754,290 and $13,023 was recognized as of December 31, 2009 and 2008, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a FIFO basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition.
The Company estimates the net realizable value of inventories based on intended use, current market value and inventory ageing analyses. The Company writes down the inventories for estimated obsolescence or unmarketable inventories equivalent to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions.
Allowance for (recovery of) obsolete inventories of $454,052 and $(65,456) were charged (credited) to the consolidated statement of operations and comprehensive (loss) income during the years ended December 31, 2009 and 2008, respectively.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
Depreciation is provided on a straight-line basis over the assets’ estimated useful lives at the annual rate of 20%.
Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to the consolidated statement of operations and comprehensive (loss) income.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3.
Summary of significant accounting policies (Cont’d)
Impairment of long-lived assets
Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets. During the reporting periods, the Company did not identify any indicators that would require testing for impairment.
Revenue recognition
Revenue is recognized when it is probable that the economic benefits will flow to the Company and when the revenue can be measured reliably, on the following basis :
(i)
revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time of delivery and the sales price is fixed or determinable and collection is reasonably assured.
In respect of the revenue generated from the co-owned stores, the Company has reviewed FASB ASC 605 “Revenue Recognition” and considers itself to fulfill the following indicators for gross revenue reporting: (i) the Company is the primary obligator to the customer as the Company is responsible for fulfillment and customer remedies in the event of dissatisfaction; (ii) the Company retains inventory risk of the unsold inventories in the co-owned stores; and (iii) the Company has complete latitude to set the prices for the products and the net amount to be earned varies with that selling price. Accordingly, the Company is the principal of these transactions according to ASC 605 and reports the revenue from co-owned stores on a gross basis. The payments (or commission) paid to the partners of the co-owned stores are recorded as the Company’s expenses.
(ii)
interest income is recognized on an accrual basis.
Advertising and transportation expenses
Advertising and transportation expenses are charged to expense as incurred.
Advertising expenses amounting to $63,583 and $186,377 for the years ended December 31, 2009 and 2008, respectively, were included in selling and marketing expenses.
Transportation expenses amounting to $63,117 and $31,051 for the years ended December 31, 2009 and 2008, respectively, were included in selling and marketing expenses.
Leases
Leases are classified as finance leases whenever the terms of the leases transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Rentals payable under operating leases are charged to the consolidated statement of operations and comprehensive (loss) income on a straight-line basis over the terms of the relevant leases.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3.
Summary of significant accounting policies (Cont’d)
Warranty
The Company maintains a policy of providing after sales services for all products by way of a warranty program. The Company has assessed the amount of goods that would be returned from customers and concluded that no warranty reserve was necessary. However, the Company will periodically assess the estimation of its warranty liability and recognize the reserve when necessary based on the actual experience.
Stock-based compensation
The Company adopted the fair value method of accounting for share-based compensation. Under the fair value method, compensation cost related to employee stock options or similar equity instruments which are equity-classified awards, is measured at the grant date based on the value of the award and is recognized over the requisite service period, which is usually the vesting period. The cost of a liability-classified award is measured based on its current fair value.
Fair value of share options granted is determined using the Black-Scholes model. Under this model, certain assumptions, including the risk-free interest rate, the expected life of the options and the estimated fair value of the Company’s common stock and expected volatility, are required to determine the fair value of the options. If different assumptions had been used, the fair value of the options would have been different from the amount the Company computed and recorded, which would have resulted in either an increase or decrease in the compensation expense.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations and comprehensive (loss) income in the period that includes the enactment date.
Off-balance sheet arrangements
The Company does not have any off-balance sheet arrangements.
Government grant income
Government grant income consisted of receipt of funds to reward the Company’s successful listing on the Over-the-Counter Bulletin Board and private placement. No present or future obligation arises from the receipt of such amount.
Comprehensive income
The Company has adopted ASC 220 “Comprehensive Income”, previously SFAS No. 130, which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Components of comprehensive income include net income/loss and foreign currency translation adjustments.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3.
Summary of significant accounting policies (Cont’d)
Foreign currency translation
The functional currencies of the Company and its subsidiaries include United States dollars (“US$”) and RMB. The Company and its subsidiaries maintain their financial statements in their respective functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income or loss for the respective periods.
