Attached files
file | filename |
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EX-32.2 - QKL Stores Inc. | v181492_ex32-2.htm |
EX-31.1 - QKL Stores Inc. | v181492_ex31-1.htm |
EX-31.2 - QKL Stores Inc. | v181492_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q/A
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
.
Commission
file number: 033-10893
QKL
STORES INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
75-2180652
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
Jingqi
Street,
Dongfeng
Xincun
Sartu
District
Daqing,
P.R. China 163311
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (011)
86-459-4607626
Indicated
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes o No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes x No
o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of ”large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
Registrant has 29,667,631 shares of common stock outstanding as of May 13,
2010.
EXPLANATORY
NOTE
This
quarterly report on Form 10-Q is being filed as Amendment No. 1 to our Quarterly
Report on Form 10-Q which was originally filed on November 16, 2009 with the
Securities and Exchange Commission. We are amending and restating our
financial statements to reclassify outstanding Series A and Series B warrants as
a liability pursuant to EITF 07-5, “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock” (FASB ASC
815-40-15-5) so that
the financial statements in this Form 10-Q are consistent with our financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2009, which was filed with the SEC on April 1,
2010.
Except as
specifically referenced herein, this Amendment No. 1 to the Quarterly Report on
Form 10-Q does not reflect any event occurring subsequent to November 16, 2009,
the filing date of the original report.
QKL
STORES INC.
Index
Page
|
|
Part I: FINANCIAL
INFORMATION
|
|
Item
1 – Financial Statements:
|
|
Condensed
Balance Sheets
|
2
|
Condensed
Statements of Operations
|
3
|
Condensed
Statements of Cash Flows
|
4
|
Notes
to Unaudited Condensed Financial Statements
|
5
|
Item
2 – Management’s Discussion and Analysis or Results of
Operations
|
27
|
Item
3 – Quantitative and Qualitative Disclosures About Market
Risk
|
40
|
Item 4T
– Controls and Procedures
|
40
|
Part II. OTHER
INFORMATION
|
|
Item
1 – Legal Proceedings
|
40
|
Item
1A – Risk Factors
|
40
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
40
|
Item
3 – Defaults Upon Senior Securities
|
40
|
Item
4 – Submission of Matters to a Vote of Security Holders
|
40
|
Item
5 – Other Information
|
40
|
Item
6 – Exhibits
|
41
|
Signatures
|
42
|
1
PART
1. FINANCIAL INFORMATION
Item
1. Financial Statements
QKL
STORES INC.
Condensed
Balance Sheets
September 30,
2009
(Unaudited
Restated)
|
December 31,
2008
|
|||||||
ASSETS
|
||||||||
Cash
|
$
|
26,689,177
|
$
|
19,285,021
|
||||
Pledged
deposits
|
181,693
|
293,149
|
||||||
Trade
receivables, net of allowance of doubtful accounts of nil and nil,
respectively
|
452,366
|
793,352
|
||||||
Inventories
|
15,614,718
|
14,544,341
|
||||||
Other
receivables
|
3,889,925
|
4,189,140
|
||||||
PrPrepaid
expenses
|
2,111,601
|
1,862,591
|
||||||
Advances
to suppliers
|
3,039,363
|
3,342,756
|
||||||
Total
current assets
|
51,978,843
|
44,310,350
|
||||||
Property,
plant and equipment, net
|
15,822,986
|
12,960,303
|
||||||
Intangible
assets
|
19,980,756
|
19,655,082
|
||||||
Other
assets
|
419,146
|
787,741
|
||||||
Total
assets
|
$
|
88,201,731
|
$
|
77,713,476
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
Short-term
bank loans
|
$
|
-
|
$
|
2,188,439
|
||||
Accounts
payable
|
24,580,735
|
21,283,818
|
||||||
Cash
card and coupon liabilities
|
6,256,616
|
3,858,514
|
||||||
Customer
deposits received
|
1,561,722
|
2,901,205
|
||||||
Accrued
expenses and other payables
|
4,306,397
|
2,362,077
|
||||||
InIncome
taxes payable
|
761,381
|
1,252,336
|
||||||
Total
current liabilities
|
37,466,851
|
33,846,389
|
||||||
Warrant
liabilities
|
53,862,655
|
-
|
||||||
Total
liabilities
|
91,329,506
|
33,846,389
|
||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity
|
||||||||
Common
stock, $.001 par value per share, authorized 100,000,000, shares, issued
and outstanding 20,882,353 at September 30, 2009 and December 31,
2008
|
20,882
|
20,882
|
||||||
Series
A convertible preferred stock, par value $0.01, 10,000,000 shares
authorized, 9,117,647 shares issued and outstanding at September 30, 2009
and December, 2008
|
91,176
|
91,176
|
||||||
Additional
paid-in capital
|
15,763,477
|
21,783,477
|
||||||
Statutory
reserves
|
3,908,247
|
3,908,247
|
||||||
Retained
earnings (accumulated deficit)
|
(25,343,661)
|
14,204,169
|
||||||
Accumulated
other comprehensive income
|
2,432,104
|
3,859,136
|
||||||
Total
stockholders’ equity (deficit)
|
(3,127,775)
|
43,867,087
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
88,201,731
|
$
|
77,713,476
|
See
notes to unaudited condensed financial statements.
2
QKL
STORES INC.
