VLOV, Inc. Reports Record Annual Financial Results of $73.8 Million in Revenue and Adjusted Fully Diluted EPS of $0.65

XIAMEN, China, April 1, 2011 /PRNewswire-Asia/ -- VLOV, Inc. (OTC Bulletin Board: VLOV) ("VLOV" or the "Company"), which designs, sources and markets VLOV-brand fashion-forward apparel for men aged 18-45 in the People's Republic of China, today announced its financial results for the fourth quarter and full year ended December 31, 2010.

Qingqing Wu, Chairman and CEO of VLOV, commented, "The strength of our fourth quarter financial results is attributable to our continuing efforts to offer more upscale products, with an emphasis on higher margin goods.  Our Spring sales fair, held in December, met with exceptional response from our distributors, resulting in higher than anticipated orders at the end of the fourth quarter.  At the same time, we have maintained a sharp focus on controlling costs, which helped drive operating margins of 23.5%."

"In the third quarter of 2010 we began to outsource 100% of our manufacturing, which allows the Company to focus more resources on design, marketing and advertising. As part of this initiative, our distributors continue to be very supportive by closing counter- and concession-type points of sale and opening stand-alone VLOV stores that more effectively showcase our enhanced, premium brand image. We are confident this strategy will enable the Company to generate improved gross profit and gross margin over the long-term. As of December 31, 2010, our distributors operated 526 POS and 36 stand-alone store locations.

Results for the year ended December 31, 2010 vs. the year ended December 31, 2009

Net Sales (amounts in thousands, in U.S. Dollars, except for percentages)

Net sales were $73,834 for the year ended December 31, 2010 compared with $64,343 for 2009, an increase of $9,491 or 14.75%.  We generate revenue primarily from the sales of our apparel to our distributors, who retail them throughout northern, central and southern China.  These retail locations, also known as points of sales ("POS"), include counters, concessions, stand-alone stores and store-in-stores. We design and create samples, which are presented to our distributors at our biannual previews for their selection and purchase based on what they believe will sell most effectively in their POS. Additionally, we set guidelines for our distributors as to how our products are to be advertised and displayed. We believe that our sales are driven by marketing and advertising as well as by creating fashionable designs. We do not own or operate any VLOV retail locations ourselves; the POS are established and owned by our distributors, each of whom operates its network of POS directly or through third-party retail operators. The increase in our sales was primarily attributable to increased sales in the Shandong, Liaoning, Sichuan and Fujian Provinces, as well as increased advertising.

We have continued to upscale our product offerings to our distributors and have been working with our distributors to sell our products primarily via stand-alone stores and store-in-stores and not through counters and concessions as we believe that stand-alone stores and store-in-stores strengthen our brand image with consumers. In this regard, our distributors have collectively closed more than 200 counters and concessions since March 31, 2010 and have opened 36 stand-alone stores as of December 31, 2010 that reflect our upscale brand image.

Cost of Sales and Gross Profit Margin (amounts in thousands, in U.S. Dollars, except for percentages)

During the third quarter of 2010 we began to fully outsource our manufacturing to third parties. Our products are manufactured on our behalf, based on orders for our products that we receive from our distributors, which orders are based on the clothing samples we design and create.

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

As we shifted away from sub-contract manufacturing and manufacturing product ourselves entirely to O.E.M. manufacturing in 2010, the components of our cost of sales have correspondingly shifted. Raw material costs accounted for 1.50%, of our total net sales in 2010, compared with 4.72% in 2009. With the shift to O.E.M. manufacturing, O.E.M. finished goods cost, representing our purchase of finished products from the O.E.M. manufacturers, correspondingly increased accounting for 57.37% of our total net sales in 2010, compared with 56.89% in 2009.

Labor cost accounted for 0.38% of our total net sales in 2010, compared with 1.82% in 2009. The decrease was primarily attributable to our increase in outsourcing our manufacturing to third parties.

Overhead and other expenses were 0.16% of our total net sales in 2010, compared with 0.42% for 2009. The decrease was primarily attributable to our increase in outsourcing our manufacturing to third parties.

Total cost of sales for 2010 was $43,863, an increase of 6.77% from $41,080 for 2009. As a percentage of total net sales, our cost of sales decreased to 59.41% of total net sales for 2010, down from 63.85% of total net sales for 2009.  Consequently, gross margin as a percentage of total net sales increased to 40.59% for 2010 from 36.15% for 2009.  Our gross margin increased due to the increased outsourcing of our manufacturing to third parties as well as focusing production and marketing on higher margin items such as suits, down jackets and leather jackets.

Selling, General and Administrative Expenses (amounts in thousands, in U.S. Dollars, except for percentages)

Selling expenses were $8,568 in 2010, compared with $4,604 in 2009, increase of $3,964 or 86.10%.  The increase was mainly due to additional advertising expense. In order to increase our brand image and awareness, we anticipate that our selling expenses will continue to increase in absolute dollars and as a greater percentage of total revenue, as we continue our marketing efforts to support our existing distribution network as well as to penetrate potential new markets.