For financial reporting purposes, the financial statements of the subsidiaries that are prepared using RMB have been translated into US$. Assets and liabilities are translated at the exchange rates at the balance sheet date and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income or loss but are included in foreign currency translation adjustments to accumulated other comprehensive income, a component of stockholders’ equity. The exchange rates in effect as of December 31, 2009 and 2008 were both RMB1 for $0.1467. The average exchange rates for the years ended December 31, 2009 and 2008 were RMB1 for $0.1466 and $0.1442 respectively. There was no significant fluctuation in the exchange rates for conversion of RMB to US$ after the balance sheet date.
Fair value of financial instruments
The Company considers the carrying values of assets and liabilities reported in the consolidated balance sheet and qualifying as financial instruments approximate their fair values due to the short-term maturity of such instruments.
It is the management’s opinion that the Company is not exposed to significant interest, price, foreign currency or credit risks arising from these financial instruments.
Basic and diluted (loss) earnings per share
Basic (loss) earnings per share is computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the average number of common stock outstanding during the reporting periods.
Diluted (loss) earnings per share are computed using the sum of weighted average number of shares outstanding and dilutive potential shares outstanding during the periods presented. During the year ended December 31, 2009, there were no dilutive potential shares. During the year ended December 31, 2008, dilutive potential shares included warrants issued to investors.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3.
Summary of significant accounting policies (Cont’d)
Recently issued accounting pronouncements
FASB Accounting Standards Codification (Accounting Standards Update “ASU” No. 2009-1)
In June 2009, the Financial Accounting Standard Board (“FASB”) approved its Accounting Standards Codification (“Codification”) as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification is effective for interim or annual financial periods ending after September 15, 2009 and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification.
As a result of the Company’s implementation of the Codification during the current year, previous references to new accounting standards and literature are no longer applicable. In these financial statements, the Company provides reference to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification.
Noncontrolling Interests (Included in amended Topic ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”)
The amended topic establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The adoption of this amended topic has no material impact on the Company’s financial statements.
Business Combinations (Included in amended Topic ASC 805 “Business Combinations”, previously SFAS No. 141(R))
This ASC guidance addresses the accounting and disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in a business combination. The adoption of this amended topic has no material impact on the Company’s financial statements.
Intangibles - Goodwill and Other (Included in amended Topic ASC 350, previously FASB Staff Position (“FSP”) No. 142-3 “Determination of the Useful Life of Intangible Assets”)
The amended topic amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. The amended topic is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The adoption of this amended topic has no material effect on the Company's financial statements.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3.
Summary of significant accounting policies (Cont’d)
Recently issued accounting pronouncements (Cont’d)
Interim Disclosures about Fair Value of Financial Instruments (Included in amended Topic ASC 825 “Financial Instruments”, previously FSP SFAS No. 107-1)
This guidance requires that the fair value disclosures required for all financial instruments be included in interim financial statements. This guidance also requires entities to disclose the method and significant assumptions used to estimate the fair value of financial instruments on an interim and annual basis and to highlight any changes from prior periods. The amended topic was effective for interim periods ended after 15 September 2009. The adoption of this amended topic has no material impact on the Company’s financial statements.
Business Combinations (Included in amended Topic ASC 805, previously FSP No. 141R-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”)
Amended topic ASC 805 amends the requirements for the provisions for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The amended topic eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria and instead carries forward most of the provisions for acquired contingencies. The amended topic is effective for contingent assets and contingent liabilities acquired from business combinations for which the acquisition data is on or as of December 15, 2008. The adoption of this amended topic has no material effect on the Company's financial statements.
Fair Value Measurements and Disclosures (Included in amended Topic ASC 820, previously FSP No. 157-4 “Determining Whether a Market is Not Active and a Transaction Is Not Distressed”)
The amended topic clarifies when markets are illiquid or that market pricing may not actually reflect the “real” value of an asset. If a market is determined to be inactive and market price is reflective of a distressed price then an alternative method of pricing can be used, such as a present value technique to estimate fair value. The amended topic identifies factors to be considered when determining whether or not a market is inactive. The amended topic is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 and shall be applied prospectively. The adoption of this amended topic has no material effect on the Company's financial statements.
