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VLOV posts Q1 financial results
May '10
VLOV, Inc., China-based designer of VLOV brand men's apparel, announced financial results for the first quarter ended March 31, 2010.

Sales - Net sales in the first quarter of 2010 were $18.1 million compared to $17.9 million in the first quarter of 2009. The results reflect mixed performance throughout the regions where the Company's distributors operate their VLOV points of sale ("POS"). While sales increased in 8 of the 12 regions, particularly northeastern China, sales in some of the southern regions were down significantly due to some underperforming POS. Because these locations were not consistent with VLOV's enhanced brand image, they were closed by the distributors after the Chinese New Year and reopened in new locations during April. The Company is providing regional marketing and advertising support in conjunction with the distributors.

Cost of Sales - Cost of sales for the first quarter of 2010 was $11.1 million, down 2.8% compared to $11.5 million in the 2009 period. As a percentage of net sales, cost of sales decreased to 61.7% versus 64.2% a year ago, primarily due to the Company's shift from sub-contract manufacturing to O.E.M. manufacturing that began in 2009.

Gross Profit - First quarter gross profit increased 8.2% to $6.9 million versus $6.4 million a year ago, while gross margin improved 250 basis points to 38.3% in the first quarter of 2010. The increase in gross margin is primarily attributable to a 15% increase in the Company's average selling price to its distributors.

Operating Expense - Operating expenses were $2.3 million, or 12.8% of sales, compared to $1.4 million, or 7.6% of sales, in the first quarter of 2009. The year-over-year increase of $1 million is primarily attributable to higher selling expense, which reflects planned increases in advertising and marketing to help the Company penetrate new markets. First quarter 2010 advertising expense totaled $1.4 million, or 7.5% of sales, which is consistent with the Company's prior guidance for full year expenditures between 8%-10% of total sales in 2010. This compares to $0.6 million, or 3.9% of sales in the first quarter of 2009. General and administrative expenses increased to $0.8 million compared to $0.6 million a year ago, reflecting higher expenses related to design and product development initiatives.

Operating Income - Income from operations in the first quarter of 2010 came in at $4.6 million compared to $5.0 million in the first quarter of 2009. Operating margin was 25.5% versus 28.2% in the 2009 period.

Net Income - Net income attributable to common stockholders in the first quarter of 2010 was $1.1 million, or $0.06 per diluted share, versus $3.8 million, or $0.25 per diluted share, in the comparable period of 2009. 2010 first quarter net income includes a non-cash loss of $2.3 million relating to the change in the fair value of warrants as a result of the Company's classification and adoption of ASC 815-40-15 that requires the Company to record its warrants as a liability primarily because the Company's functional currency is the Chinese Renminbi while the Company's reporting currency is the US Dollar. The corresponding liability increase does not have to be settled in cash by the Company and will be allocated against the Company's common stock if the warrants are exercised or eliminated if the warrants expire.

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