Unaudited
Condensed Statements of Operations
(Unaudited)
Three Months Ended
September 30,
|
(Unaudited
)
Nine Months Ended
September 30,
|
|||||||||||||||
2009
(Restated)
|
2008
|
2009
(Restated)
|
2008
|
|||||||||||||
Net
sales
|
$ |
57,078,873
|
$ |
31,582,422
|
$ |
175,852,053
|
$ |
90,336,904
|
||||||||
Cost
of sales
|
46,607,907
|
23,788,325
|
143,096,587
|
69,080,122
|
||||||||||||
Gross
profit
|
10,470,966
|
7,794,097
|
32,755,466
|
21,256,782
|
||||||||||||
Selling
expenses
|
6,348,030
|
3,945,824
|
18,424,432
|
10,280,984
|
||||||||||||
General
and administrative expenses
|
1,051,608
|
647,002
|
3,217,258
|
2,025,131
|
||||||||||||
Income
from operation
|
3,071,328
|
3,201,271
|
11,113,776
|
8,950,667
|
||||||||||||
Other
expenses
|
-
|
-
|
-
|
(1,976,470
|
) | |||||||||||
Changes
in fair value of warrants
|
(31,612,218
|
) |
-
|
(45,050,638
|
) |
-
|
||||||||||
Interest
income
|
35,342
|
89,683
|
188,448
|
196,143
|
||||||||||||
Interest
expenses
|
(4
|
) |
(41,533
|
) |
(20,800
|
) |
(170,675
|
) | ||||||||
Income
(Loss) before provision for income taxes
|
(28,505,552)
|
3,249,421
|
(33,769,214)
|
6,999,665
|
||||||||||||
Provision
for income taxes
|
829,840
|
824,344
|
2,986,599
|
2,343,631
|
||||||||||||
Net
income (loss) attributable to common stockholders
|
$
|
(29,335,392)
|
$
|
2,425,077
|
$
|
(36,755,813)
|
$
|
4,656,034
|
||||||||
Weighted
average number of shares outstanding
|
||||||||||||||||
Basic
|
20,882,353
|
20,882,353
|
20,882,353
|
20,882,353
|
||||||||||||
Diluted
|
20,882,353
|
31,127,457
|
20,882,353
|
30,753,466
|
||||||||||||
Earnings
(loss) per share
|
||||||||||||||||
Basic
|
$
|
(1.40)
|
$
|
0.12
|
$
|
(1.76)
|
$
|
0.22
|
||||||||
Diluted
|
(1.40)
|
0.08
|
(1.76)
|
0.15
|
See
notes to unaudited condensed financial statements.
3
QKL
STORES INC.
Unaudited
Condensed Statements of Cash Flows
Nine Months
Ended
September 30,
2009
|
Nine Months
Ended
September 30,
2008
|
|||||||
(Unaudited
Restated)
|
(Unaudited)
|
|||||||
C
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income (loss)
|
$
|
(36,755,813)
|
$
|
4,656,034
|
||||
Depreciation
|
1,869,122
|
1,300,368
|
||||||
Amortization
|
20,359
|
24,026
|
||||||
Loss
on disposal of property, plant and equipment
|
51,040
|
37,295
|
||||||
Changes
in fair value of warrants
|
45,050,638
|
-
|
||||||
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
||||||||
Accounts
receivables
|
342,666
|
-
|
||||||
Inventories
|
(1,034,325
|
)
|
(871,726
|
)
|
||||
Other
receivables
|
309,164
|
(3,199,657
|
)
|
|||||
Prepaid
expenses
|
(614,555
|
)
|
(998,758
|
)
|
||||
Advances
to suppliers
|
311,285
|
(482,372
|
)
|
|||||
Accounts
payable
|
2,225,442
|
8,150,921
|
||||||
Cash
card and coupon liabilities
|
2,387,021
|
1,036,247
|
||||||
Customer
deposits received
|
(317,626
|
)
|
(655,423
|
)
|
||||
Accrued
expenses and other payables
|
1,889,190
|
1,001,775
|
||||||
Income
taxes payable
|
(493,640
|
)
|
415,374
|
|||||
Net
cash provided by operating activities
|
15,239,968
|
10,414,104
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases
of property, plant and equipment
|
(4,246,550
|
)
|
(1,644,475
|
)
|
||||
Proceeds
from disposal of property, plant and equipment
|
21,162
|
92,561
|
||||||
Increase
(decrease) pledged deposits
|
111,456
|
(300,000
|
)
|
|||||
Net
cash used in investing activities
|
(4,113,932
|
)
|
(1,851,914
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from issuance of Series A convertible preferred stock
|
-
|
15,500,000
|
||||||
Repayment
of short-term bank loans
|
(2,192,178
|
)
|
(2,857,608
|
)
|
||||
Net
cash provided by (used in) financing activities
|
(2,192,178
|
)
|
12,642,392
|
|||||
Net
increase in cash
|
8,933,858
|
21,204,582
|
||||||
Effect
of foreign currency translation
|
(1,529,702
|
)
|
1,261,970
|
|||||
Cash
at beginning of period
|
19,285,021
|
10,742,064
|
||||||
Cash
at end of period
|
$
|
26,689,177
|
$
|
33,208,616
|
||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
received
|
$
|
188,448
|
$
|
196,143
|
||||
Interest
paid
|
$ |
20,800
|
$ |
170,675
|
||||
Income
taxes paid
|
$
|
2,504,587
|
$
|
1,928,258
|
See notes to unaudited condensed
financial statements.
4
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
1 - Organization and Business Operations
QKL
Stores, Inc. (“Store”, “Company”) (formerly known as Forme Capital, Inc.) was
incorporated under the laws of the State of Delaware on December 2, 1986. From
1989 to 2000, Store created and spun off to its stockholders nine blind pool
companies for two years, then operated as a real estate company for eight years,
then sold substantially all of its assets and ceased operations. From 2000 until
March 28, 2008, Store was a shell company with no substantial operations or
assets. Store currently operates through (1) itself, (2) one directly
wholly-owned subsidiary in the British Virgin Islands: Speedy Brilliant Group
Ltd. (“Speedy Brilliant (BVI)”), (3) one directly wholly-owned subsidiary of
Speedy Brilliant (BVI) located in Mainland China: Speedy Brilliant (Daqing) Ltd.
(“Speedy Brilliant (Daqing)” or “WFOE”), (4) one operating company located in
Mainland China: Daqing Qingkelong Chain Commerce & Trade Co., Ltd.
(“Qingkelong Chain”), which Store controls, through contractual arrangements
between WFOE and Qingkelong Chain, as if Qingkelong Chain were a wholly-owned
subsidiary of Store, and (5) one wholly-owned operating subsidiary of Qingkelong
Chain located in Mainland China: Daqing Qinglongxin Commerce &
Trade Co., Ltd (“Qinglongxin Commerce”).