Investments - Debt and Equity Securities - Overall - Transition and Open Effective Date Information (Included in amended Topic ASC 320, previously FSP No. 115-2 and SFAS No. 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments”)
The amended topic amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and securities with unrealized losses. The adoption of this amended topic has no material impact on the Company’s financial statements.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3.
Summary of significant accounting policies (Cont’d)
Recently issued accounting pronouncements (Cont’d)
Subsequent Events (Included in amended Topic ASC 855 “Subsequent Events”, previously SFAS No. 165)
The amended topic establishes accounting and disclosure requirements for subsequent events. The amended topic details the period after the balance sheet date during which the Company should evaluate events or transactions that occur for potential recognition or disclosure in the financial statements, the circumstances under which the Company should recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures for such events.
In February 2010, the FASB issued ASU No. 2010-09, an update to this amended topic, which removed the requirement, effective immediately, to disclose the date through which subsequent events had been evaluated. The Company adopted this amended topic upon its effective date.
Accounting for Transfers of Financial Assets (Included in amended Topic ASC 860 “Transfers and Servicing”, previously SFAS No. 166 “Accounting for Transfers of Financial Assets - an Amendment of FASB Statement No. 140”)
The amended topic addresses information a reporting entity provides in its financial statements about the transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Also, the amended topic removes the concept of a qualifying special purpose entity, limits the circumstances in which a transferor derecognizes a portion or component of a financial asset, defines participating interest and enhances the information provided to financial statement users to provide greater transparency. The amended topic is effective for the first annual reporting period beginning after November 15, 2009 and will be effective for the Company as of January 1, 2010. The management is in the process of evaluating the impact of adopting this amended topic on the Company’s financial statements.
Consolidation of Variable Interest Entities - Amended (Included in amended Topic ASC 810 “Consolidation”, previously SFAS 167 “Amendments to FASB Interpretation No. 46(R)”)
The amended topic require an enterprise to perform an analysis to determine the primary beneficiary of a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity. The amended topic also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The amended topic is effective for the first annual reporting period beginning after November 15, 2009 and will be effective for the Company as of January 1, 2010. The management is in the process of evaluating the impact of adopting this amended topic on the Company’s financial statements.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3.
Summary of significant accounting policies (Cont’d)
Recently issued accounting pronouncements (Cont’d)
In August 2009, the FASB issued ASU No. 2009-05, an update to ASC 820 “Fair Value Measurements and Disclosures”. This update provides amendments to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in ASU No. 2009-05. ASU No. 2009-05 became effective for the Company’s annual financial statements for the year ending December 31, 2009. The adoption of this amended topic has no material impact on the Company’s financial statements.
In October 2009, the FASB issued ASU No. 2009-13 “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force”. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The management is in the process of evaluating the impact of adopting this ASU on the Company’s financial statements.
In January 2010, the FASB issued ASU No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”. This updates requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:
-
A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and
-
In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.
In addition, ASU No. 2010-06 clarifies the requirements of the following existing disclosures:
-
For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and
-
A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The management is in the process of evaluating the impact of adopting this amended topic on the Company’s financial statements.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4.
Finance costs
5.
Income taxes
United States
The Company is subject to the United States of America Tax law at tax rate of 34%. It has no assessable profit for the years ended December 31, 2009 and 2008.
The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiary of approximately US$80,000 and US$4,661,000 as of December 31, 2009 and 2008, respectively, because the Company currently does not expect those unremitted earnings to reverse and become taxable to the Company in the foreseeable future. A deferred tax liability will be recognized when the Company no longer plans to permanently reinvest undistributed earnings. Calculation of related unrecognized deferred tax liability is not practicable.
BVI
Omnia BVI was incorporated in the BVI and, under the current laws of the BVI, is not subject to income tax.
PRC
Oriental Fashion is subject to the PRC Enterprise Income Tax (“EIT”). As Oriental Fashion was a wholly-foreign owned enterprise engaged in manufacture industry which was duly approved by the PRC tax authority, it was entitled to two years’ exemption, from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by 50% tax reduction for the immediate next three calendar years. This tax holiday commenced in the fiscal financial year 2007.