General and administrative expenses decreased from $5,090 for 2009 to $4,056 for 2010, a decrease of $1,034 or 20.31%.  The decrease was mainly due to higher professional fees incurred during the year ended December 31, 2009 relating to our reverse acquisition transaction in February 2009, including legal and accounting fees. As we continue to further improve our operating infrastructure and incur expenses related to being a U.S. public company, we anticipate that our general and administrative expenses will continue to increase in absolute dollars as well as a percentage of total revenues.

Change in Fair Value of Derivative Liability (amounts in thousands, in U.S. Dollars, except for percentages)

We issued common stock purchase warrants to the investors in our financings completed in October, November and December 2009.  These warrants are accounted for at fair value as derivative instruments and are marked-to-market each period, with changes in the fair value charged or credited to income each period and do not impact cash flow as these are non-cash charges. During the years ended December 31, 2010 and 2009, we recorded gains of $2,351 and $1,009, respectively. In future periods, we may experience significant gains or losses, as the value of these warrants fluctuates in response to changes in our stock price.

Net Income (amounts in thousands, in U.S. Dollars, except for percentages)

As a result of the foregoing, net income for the year ended December 31, 2010 was $14,986, an increase of 43.48% from $10,445 for 2009.

Net Income Attributable to Common Shareholders (amounts in thousands, in U.S. Dollars, except for percentages)

Net income attributable to our common shareholders was $14,986 for 2010, compared with $6,442 of net income attributable to common shareholders from a year ago, an increase of 132.63%.

Adjusted Net Income (non-GAAP) (amounts in thousands in U.S. Dollars, except for percentages).

Adjusted net income increased by 33.9% or $3,199 from $9,436 from the year ended December 31, 2009 to $12,635 for the year ended December 31, 2010. Adjusted net income for the year ended December 31, 2010 excludes $2,351 of gains related to the derivative warrant liability while adjusted net income excludes $1,009 of gains from the derivative warrant liability and includes $4,003 in deemed dividends relating to the series A convertible preferred stock. Please see "About Non-GAAP Financial Measures" below.

Balance Sheet

As of December 31, 2010, VLOV had $12.013 million in cash and cash equivalents, $41,825 million in current assets and $7.728 million in total liabilities, which does not include the derivative liability of $1.312 million. The derivative liability reflects the fair value of the Company's outstanding common stock warrants as of December 31, 2010 and will be allocated to equity when the warrants are exercised or eliminated upon warrant expiration.  As of March 30, 2011, VLOV had $28.2 million in cash and cash equivalents as a result of timing differences. Our cash position changes frequently, however, we typically have operating cash between $10 million to $12 million.

Transfer of Business Operations from VIE to Subsidiary

Since January 1, 2011, the Company has been in the process of transferring its business operations from Jinjiang Yinglin Fashion Limited ("Yinglin Jinduren") which it controls through contractual arrangements, to Dong Rong (China) Co., Ltd. ("China Dong Rong"), the Company's wholly-owned subsidiary in China. The transfer of all design, marketing, sales and purchasing-related assets and sales contracts previously under Yinglin Jinduren were completed during the first quarter of 2011, and all business operations of the Company are currently conducted by China Dong Rong. On March 10, 2011, the remaining $4 million of registered capital for China Dong Rong was funded.

2009 Registration Statement Declared Effective on March 30, 2011

On March 30, 2010, VLOV's registration statement (registration number 333-163803) was declared effective. The registration statement registers the shares of series A convertible preferred stock, common stock and related warrants issued in conjunction with VLOV's financing that was completed in December 2009.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for the change in the fair value of the Company's warrants under ASC 815-40-15. The Company believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges and gains that our management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement as these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of VLOV. Accordingly, management excludes the change in the fair value of the Company's warrants under ASC 815-40-15 when making operational decisions. The Company believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand the Company's financial performance in comparison to historical periods. In addition, it allows investors to evaluate the Company's performance using the same methodology and information as that used by our management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, our management compensates for these limitations by providing the relevant disclosure of the items excluded.

The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.

About VLOV, Inc.

VLOV, Inc., a leading lifestyle apparel designer based in China, designs, sources and markets VLOV brand fashion-forward apparel for men ages 18 to 45. As of December 31, 2010, VLOV products were sold through 526 points of sale operated by independent distributors across northern, central and southern China.

Safe Harbor Statement

This press release contains certain statements that may include "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by the use of forward-looking terminology such as "believes, expects, anticipate, optimistic, intend, will" or similar expressions. The Company's actual results could differ materially from those anticipated in these forward- looking statements as a result of a variety of factors, including those discussed in VLOV's periodic reports that are filed with the Securities and Exchange Commission and available on its website at http://www.sec.gov. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.