Speedy
Brilliant (BVI) was established in the British Virgin Islands as a BVI business
company on February 23, 2007. Speedy Brilliant (Daqing) was established in the
Heilongjiang Province of the People’s Republic of China (the PRC) as a limited
company on August 1, 2007. Qingkelong Chain was established in the Heilongjiang
Province of the PRC as a limited company on November 2, 1998. Qinglongxin
Commerce was established in the Heilongjiang Province of the PRC as a limited
company on July 10, 2006.
The Store
and its subsidiaries (hereinafter, collectively referred to as “the Company”)
are engaged in the operation of retail chain stores in the PRC.
The
Company is a regional supermarket chain that currently operates 31
supermarkets and 2 department stores in northeastern China and Inner Mongolia.
The Company’s supermarkets sell a broad selection of merchandise including
groceries, fresh food and non-food items. The Company currently has one
distribution center servicing its supermarkets.
Management
believes that the Company is the only supermarket chain in northeastern China
and Inner Mongolia that is a licensee of the International Grocers Alliance, or
IGA, a United States-based global grocery network with aggregate retail sales of
more than $21.0 billion per year. As a licensee of IGA, we are able to engage in
group bargaining with suppliers and have access to more than 2,000 private IGA
brands, including many that are exclusive IGA brands.
The
Company completed the initial steps in the execution of our expansion plan
in March 2008, when the Company raised financing through the combination of our
reverse merger and private placement. Under that plan, the Company opened four
new stores in 2009 that have, in the aggregate, approximately 20,000 square
meters of space and 10 new stores in 2008 that have, in the aggregate,
approximately 50,000 square meters of space. Six stores opened in 2008 were
opened by the Company and four of the new stores were opened through the
acquisition of existing businesses by the Company. The Company plans to open
three additional supermarkets in 2009 that will have, in the aggregate,
approximately 17,300 square meters of space and one additional distribution
center that will have approximately 19,600 square meters of space. In 2010, the
Company plans to open hypermarkets, as well as additional supermarkets and
department stores having, in the aggregate, approximately 120,000 square meters
of space. The Company is also making improvements to its logistics and
information systems to support our supermarkets. The Company expects to finance
its expansion plan from funds generated from operations, bank loans and proceeds
from this offering.
5
NOTE
2 - Summary of Significant Accounting Policies
Basis
of Presentation – Interim Financial Statements
The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements
and notes are representations of management. Accounting policies adopted by the
Company conform to generally accepted accounting principles in the United States
of America and have been consistently applied in the presentation of financial
statements.
6
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (continued)
Basis
of Presentation – Interim Financial Statements (continued)
The
accompanying unaudited financial statements have been prepared pursuant to the
rules and regulations of the SEC and should be read in conjunction with the
Company’s audited financial statements and footnotes thereto for the period from
inception (July 3, 2007) to December 31, 2008 included in the Company’s Annual
Report on Form 10-K. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the Unites States of America have been omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. The
financial statements reflect all adjustments (consisting primarily of normal
recurring adjustments) that are, in the opinion of management necessary for a
fair presentation of the Company’s financial position, results of operations and
cash flows. The operating results for the period ended September 30, 2009 are
not necessarily indicative of the results to be expected for the full
year.
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. This basis of accounting differs in certain material respects from
that used for the preparation of the books of account of the Company’s principal
subsidiaries, which are prepared in accordance with the accounting principles
and the relevant financial regulations applicable to enterprises with limited
liabilities established in the PRC and Hong Kong, the accounting standards used
in the places of their domicile. The accompanying condensed interim consolidated
financial statements reflect necessary adjustments not recorded in the books of
account of the Company’s subsidiaries to present them in conformity with US
GAAP.
Restatement
— Accounting for Series A and Series B Warrant
On March
28, 2008, the Company completed the sale of 9,117,647 units for approximately
$15,500,000. Each unit consisted of one share of our Series A preferred stock
and one Series A warrant and one Series B warrant. Each share of Series A
preferred stock is convertible into one share of common stock, subject to
certain anti-dilution provisions. Each warrant is convertible into 0.625 shares
of common stock or a total of 11,397,058 shares of common stock. The warrants
have a five year life and the Series A warrants are exercisable at an equivalent
price of $3.40 per share and the Series B are exercisable at an equivalent price
of $4.25 per share.
During
the year-end audit of December 31, 2009, the company discovered that the
warrants described above were not appropriately accounted for in accordance with
the provisions of FASB Topic 815, “Derivatives and Hedging” (“ASC 815”)
(previously EITF 07-5, “Determining Whether an Instrument (or an Embedded
Feature) is Indexed to an Entity’s Own Stock”) which was effective January1,
2009.For quarterly reporting periods during 2009, the Company incorrectly
reflected these warrants as equity and did not mark them to market each period
in accordance with the requirements of ASC 815. These warrants contained down
round protection (full-ratchet down round protection) and as such under ASC 815
are not considered to be indexed to the company’s own stock. As such, they met
the definition of a derivative and should have been classified as a liability
and marked to market each period, with all changes in the fair value recognized
in earnings for all reporting periods effective January 1, 2009 until such time
as the warrants are exercised or expire.
As a
result of this, the Company restated its financial statements to appropriately
adopt ASC 815 by reclassifying these warrants from equity to liability measured
at fair value and reflecting the changes in fair value in earnings for each
reporting period. The retrospective effect of the adoption ASC 815 has been
reflected as a cumulative effect adjustment to the opening balance sheet of
retained earnings.