On March 16, 2007, the National People’s Congress of the PRC determined to adopt the New corporate income tax law (the “ New CIT Law”). The New CIT Law unifies the application scope, tax rates, tax deduction and preferential policy for both domestic enterprises (“DE”) and foreign investment enterprises (“FIE”). The applicable tax rate of DE and FIE will be 25% after their preferential tax holidays and the transition period have ended. During the transition period, tax rates for the subject entities are 20%, 22% and 24% for the calendar years 2009, 2010 and 2011, respectively, before the application of applicable tax holidays or other tax preferences.
By virtue of the New CIT Law and the above-mentioned tax reduction, Oriental Fashion was subject to EIT rate of 10% during 2009. During 2008, Oriental Fashion was subject to EIT rate of 18% with full tax exemption.
No provision for EIT has been made for the year ended December 31, 2009 since Oriental Fashion had an operating loss.
Income tax benefit attributable to (loss) income from operations consists of deferred tax of $366,574 and $nil for the years ended December 31, 2009 and 2008, respectively.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
5.
Income taxes (Cont’d)
The effective income tax differs from the PRC EIT tax rate of 10% and 18% for the years ended December 31, 2009 and 2008, respectively, as follows:
For the year ended December 31, 2008, the amount of benefit from tax holiday was $451,370 and the effect on earnings per share was $0.02.
In July 2006, the FASB issued ASC 740 (previously Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”). This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s tax positions and considered that no additional provision for uncertainty in income taxes is necessary as of December 31, 2009.
The Company’s temporary difference that gives rise to deferred tax asset includes net operating loss carryforwards. The Company has recorded a deferred tax asset of $366,799 reflecting the benefit of $3,665,741 in loss carryforwards, which expire through to 2014. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
6.
(Loss) earnings per share - basic and diluted
The following table sets forth the computation of basic and diluted (loss) earnings per share (“EPS”) for the years presented:
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
6.
(Loss) earnings per share - basic and diluted (Cont’d)
5,412,000 warrants issued to investors and Keating Securities, and options to purchase 1,369,840 shares of the Company’s common stock granted to the Company’s director and employees outstanding as of December 31, 2009 have not been included in the computation of diluted loss per share for the year then ended because to do so would have an anti-dilutive effect. Accordingly, the basic and diluted loss per share for the year ended December 31, 2009 are the same.
5,412,000 warrants issued to investors and Keating Securities outstanding as of December 31, 2008 have not been included in the computation of diluted earnings per share for the year then ended because to do so would have an anti-dilutive effect. The dilutive potential shares included 292,752 warrants issued to investors.
7.
Trade receivables
An analysis of the allowance for doubtful accounts for the years ended December 31, 2009 and 2008 are as follows:
8.
Inventories
Allowance for (recovery of) obsolete inventories of $454,052 and $(65,456) were recognized for the years ended December 31, 2009 and 2008, respectively, and were included in cost of revenues.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
9.
Other receivables and deposits
An analysis of the allowance for doubtful accounts for the years ended December 31, 2009 and 2008 are as follows:
10.
Property and equipment, net
Depreciation for the years ended December 31, 2009 and 2008 was $274,101 and $211,915, respectively.
During the years ended December 31, 2009 and 2008, property and equipment with net book value of $709 and $5,055 were disposed of at considerations of $323 and $4,319, respectively, resulting in a loss of $386 and $736 respectively.
11.
Trademarks
Oriental Fashion currently owns four trademarks, namely “Omnialuo”, “Omnialo”, “歐柏蘭羅” and “歐柏蘭奴” which were registered in the PRC. These trademarks were transferred to the subsidiary from a major stockholder of the Company for nil consideration during 2006.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
12.
Bank loan
The bank loan denominated in RMB was fully repaid during the year. It carried interest at 7.623% per annum.
The bank loan was (i) guaranteed by Ms. Zheng Luo, who did not receive any compensation for acting as guarantor; and (ii) secured by a guarantee put up by a guaranty company, which received $8,649 from the Company for issuing the guarantee.
13.
Loan from a stockholder
A stockholder extended a loan to the Company in 2006, which is interest-free, unsecured and repayable on demand. The Company repaid $190 and $6,242 to the stockholder in 2009 and 2008, respectively.
14.
Other payables, deposits received and accrued expenses
15.
