Vlov Inc (OTC BB:VLOV)

• Net Sales for the quarter were $15.2 vs $21.2 in prior year period
• Adjusted EPS for the quarter were $0.28 vs $0.54 in prior year period 

As of March 31, 2012, 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. Additionally, the Company owns and operates 20 stores in Fujian Province. Fujian is one of China's wealthiest provinces and is home to the Company's headquarters. As of March 31, 2011, VLOV's distributors operated 552 store locations reflecting a period-over-period decrease of 25.2% in total POS operated.

Mr. Qingqing Wu, Chairman and CEO of VLOV, commented, "We are continuing to deliver more upscale product offerings and to work closely with our distributors to sell VLOV brand goods in higher-end stand-alone stores and store-in-stores rather than through counters and concessions. While the short term impact of lower-end point-of-sale closures by our distributors has resulted in decreases in revenue and operating income, we expect that our more upscale and exclusive offerings will enable us to generate sales growth, improve profitability and capture increased market share over the long-term."

Crowe Horwath LLP resigned as the registrant’s independent auditors effective as of April 18, 2012. T

he reports of Crowe Horwath LLP on the registrant’s financial statements as of December 31, 2011 and 2010 and for the years ended December 31, 2011 and 2010 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

Fourth Quarter 2011 Results

• Net Sales for the quarter were $31.0 vs $24.7 in prior year period
• Adjusted EPS for the quarter were $0.55 vs $0.57 in prior year period 

"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."

GeoTeam® Note: Third Quarter 2011 vs. 2010 Adjusted EPS was $0.07 vs. $0.13

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 strengthen our brand image with consumers, rather than through counters and concessions. 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. We believe that this increased expenditure towards our brand has been the primary driver of our increased revenues.

Margins Pressure:

Selling expenses for the three months ended September 30, 2011 increased by 125.4% to $3,153 as compared to the same period in 2010, and increased by 72.3% to $9,375 for the nine months ended September 30, 2011 as compared to for the same periods in 2010. The increase was mainly due to increased spending on advertising, including nationwide advertising, as well as fashion events including the Mercedes-Benz New York Fashion Week held during the third quarter. We expect that our selling expenses will continue to increase as we continue 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, men aged 20-45. As we completed the acquisition of our Fujian distributor’s retail network on June 30, 2011, we believe that our selling expenses will also increase as a percentage of total revenue and in absolute dollars.

General and administrative expenses increased by 131.1% from $702 for the three months ended September 30, 2010 to $1,622 for the same period in 2011, and increased by 49.7% from $2,602 for the nine months ended September 30, 2010 to $3,896 for the same period in 2011. The higher general and administrative expenses for the three and nine months ended September 30, 2011 resulted from costs 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 which 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.

Second Quarter 2011 Results

• Net sales for the three months ended June 30, 2011 were $20,588, an increase of 14.72% from $17,946 for the same period in 2010.
• Adjusted net income increased by 48.0% or $1,104 from $2,301 from the three months ended June 30, 2010 to $3,405 for the three months ended June 30, 2011.
• Non GAAP fully diluted EPS for the Second Quarter 2011 was $0.17 vs $0.11 in 2010

We presently finance our operations primarily from the cash flow from our operations, and we anticipate that this will continue to be our primary source of funds to finance our short-term cash needs.

On November 19, 2009, we incorporated China Dong Rong with $8,000 in registered capital of which $4,000 was funded. There was no restriction on the funds contributed, and therefore such contribution is not reflected as a statutory reserve. The remaining $4,000 in registered capital, which is required to be contributed by November 19, 2011, was funded on March 10, 2011.

Results for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010

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

Net sales were $21,172 for the three months ended March 31, 2011, compared with $18,067 for the same period in 2010, an increase of $3,105 or 17.19%.  We generate revenue primarily from the sales of our apparel products to our 12 distributors, who retail them at their POS throughout northern, central and southern China. The increase in our net sales was primarily attributable to increases in sales to our distributors in Beijing, Zhejiang and Fujian and an increase in the average unit price of 144.3% period over period.

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. As of March 31, 2011, our distributors operated 552 POS that included 36 stand-alone store locations, as compared to 742 POS as of March 31, 2010.

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

Net income attributable to our common shareholders was $4,242 for the three months ended March 31, 2011, compared with $917 of net income attributable to common shareholders from the three months ended March 31, 2010, an increase of 362.60%.

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

Adjusted net income increased by 24.09% or $822 from $3,412 from the three months ended March 31, 2010 to $4,234 for the three months ended March 31, 2011. Adjusted net income for the three months ended March 31, 2011 excludes $222 of gains related to the derivative warrant liability while adjusted net income excludes $2,341 of losses from the derivative warrant liability.