7
The
Company’s consolidated condensed balance sheet as of September 30, 2009, as
previously reported and as restated, is as follows:
September
30,2009
|
||||||||||||
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||
Assets
|
||||||||||||
Cash
|
$ | 26,689,177 | - | $ | 26,689,177 | |||||||
Pledged
deposits
|
181,693 | - | 181,693 | |||||||||
Trade
receivables
|
452,366 | - | 452,366 | |||||||||
Inventories
and consumables
|
15,614,718 | - | 15,614,718 | |||||||||
Other
receivables
|
3,889,925 | - | 3,889,925 | |||||||||
Prepaid
expenses
|
2,111,601 | - | 2,111,601 | |||||||||
Advances
to suppliers
|
3,039,363 | - | 3,039,363 | |||||||||
Total
current assets
|
51,978,843 | - | 51,978,843 | |||||||||
Property,
plant equipment, net
|
15,822,986 | - | 15,822,986 | |||||||||
Land
use rights, net
|
19,980,756 | - | 19,655,082 | |||||||||
Other
assets
|
419,146 | - | 419,146 | |||||||||
Total
assets
|
$ | 88,201,731 | - | $ | 88,201,731 | |||||||
Liabilities
and Stockholders’ Equity:
|
||||||||||||
Short-term
bank loans
|
$ | - | - | $ | - | |||||||
Accounts
payable
|
24,580,735 | - | 24,580,735 | |||||||||
Cash
card and coupon liabilities
|
6,256,616 | - | 6,256,616 | |||||||||
Deposits
received
|
1,561,722 | - | 1,561,722 | |||||||||
Accrued
expenses and other payables
|
4,306,397 | - | 2,362,077 | |||||||||
Income
taxes payable
|
761,381 | - | 761,381 | |||||||||
Total
current liabilities
|
37,466,851 | - | 37,466,861 | |||||||||
Warrant
liabilities
|
- | 53,862,655 | 53,862,655 | |||||||||
Total
liabilities
|
37,466,851 | 53,862,655 | 91,329,506 | |||||||||
Commitments
and contingencies
|
- | - | - | |||||||||
Common
stock
|
20,882 | - | 20,882 | |||||||||
Series
A convertible preferred stock
|
91,176 | - | 91,176 | |||||||||
Additional
paid-in capital
|
21,783,477 | (6,020,000 | ) | 15,763,477 | ||||||||
Statutory
reserves
|
3,908,247 | - | 3,908,247 | |||||||||
Retained
earnings (accumulated deficit)
|
22,498,994 | (47,842,655 | ) | (25,343,661 | ) | |||||||
Accumulated
other comprehensive income
|
2,432,104 | - | 2,432,104 | |||||||||
Total
stockholders’ equity
|
50,734,880 | (53,862,655 | ) | (3,127,775 | ) | |||||||
Total
liabilities and stockholders’ equity
|
$ | 88,201,731 | - | $ | 88,201,731 |
8
The
Company’s consolidated statements of operations for the three months ended
September 30, 2009 and 2008, as previously reported and as restated, are as
follows:
Three
months ended September 30,2009
|
||||||||||||
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||
Net
sales
|
$ | 57,078,873 | $ | - | $ | 57,078,873 | ||||||
Cost
of sales
|
46,607,907 | - | 46,607,907 | |||||||||
Gross
profit
|
10,470,966 | - | 10,470,966 | |||||||||
Selling
expenses
|
6,348,030 | - | 6,348,030 | |||||||||
General
and administrative expenses
|
1,051,608 | - | 1,051,608 | |||||||||
Income
from operations
|
3,071,328 | - | 3,071,328 | |||||||||
Changes
in fair value of warrants
|
- | (31,612,218 | ) | (31,612,218 | ) | |||||||
Interest
income
|
35,342 | - | 35,342 | |||||||||
Interest
expense
|
(4 | ) | - | (4 | ) | |||||||
Income(Loss)before
provision for income taxes
|
3,106,666 | - | (28,505,552 | ) | ||||||||
Provision
for income taxes
|
829,840 | - | 829,840 | |||||||||
Net
income (loss) attributable to common stockholders
|
$ | 2,276,826 | $ | (31,612,218 | ) | $ | (29,335,392 | ) | ||||
Weighted
average number of shares outstanding
|
||||||||||||
Basic
|
20,882,353 | - | 20,882,353 | |||||||||
Diluted
|
30,000,000 | 9,117,647 | 20,882,353 | |||||||||
Net
income (loss) per share
|
||||||||||||
Basic
|
$ | 0.11 | $ | (1.51 | ) | $ | (1.40 | ) | ||||
Diluted
|
0.08 | (1.48 | ) | (1.40 | ) |
9
The
Company’s consolidated condensed statements of operations for the nine months
ended September 30, 2009, as previously reported and as restated, are as
follows:
Nine
months ended September 30,2009
|
||||||||||||
As
Previously Reported
|
Adjustment
|
As
Restated
|
||||||||||
Net
sales
|
$ | 175,852,053 | $ | - | $ | 175,852,053 | ||||||
Cost
of sales
|
143,096,587 | - | 143,096,587 | |||||||||
Gross
profit
|
32,755,466 | - | 32,755,466 | |||||||||
Selling,
expenses
|
18,424,432 | 18,424,432 | ||||||||||
General
and administrative expenses
|
3,217,258 | - | 3,217,258 | |||||||||
Income
from operations
|
11,113,776 | - | 11,113,776 | |||||||||
Changes
in fair value of warrants
|
- | (45,050,638 | ) | (45,050,638 | ) | |||||||
Interest
income
|
188,448 | - | 188,448 | |||||||||
Interest
expense
|
(20,800 | ) | - | (20,800 | ) | |||||||
Income(Loss)before
income taxes
|
11,281,424 | (45,050,638 | ) | (33,769,214 | ) | |||||||
Income
taxes
|
2,986,599 | - | 2,986,599 | |||||||||
Net
income (loss) attributable to common stockholders
|
$ | 8,294,825 | $ | (45,050,638 | ) | $ | (36,755,813 | ) | ||||
Weighted
average number of shares outstanding
|
||||||||||||
Basic
|
20,882,353 | - | 20,882,353 | |||||||||
Diluted
|
30,000,000 | 9,117,647 | 20,882,353 | |||||||||
Earning(loss)
per share
|
||||||||||||
Basic
|
$ | 0.40 | $ | (2.16 | ) | $ | (1.76 | ) | ||||
Diluted
|
$ | 0.28 | $ | (2.04 | ) | $ | ((1.76 | ) |
Principles
of Consolidation and Presentation
The
consolidated financial statements include the accounts of Store and its
wholly-owned and majority owned subsidiary of Store. All intercompany accounts,
transactions, and profits have been eliminated upon
consolidation.