Make good escrow agreement
In connection with the 2007 Private Placement, Ms. Zheng Luo and another stockholder agreed to place 3,546,268 shares of the Company’s common stock they collectively own in escrow (the “Escrow Shares”). If the Company fails to report net income of at least $2.0 million under U.S. GAAP (before adjustments for non-cash and cash charges related to the RTO and the 2007 Private Placement, including any liquidated damages payments under the registration rights agreement with the 2007 Private Placement investors (the “Registration Rights Agreement”) and any expense relating to any issuance of shares by the Company prior to the RTO and the 2007 Private Placement, and for any charges related to the release of the Escrow Shares, and before accounting for the impact on net income of any equity incentive options or shares granted) for the fiscal year 2007, the escrow agent shall transfer to the investors in the 2007 Private Placement the number of Escrow Shares based on the following formula: (($2.0 million - 2007 Adjusted reported net income)/$2.0 million) multiplied by the Escrow Shares, subject to a maximum number of 50% of the Escrow Shares.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
15.
Make good escrow agreement (Cont’d)
If the Company fails to report net income of at least $4.3 million under U.S. GAAP (before adjustments for non-cash and cash charges related to the RTO and the 2007 Private Placement, including any liquidated damages payments under the Registration Rights Agreement and any expense relating to any issuance of shares by the Company prior to the RTO and the 2007 Private Placement, and for any charges related to the release of Escrow Shares, and before accounting for the impact on net income of any equity incentive options or shares granted) for the fiscal year 2008, the escrow agent shall transfer to the investors in the 2007 Private Placement the lesser of: (i) the number of Escrow Shares based on the following formula: (($4.3 million - 2008 Adjusted reported new income)/$4.3 million) multiplied by the Escrow Shares; or (ii) the number of Escrow Shares still in escrow.
As overall segment profit (before unallocated expenses relating to the reverse acquisition, the 2007 Private Placement and related SEC resale registration totaling $970,320, but less other unallocated general and administrative expenses of $2,098 relating to corporate operations, not included in the segment information) for the year ended December 31, 2007 was $2,176,827, the Company achieved the net income threshold for the fiscal year 2007 and 50% of the Escrow Shares were released back to Ms. Luo and the other stockholder. Since Ms. Luo is also the director and chief executive officer of the Company, the release of shares from escrow to her constituted a compensatory plan and was treated as an expense for the amount of the market value of the shares as of the date the performance goals were met, i.e. December 31, 2007.
The Company’s common stock began trading on the Over-the-Counter Bulletin Board on January 10, 2008. The per share closing price of the Company’s common stock on January 10, 2008 of $1.5 was used to calculate the compensation expense. The total expense recognized for the fiscal year 2007 was $2,299,893.
During the year ended December 31, 2008, the Company’s net income (before unallocated expenses relating to the reverse acquisition, the 2007 Private Placement and related SEC resale registration totaling $698,257), was $2,151,132, before the make good provision of $414,199. Accordingly, the Company failed to report the net income threshold for the fiscal year 2008 and the Escrow Shares relating to the 2008 performance threshold would be released to the investors, Ms. Luo and another stockholder pursuant to the agreed terms and formula.
767,035 and 119,999 shares of the Escrow Shares were estimated to be released back to Ms. Luo and the other stockholder. The release of shares from escrow to Ms. Luo constituted a compensatory plan. The per share closing price of the Company’s common stock on December 31, 2008 of $0.54 was used to calculate the compensation expenses. The total expense recognized for the fiscal year 2008 was $414,199. During the year ended December 31, 2009, 711,269 and 111,275 shares of Escrow Shares were released back to Ms. Luo and the other stockholder.
The release of shares from escrow to the other stockholder did not constitute a compensatory plan as this stockholder did not hold and currently does not hold any position in the Company and has no relationship to the Company other than as a stockholder.
The release of shares held in escrow to the investors constituted a donation from Ms. Luo and the other stockholder to the Company.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
16.
Commitments and contingencies
Operating lease arrangements
The Company leases office premises and showrooms under various non-cancelable operating lease agreements that expire at various dates through years 2009 to 2013. The minimum future commitments payable under these agreements as of December 31, 2009 was $696,813.
Rental expenses under operating leases were $452,256 and $462,658 for the years ended December 31, 2009 and 2008, respectively.
17.