Recall the excerpt from on of our prior research notes:

On November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital of $8 million. As of September 30, 2010, $4 million has been contributed to China Dong Rong and the remaining registered capital will be contributed within two years after the date of incorporation. It is the intention of the Company and the equity owners of Yinglin Jinduren to transfer the business operations of Yinglin Jinduren to China Dong Rong; however, such transfer had not yet occurred as of September 30, 2010.

VLOV has now put this issue to rest:

On November 19, 2009, China Dong Rong was established as the wholly-owned subsidiary of HK Dong Rong, with registered capital of $8 million, all of which has been funded as of the date of this report

2010 Results:

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%."

Full Year

• Net Sales of $73.8m vs. $63.3 the year before.
• Adjust Net Income of $12.6m vs. $9.4m
• Adjusted EPS $0.65 vs. $0.59

Fourth Quarter:

• Net Sales of $24.7m vs. $18.5m.
• Adjust Net Income of $4.5m vs. $0.6m
• Adjusted EPS $0.23 vs. $0.04

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.

We presently finance our operations primarily from the cash flow from our operations, and we anticipate that this will continue to be our primary source of funds to finance our short-term cash needs.

On November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital of $8 million. As of September 30, 2010, $4 million has been contributed to China Dong Rong and the remaining registered capital will be contributed within two years after the date of incorporation. It is the intention of the Company and the equity owners of Yinglin Jinduren to transfer the business operations of Yinglin Jinduren to China Dong Rong; however, such transfer had not yet occurred as of September 30, 2010.

We are speculating that VLOV will attempt to raise capital in the near future:

On November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital of $8 million. China Dong Rong, which currently conducts no business activities, is deemed to be a wholly foreign owned enterprise, or WFOE, as its direct parent company, HK Dong Rong, is not a PRC company. $4 million of the registered capital has been funded, with the balance to be funded within two years from the incorporation date. It is our intention and that of the equity owners of Yinglin Jinduren to transfer all of the business operations currently conducted by Yinglin Jinduren to China Dong Rong sometime in 2010.

Second Quarter Results (Unaudited):

First Six Months of 2010 Results (Unaudited):

"We are pleased with the business trends and financial results during the quarter," stated Mr. Qingqing Wu, Chairman and CEO of VLOV. Mr. Wu continued, "We are executing on our strategy to upscale our brand image amongst our target demographic by working with our distributors to move towards operating stand alone stores and store-in-stores and away from counters and concessions which lessen the value of our brand. Our distributors are presently operating 519 points of sale and plan to open between 30 and 40 high-end stand alone store locations by the end of 2010." Mr. Wu concluded, "Even with our distributors closing over 200 counters and concessions this year, we were able to achieve top line revenue growth during the quarter of 27%. We are reconfirming our July 2010 guidance of $71 to $75 million top line revenue and adjusted net income of between $13.2 and $14.2 million."

Mr. Qingqing Wu, Chairman and CEO of VLOV, stated, "Although first quarter sales were impacted by soft performance in some of our southern regions, we anticipate improved overall sales trends during the balance of the year. We are focused on three key initiatives to drive sales: 1) We are working closely with all of our distributors to strengthen their existing VLOV points of sale, including potentially refurbishing select locations and increasing local marketing efforts. 2) As part of our strategy to evolve VLOV's lifestyle brand positioning and extend our reach to higher income consumers, we have enhanced our design aesthetic to be more stylish and chic. Similarly, the newest generation of VLOV POS reflects a contemporary, stylish and sophisticated image. At the same time, we have raised our price points, which we expect will drive continued increases in gross margin performance this year. 3) We are implementing targeted advertising and marketing programs, including advertising the VLOV brand in key fashion publications such as GQ and Men's Vogue, hosting VLOV fashion shows and sponsoring events that resonate with our target demographic. In particular, we are focused on northeastern China, including Beijing, Shandong and Liaoning, which have a number of Tier II and Tier III cities that represent strong potential markets for the VLOV brand.

"Looking at the balance of 2010, we believe the Company is well-positioned to achieve sales growth and continued gross margin expansion while building long-term brand value through increased marketing and advertising efforts. VLOV's target customers have high discretionary income levels, they are discerning about the brands they buy and seek the stylish, chic, fashion-forward look that VLOV offers."

Mr. Qingqing Wu concluded, "We are enthusiastic about our upcoming sales preview being held in Xiamen at the end of May. We believe our designs will meet with excellent response from both our distributors and the fashion press and look forward to providing our investors with feedback from this important event."