10
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could materially differ from those
estimates.
Segment
Reporting
SFAS
No. 131, “Disclosures About Segments of an Enterprise and Related
Information,” requires public companies to report financial and descriptive
information about their reportable operating segments. The Company identifies
operating segments based on how management internally evaluates separate
financial information, business activities and management responsibility. The
Company operates in a single business segment consisting of operating retail
chain stores in the PRC.
Advertising
and Promotion Costs
Costs
associated with advertising and promotions are expensed as incurred. Advertising
expenses included in the selling expenses for the nine months ended September
30, 2009 and 2008 were $47,710 and $58,171, respectively, and also included in
the general and administrative expenses for nine months ended September 30, 2009
and 2008 were $6,106 and $70,024 respectively.
Pledged
Deposits
Pledged
deposits are restricted cash kept in a trust account maintained in the United
States for the purpose of investor and public relation affairs. As of September
30, 2009, the balance of the pledged deposit was $181,693.
11
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (continued)
Revenue
Recognition
Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, and the seller’s price to the buyer is fixed or
determinable, and collection is reasonably assured. The Company recognizes sales
revenue net of sales taxes and estimated sales returns at the time it sells
merchandise to the customers.
Accordingly,
revenue represents the purchase price of goods sold, recognized upon the
delivery of goods to customers at the point of sale, generally at the checkout
counter. The Company generally recognizes revenue at the time of sale, when
goods are delivered to the customer and cash is received and recorded by its
employees. In addition to cash payments, the Company receives payments by bank
debit cards, for which the Company also recognizes revenue at the time of sale.
The Company also receives payments by a pre-paid cash cards, which represents
cash accounts that customers has funded prior to the sale. Revenue
from cash cards is recognized at the time the customer funds the card account.
Customer purchases of cash cards are not recognized as revenue until the card is
redeemed and the customer purchases merchandise by using the cash cards. The
Company does not accept any other method of payment and we do not deliver goods
on credit.
The
products generally could be returned by the customers within 7 days after
purchased. Estimated sales returns are based on past experience and have been
immaterial.
Cash
Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Inventories
Inventories
are comprised of merchandise purchased for resale and are stated at lower of
cost and net realizable value. Cost of merchandise, representing the purchase
cost, is calculated on the weighted average basis. Net realizable
value is the estimated selling price in the ordinary course of business less any
applicable selling expenses.
Consumables
are comprised of (i) the packaging materials and (ii) the stationery for own
consumption. Consumables are stated at cost, which is determined by using the
weighted average method. The costs of packaging materials are expensed into the
costs of inventories sold. The costs of consumables for our own
consumption are expensed into selling expenses and general & administrative
expenses, depending on which department consumed.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Significant additions or improvements
extending useful lives of assets are capitalized. Maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives as follows:
12
Buildings
|
30-40 years
|
Shop
equipment
|
6 years
|
Office
equipment
|
5 years
|
Motor
vehicles
|
8 years
|
Car
park
|
43 years
|
Leasehold
improvements
|
5 years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to expense as
incurred, whereas significant renewals and betterments are
capitalized.
13
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (continued)
Cash
Card and Coupon Liabilities
Cash
cards and coupon liabilities are recorded as liabilities at face value or
selling value to the customers when coupons or cash cards are sold.
Coupons
surrendered in exchange for products and/or debit in cash cards during the year
are recognized as sales less discount and transferred the net sales to the
income statements.
Cash
cards have no expiration dates. Therefore, cash cards cannot expire unredeemed.
Unredeemed cash cards are not recognized as income. Unredeemed cash cards are
accounted for as cash card and coupon liabilities, which is deferred revenue in
current liabilities. Management recognizes income when there is evidence that
the revenue is earned.
Coupons
have expiration dates. If coupons with expiration dates remain unredeemed at the
expiration date, they are recognized as other operating income.
Outstanding
cash card and coupon liabilities are classified as current liabilities at the
end of the periods.
Suppliers
and Consignees
Generally,
we have 30 days credit period from our suppliers and consignees. Income from
suppliers and consignees includes fees paid in connection with product
promotions, general sponsorships, and savings relating to transportation and
early settlement of our accounts. Consistent with EITF 02-16, product promotions
and general sponsorships are classified as a reduction in the cost of inventory.
Other income from suppliers and consignees, such as savings relating to
transportation and early settlement of our accounts have been included as other
operating income in our net revenues. Rebates from suppliers and consignees have
been included as a reduction in the cost of inventory as earned and recognized
as a reduction in cost of sales when the product is sold.
In
connection with our sponsorships, we incur expenses for our posters and
promotional flyers. The sponsorship amounts we recognize are net of those
expenses.
Long-lived
Assets
In
accordance with Statement of Financial Accounting Standards No. 144 (“SFAS
144”), “Accounting for Impairment on Disposal of Long-lived Assets”, the Company
reviews for impairment of long-lived assets whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable. The Company
considers the carrying value of assets may not be recoverable based upon its
review of the following events or changes in circumstances: the asset’s ability
to continue to generate income from operations and positive cash flow in future
periods; loss of legal ownership or title to the assets; significant changes in
its strategic business objectives and utilization of the asset; or significant
negative industry or economic trends. Impairment would be recognized
when estimated future cash flows expected to result from the use of the asset
are less than its carrying amount.
As of
September 30, 2009, the Company is not aware of any events or changes in
circumstances that would indicate that the long-lived assets are
impaired.
14
Concentration
of Credit Risk
The
Company maintains cash in a bank deposit accounts in PRC, except one pledged
deposit account in U.S. for the sole purpose of disbursements of investor’s
relationship expenses. Balance in that account that is in excess of FDIC limit
on September 30, 2009 was $81,693. The Company has not experienced any
losses on this account and any other accounts in PRC..
15
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (continued)
Retirement
Benefit Plans
The
employees of the Group are members of a state-managed retirement benefit plan
operated by the government of the PRC. The Group is required to
contribute a specified percentage of payroll costs to the retirement benefit
scheme to fund the benefits. The only funding obligation of the Group
with respect to the retirement benefit plan is to make the specified
contributions.