Statutory reserve
The statutory reserve comprises the statutory reserve of Oriental Fashion. In accordance with the relevant PRC regulations, Oriental Fashion is required to appropriate 10% of its net income determined in accordance with PRC GAAP each year, if any, to fund the statutory reserve until the balance of the reserve reaches 50% of the registered capital.
The statutory reserve is not distributable and can be used to make up cumulative prior year losses.
18.
Defined contribution plan
Pursuant to the relevant PRC regulations, the Company is required to make contribution to a defined contribution retirement scheme organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company’s employees. The only obligation of the Company with respect to retirement scheme is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in future years. The defined contribution plan contributions were charged to the consolidated statement of operations. The Company contributed $34,105 and $25,644 for the years ended December 31, and 2008, respectively.
19.
Stock option plan
On April 23, 2008, the board of directors adopted the 2008 Equity Incentive Plan (the “Plan”). The purposes of the Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants, and to promote the success of the Company’s business. The maximum aggregate number of shares that may be issued under the Plan is 5,000,000 shares.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
19.
Stock option plan (Cont’d)
Pursuant to the Plan, on January 6, 2009, the Company granted options to purchase 735,200 and 137,040 shares of common stock with an exercise price of $0.60 and $1.25 per share, respectively, to a director and several employees of the Company. In accordance with the vesting provisions of the grants, 50% of the options were vested on the date of grant and 12.5% will vest thereafter on each of the following March 31, June 30, September 30 and December 31, until fully vested. The options granted expire in ten years after the date of grant or are exercisable for 36 months after the optionee ceases to be a service provider to the Company.
Pursuant to the Plan, on January 20, 2009, the Company granted options to purchase 497,600 shares of common stock with an exercise price of $0.60 per share to a director and several employees of the Company. In accordance with the vesting provisions of the grants, 50% of the options will vest on the first anniversary date of the date of grant and 12.5% will vest thereafter on each of the following March 31, June 30, September 30 and December 31, until fully vested. The options granted expire in ten years after the date of grant or are exercisable for 36 months after the optionee ceases to be a service provider to the Company.
A summary of share option plan activity for the year ended December 31, 2009 is presented below:
# Aggregate intrinsic value represents the value of the Company’s closing stock price on December 31, 2009 of $0.17 in excess of the exercise price multiplied by the number of options outstanding or exercisable.
The weighted average grant-date fair value of options granted on January 6, 2009 and January 20, 2009 was $0.27 and $0.32 per share respectively. The Company recorded non-cash share-based compensation expense of $304,642 for the year ended December 31, 2009, in respect of share options granted on January 6, 2009 and January 20, 2009, which was allocated to general and administrative expenses.
The fair value of the above option awards granted on January 6, 2009 and January 20, 2009 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.
Expected volatility
119.66%
Expected dividends
Nil
Expected life
1.5 years - 2 years
Risk-free interest rate
1%
As of December 31, 2009, there were unrecognized compensation costs of $82,746 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.74 years.
No options were granted during the year ended December 31, 2008.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
20.
Related party transactions
Apart from the transactions and information as disclosed in notes 12 and 13 to the consolidated financial statements, the Company did not have other material transactions during the year ended December 31, 2009.
During the year ended December 31, 2008, the Company purchased finished goods of $540,900 from Shenzhen Oumeng Industrial Co., Ltd. (“Oumeng”). Certain of the Company’s principal stockholders were also principal shareholders of Oumeng and a director of Oriental Fashion, who is also the spouse of a principal stockholder of the Company and director of Oriental Fashion, managed part of the business of Oumeng during the year ended December 31, 2008. Therefore, Oumeng was deemed to have been under common control with the Company during the year ended December 31, 2008. The Company believed the terms obtained and consideration paid in connection with the transactions described above were no less favorable than those that would have been obtained by the Company in arm’s-length transactions with an unrelated party.
21.
Segment information
The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews the operating results of retail sales (including Company-owned and co-owned stores) and sales to distributors and as such, the Company has determined that it has two operating segments as defined by ASC Topic 280 “Segment Reporting”, previously SFAS No. 131.
OmniaLuo, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
21.
Segment information (Cont’d)
A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information:
All of the Company’s long-lived assets and customers are located in the PRC. Accordingly, no geographic information is presented.
22.
Subsequent events
The Company has evaluated its activities subsequent to December 31, 2009 and has concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.