Profits up 20.31% at VLOV in 2011

VLOV Inc, which designs, sources, markets and distributes VLOV-brand fashion-forward apparel for men aged 20-45 in the People's Republic of China, announced its financial results for the three and twelve months ended December 31, 2011.

"Fiscal 2011 was a year of important accomplishments and successes," commented Qingqing Wu, Chairman and CEO of VLOV. "We had record revenue while broadening global awareness of our brand by presenting at Mercedes Benz Fashion Week in both Beijing and New York City."

As of December 31, 2011, VLOV's products were sold by our distributors in 393 Points of Sale ("POS") throughout China, including counters, concessions, stand-alone stores and store-in-stores.

In the fourth quarter, our distributors continued to close counter and concession-style POS while opening higher-end store-in-store and stand-alone store locations, which we believe are more effective in showcasing our upscale brand image.

Additionally, the Company currently owns and operates 20 stores in Fujian Province: 13 store locations that the Company acquired on June 30, 2011 from its Fujian distributor and 7 additional stores opened since the acquisition. Fujian is one of China's wealthiest provinces and is home to the Company's headquarters.

Mr. Wu continued, "We were able to achieve significant growth in both revenue and earnings during the fourth quarter despite fewer store locations collectively operated by our distributors. We remain committed to working closely with our distributors who have been extremely pleased with our initiatives to build VLOV's global brand image and who are making investments to further elevate their VLOV stores.

We also plan to open additional stores in Fujian and most importantly, continue to provide our customers with fashion-forward designs that embody their successful lifestyle."

Net sales were $88,826 for 2011 as compared with $73,834 for 2010, an increase of $14,992 or 20.31%. Net sales for both years were primarily generated from the sales of our apparel products to our distributors, who retailed them at their POS throughout northern, central and southern China. The increase in our net sales during the year ended December 31, 2011 was primarily attributable to increased sales by our Zhejiang, Beijing and Liaoning distributors, as well as sales from Company-owned stores that we began to operate in the second half of 2011 after acquiring them from our Fujian distributor.

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 which we believe strength our brand image with consumers rather than through counters and concessions.

We opened our first flagship store in Xiamen in April 2011, and our Shenyang and Beijing distributors each opened a flagship store in January 2012. Additionally, we have significantly increased our advertising expense as well as our presence at international fashion shows including the Mercedes-Benz New York Fashion Week in September 2011 and the Beijing Fashion Week in November 2011. We believe that this increased expenditure towards our brand has been the primary drive of our increased revenue.

All of our products are manufactured by third parties, based on orders for our products that we receive from our distributors and from our own stores. Historically, we have outsourced to two types of manufacturers:
• Sub-contractors, which require us to provide them with the raw materials for our products,
• O.E.M. manufacturers that supply their own raw materials. Beginning in 2009
We have shifted almost all of our outsourcing entirely to O.E.M. manufacturers. We did not use sub-contractors for manufacturing during the year ended December 31, 2011 and such type of manufacturing accounted for less than 5% of net sales for the year ended December 31, 2010.

Total cost of sales for 2011 was $50,064, an increase of 18.190% from $43,863 for 2010, primarily due to increased sales. Our cost of sales as a percentage of net sales decreased to 56.36% of total net sales for 2011 from 59.41% of total net sales for 2010. Consequently, gross margin as a percentage of net sales increased to 43.64% for 2011 from 40.59% for 2010. Our gross margin primarily increased due to higher average selling prices of our apparels.

Selling expenses for 2011 increased by 82.29% to $15,619 as compared to 2010. The increase was mainly due to increased spending on advertising, as well as fashion events such as the Mercedes-Benz New York Fashion Week as well as operating our own store locations. We expect that our selling expenses will continue to increase as we continue to expand our retail distribution network, our marketing efforts to support our existing distribution network and penetrate potential new markets in these regions as well as establish our brand amongst our target demographic. We believe that our selling expenses will also increase as a percentage of our total net sales and in absolute dollars.

General and administrative expenses increased by 34.76% from $4,056 for 2010 to $5,466 for 2011. The higher general and administrative expenses for 2011 resulted from the higher cost of operating a U.S. publicly traded company as well as increased research and development costs. As we are now operating the retail network of our Fujian distributor that we acquired on June 30, 2011, as well as additional stores that we have opened, we expect our general and administrative expenses will also increase as a percentage of our net sales and in absolute dollars.

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 and credits. During 2011 and 2010, we recorded gains of $639 and $2,351, respectively. In future periods, we may experience significant gains or losses, as the value of these warrants fluctuates in responseto changes in our common stock price.

VLOV, Inc., a leading lifestyle apparel designer based in China, designs, sources, markets and distributes VLOV brand fashion-forward apparel for men ages 20 to 45 throughout China.