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of operations as
incurred. The retirement benefit funding included in the selling expenses for
the nine months ended September 30, 2009 and 2008 were $1,314,789 and $541,604
respectively, and included in the general and administrative expenses for the
nine months ended September 30, 2009 and 2008 were $137,907 and $91,125
respectively.
Income
Taxes
Deferred
income tax assets and liabilities are computed for differences between the
financial statements and tax basis of assets and liabilities that will result in
future taxable or deductible amounts and are based on enacted tax laws and rates
applicable to the periods in which the differences are expected to effect
taxable income. Valuation allowances are established when necessary
to reduce deferred income tax assets to the amount expected to be
realized. Deferred income taxes are not material to the Company’s
financial position and results of operations as of September 30,
2009.
In July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting For Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109 (“FIN 48”). FIN 48 establishes new evaluation and
measurement processes for all income tax positions taken. FIN 48 also
requires expanded disclosure of income tax matters. The adoption of
this standard had no effect on the Company’s financial statements.
Fair
Value Measurements
Effective
January 1, 2008, the Company adopted SFAS No. 157, ‘‘Fair Value Measurement’’
(‘‘SFAS No. 157’’), for its financial assets and liabilities that are remeasured
and reported at fair value at each reporting period, and non-financial assets
and liabilities that are re-measured and reported at fair value at least
annually. In accordance with the provisions of FSP No. FAS 157-2, ‘‘Effective
Date of FASB Statement No. 157’’, the Company has elected to defer
implementation of SFAS No. 157 as it relates to its non-financial assets and
non-financial liabilities that are recognized and disclosed at fair value in the
financial statements on a nonrecurring basis until January 1, 2009. The Company
is evaluating the impact, if any, this standard will have on its non-financial
assets and liabilities. The adoption of SFAS No. 157 to the Company’s financial
assets and liabilities and non-financial assets and liabilities that are
re-measured and reported at fair value at least annually did not have an impact
on the Company’s financial results. The Company’s assets and liabilities that
are measured at fair value on a recurring basis as of December 31, 2008, 2007,
and 2006, include cash and cash equivalents which is valued from quoted prices
in active markets (Level 1). In general, fair values determined by Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities. Fair values determined by Level 2 inputs utilize data points
that are observable such as quoted prices in markets that are not active,
interest rates and yield curves. Fair values determined by Level 3 inputs are
unobservable data points for the asset or liability, and includes situations
where there is little, if any, market activity for the asset or
liability.
16
The fair
values of the Company’s cash and cash equivalents are determined through market,
observable and corroborated sources. The carrying amounts reflected in the
consolidated balance sheets for other current assets and accrued expenses
approximate fair value due to their short-term maturities.
17
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (continued)
Earnings
Per Share
The
Company reports earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, “Earnings Per Share”. Basic earnings per share are
computed using the weighted average number of shares outstanding during the
fiscal year. Diluted earnings per share represents basic earnings per share
adjusted to include the potentially dilutive effect of outstanding stock
options.
Calculation
of the weighted average common shares outstanding during the period is based on
20,882,353 initial shares outstanding throughout the period from March 28, 2008
(time of reverse merger) to September 30, 2009. Basic net income per
share is calculated by dividing net income by the total common stock
outstanding. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. The
shares issuable upon exercise of the Warrants and
conversion of preferred stock of 9,117,647 have been excluded from the
calculation of diluted net income per share since the
company has a loss for the three and nine months ended September 30,
2009.
(Unaudited)
|
||||||||
Nine Months Ended
|
||||||||
September 30,
|
September 30,
|
|||||||
2009
(Restated)
|
2008
|
|||||||
Basic
weighted average shares outstanding
|
20,882,353
|
20,882,353
|
||||||
-
|
||||||||
Dilutive
shares:
|
||||||||
Conversion
of Series A convertible preferred stock
|
-
|
9,117,647
|
||||||
Conversion
of warrants
|
-
|
753,466
|
||||||
Diluted
weighted average shares outstanding
|
20,882,353
|
30,753,466
|
Three Months Ended
|
||||||||
September 30,
|
September 30,
|
|||||||
2009
|
2008
|
|||||||
Basic
weighted average shares outstanding
|
20,882,353
|
20,882,353
|
||||||
Dilutive
shares:
|
||||||||
Conversion
of Series A convertible preferred stock
|
-
|
9,117,647
|
||||||
Conversion
of warrants
|
-
|
1,127,457
|
||||||
Diluted
weighted average shares outstanding
|
20,882,353
|
31,127,457
|
18
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (continued)
Preferred
Stock and Warrants
On March
28, 2008 the company completed the sale of 9,117,647 units for approximately
$15,500,000. Each unit consisted of one share of our Series A preferred stock
and one Series A warrant and one Series B warrant. Each share of Series A
preferred stock is convertible into one share of common stock, subject to
certain anti-dilution provisions. Each warrant is convertible into 0.625 shares
of common stock or a total of 11,397,058 shares of common stock. The warrants
have a five year life and the Series A warrants are exercisable at an equivalent
price of $3.40 per share and the Series B are exercisable at an equivalent price
of $4.25 per share.
The
proceeds from the transaction were allocated to the warrants and preferred stock
based on the relative fair value of the securities. The value of the
Series A shares was determined by reference to the market price of the common
shares into which it converts and the gross value of the warrants was calculated
using the Black–Scholes model. (Assumption used life of 5 years, volatility of
89%, and risk free interest rate of 2.51%). The proceeds were
allocated $91,176 to the par value of the Series A preferred, $9,388,824 to
additional paid in capital – preferred series A and $6,020,000 to the
warrants. This allocation resulted in the holders of the Preferred
Series A shares receiving a beneficial conversion feature totaling $1,917,000.
This beneficial conversion feature as been accounted for as a dividend to the
holders and has been charged to retained earnings.
In
connection with the sale of the units the Company paid fees totaling
approximately $1,591,000 in the form of cash of $1,371,500 and Series A and
Series B warrants to purchase 191,250 and 153,000 shares of common stock
respectively. The warrants were valued using the Black-Scholes model using the
same assumptions as used for the warrants contained in the units.
Under
Section 8(e) of the Registration Rights Agreement dated as of March 28, 2008 by
and among the Company and certain purchasers listed on a schedule attached
thereto the Company agreed to have a registration statement registering certain
of the securities of those purchasers declared effective with the Securities and
Exchange Commission on or prior to September 24, 2008 or pay liquidated
damages.
The
registration statement has been declared effective, pursuant to a Waiver and
Release dated as of March 9 2009, the investors have waived their right to
liquidated damages for the Company’s failure to have the registration statement
declared effective on or prior to September 24, 2008. Accordingly,
there is no contingent liability we have not accrued and recorded any amount for
this in the financial statements as of September 30, 2009.
A summary
of the status of the Company’s stock warrants during the period ended September
30,2009 and year ended December 31, 2008 is presented below:
Number
of Shares
|
||||
Balance
– December 31, 2007
|
- | |||
Granted-
Warrants A
|
5,980,955 | |||
Granted-Warrants
B
|
5,924,471 | |||
Exercised
|
- | |||
Cancelled
|
- | |||
Balance
– December 31, 2008
|
11,905,426 | |||
Granted
|
- | |||
Exercised
|
- | |||
Cancelled
|
- | |||
Balance
–September 30, 2009
|
11,905,426 |
19
Effective
January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815,
“Derivatives and Hedging” (“ASC 815”) (previously EITF 07-5, “Determining
Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own
Stock”). As a result of adopting ASC 815, warrants to purchase 11,905,426 of the
Company’s common stock previously treated as equity pursuant to the derivative
treatment exemption were no longer afforded equity treatment as there was a
down-round protection (full-ratchet down round protection). As a
result, the warrants are not considered indexed to the Company’s own stock, and
as such, all future changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised
or expire.
As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in March 2008. On January 1, 2009, the
Company recorded as a cumulative effect adjustment of decreasing additional
paid-in capital of $6,020,000 and beginning retained earnings of $2,792,017 and
$8,812,017 to warrant liabilities to recognize the fair value of such warrants.
The fair value of the warrants was $53,862,655 on September 30, 2009. The
Company recognized a $45,050,638 loss from the change in fair value of warrants
for the nine months ended September 30, 2009.
The fair
value was calculated using the Black-Scholes option pricing model. The
assumptions that were used to calculate fair value as of September 30, 2009 and
December 31, 2008 were as follows:
Investor Warrants:
|
9/30/2009
|
12/31/2008
|
||||||
Expected
volatility
|
54
|
%
|
51
|
%
|
||||
Risk
free rate
|
1.66
|
%
|
1.34
|
%
|
||||
Expected
terms
|
3.49
|
4.24
|
||||||
Expected
dividend yield
|
-
|
-
|
Expected
volatility is based on average peer group volatility with comparable size and
operations. The Company did not have enough historical share trade
period and was thinly traded. The Company believes this method
produces an estimate that is representative of the Company’s expectations of
future volatility over the expected term of these warrants. The Company has no
reason to believe future volatility over the expected remaining life of these
warrants is likely to differ materially from historical volatility. The expected
life is based on the remaining term of the warrants. The risk-free interest rate
is based on U.S. Treasury securities according to the remaining term of the
warrants.
Recent
Accounting Pronouncements
In May
2009, the FASB issued new guidance on subsequent events. The standard provides
guidance on management’s assessment of subsequent events and incorporates this
guidance into accounting literature. The standard is effective prospectively for
interim and annual periods ending after June 15, 2009. The implementation
of this standard did not have a material impact on our consolidated financial
position and results of operations. In preparing these financial statements, the
Company evaluated the events and transactions that occurred from October 1,
2009 through November 13, 2009, the date these financial statements were
issued. The Company has made the required additional disclosures in reporting
periods in which subsequent events occur.
In June
2009, the FASB issued SFAS No. 167 Amendments to FASB Interpretation
No. 46(R) (SFAS No. 167). SFAS No. 167 amends FIN 46 (revised
December 2003), Consolidation of Variable Interest Entities (FIN 46R), regarding
when and how to determine, or re-determine, whether an entity is a variable
interest entity. In addition, SFAS No. 167 replaces FIN 46R’s quantitative
approach for determining who has a controlling financial interest in a variable
interest entity with a qualitative approach. Furthermore, SFAS No. 167
requires ongoing assessments of whether an entity is the primary beneficiary of
a variable interest entity. SFAS No. 167 is effective beginning
January 1, 2010. SFAS No. 167 is not expected to have a material impact on
the Company’s financial statements.
20
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (continued)
Recent
Accounting Pronouncements (continued)
In June
2009, the FASB Accounting Standards Codification (Codification) was issued. The
Codification is the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. The Codification is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The implementation of this standard did not have a
material impact on our consolidated financial position and results of
operations.
In
October 2009, the FASB issued amendments to the accounting and disclosure for
revenue recognition. These amendments, effective for fiscal years beginning on
or after June 15, 2010 (early adoption is permitted), modify the criteria
for recognizing revenue in multiple element arrangements and the scope of what
constitutes a non-software deliverable. The Company is currently assessing the
impact on its consolidated financial position and results of
operations.
NOTE
3 – Other Receivables
Details
of other receivables are as follows:
(Unaudited)
|
||||||||
September 30,
2009
|
December 31,
2008
|
|||||||
Deposits
to employee for purchases and disbursements (1)
|
$
|
1,751,250
|
$
|
1,889,291
|
||||
Coupon
sales receivables
|
307,312
|
719,317
|
||||||
Input
VAT receivables (2)
|
415,676
|
196,207
|
||||||
Loans
to unrelated companies (3)
|
158,971
|
893,435
|
||||||
Prepaid
rent
|
279,133
|
490,890
|
||||||
Rebates
receivables
|
977,583
|
-
|
||||||
Total
|
$
|
3,889,925
|
$
|
4,189,140
|
(1)
|
Deposits
to employees for purchases and disbursements are cash held by employees in
different retail shops in various cities and provinces in the PRC. They
are held for local purchases of merchandise, and held by salespersons in
shops for day to day operations. Normally, these deposits will be
recognized as costs and expenses within 3 months after the deposits are
paid.
|
(2)
|
Input
VAT arises when the Group purchases products from suppliers and the input
VAT can be deducted from output VAT on
sales.
|
(3)
|
Loans
to unrelated companies are unsecured, interest free and repayable on
demand.
|
21
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
4 – Inventories
Details
of inventories are as follows:
(Unaudited)
|
||||||||
September 30,
2009
|
December 31,
2008
|
|||||||
Merchandise
for resale
|
$
|
15,135,406
|
$
|
14,036,699
|
||||
Production
supplies
|
472,951
|
440,459
|
||||||
Low
value consumables
|
6,361
|
67,183
|
||||||
Total
|
$
|
15,614,718
|
$
|
14,544,341
|
At
September 30, 2009 and December 31, 2008, the net book value of inventories that
are carried at net realizable value amounted to $67,006 and $20,090
respectively. Obsolete inventories written-off for the nine months ended
September 30, 2009 and 2008 were nil and nil respectively.
NOTE
5 – Property, Plant and Equipment, net
Details
of property, plant and equipment, net are as follows:
(Unaudited)
|
||||||||
September 30,
2009
|
December 31,
2008
|
|||||||
Buildings
|
$
|
6,256,715
|
$
|
6,241,563
|
||||
Shop
equipment
|
10,491,361
|
8,498,599
|
||||||
Office
equipment
|
1,066,742
|
834,563
|
||||||
Motor
vehicles
|
749,188
|
562,876
|
||||||
Car
park
|
18,837
|
18,791
|
||||||
Leasehold
improvements
|
5,787,540
|
3,736,509
|
||||||
24,370,383
|
19,892,901
|
|||||||
Less
accumulated depreciation
|
(8,547,397
|
)
|
(6,932,598
|
)
|
||||
Total
|
$
|
15,822,986
|
$
|
12,960,303
|
Depreciation
expense included in the selling expenses for the nine months ended September 30,
2009 and 2008 were $1,759,303 and $1,237,832, respectively, also included in the
general and administrative expenses for the nine months ended September 30, 2009
and 2008 were $109,819 and $62,536 respectively.
As of
September 30, 2009 and December 31, 2008, buildings with net book value of nil
and $4,538,407 respectively of the Company were pledged as collateral under loan
arrangements.
22
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
6 – Intangible Assets, net
Details
of intangible assets, net are as follows:
(Unaudited)
|
||||||||
September 30,
2009
|
December 31,
2008
|
|||||||
Goodwill
|
$
|
19,222,986
|
$
|
18,878,823
|
||||
Lease
prepayments
|
859,178
|
857,097
|
||||||
20,082,164
|
19,735,920
|
|||||||
Less
accumulated amortization
|
(101,408
|
)
|
(80,838
|
)
|
||||
Total
|
$
|
19,980,756
|
$
|
19,655,082
|
During
the year 2008, the Company acquired a number of businesses in various locations
of China through the purchases of assets and the operating rights from unrelated
parties. Goodwill represents the excess of the cost of the purchases over the
fair value of the net acquired identifiable assets at the date of
acquisition.
Lease
prepayments represent the prepaid land use rights. The land on which the Group’s
retail stores, distribution centres and office are located is owned by the PRC
government.
Amortization
expenses for the above lease prepayments were approximately $20,359 and $24,026
for the nine months ended September 30, 2009 and 2008 respectively. Estimated
amortization expense for the next five years is approximately $27,146 each
year.
As of
September 30, 2009 and December 31, 2008, lease prepayments with net book value
of nil and $621,191 respectively of the Group were pledged as collateral under
certain loan arrangements.
NOTE
7 – Short-term Bank Loans
Details
of short-term bank loans are as follows:
(Unaudited)
|
||||||||
September 30,
2009
|
December 31,
2008
|
|||||||
Loans
from Daqing City Commercial bank, interest at 7.425% per annum, due on May
22, 2009
|
$
|
-
|
$
|
2,188,439
|
||||
Total
|
$
|
-
|
$
|
2,188,439
|
As of
September 30, 2009 and December 31, 2008, buildings with net book value of nil
and $4,538,407, respectively, and lease prepayments with net book value of nil
and $621,191, respectively, of the Group were pledged as collateral for the
above loan arrangements. These loans were primarily obtained for general working
capital.
Interest
expenses for the loans were $20,800 and $170,675 respectively for the nine
months ended September 30, 2009 and 2008.
23
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
8 – Accrued expenses and other payable
Details
of other payables are as follows:
(Unaudited)
|
|
|||||||
September 30,
2009
|
December 31,
2008
|
|||||||
Repair,
maintenance, and purchase of equipment payable
|
$
|
669,490
|
$
|
1,034,993
|
||||
Staff
and promoters bond deposits
|
2,137,276
|
441,672
|
||||||
Other
PRC taxes payable
|
178,993
|
203,443
|
||||||
Accrued
expenses
|
1,320,638
|
681,969
|
||||||
$ |
4,306,397
|
$ |
2,362,077
|
NOTE
9 – Income taxes
The
Company, being registered in the State of Delaware and which conducts all of its
business through its subsidiaries incorporated in PRC, is not subject to any
U.S. income tax. The subsidiaries are Speedy Brilliant (BVI), Speedy Brilliant
(Daqing), Qingkelong Chain, Qinglongxin Commerce, Speedy Brilliant (Daqing),
Qingkelong Chain, and Qinglongxin Commerce, being registered in the PRC, are
subject to PRC’s Enterprise Income Tax. Under applicable income tax laws and
regulations, an enterprise located in PRC, including the district where our
operations are located, is subject to a 25% Enterprise Income Tax
(“EIT”).
A
reconciliation between the income taxes computed at the U.S. statutory rate and
the rate of Group’s provision for income taxes is as follows:
(Unaudited)
Nine Months Ended
|
||||||||
September 30,
2009
|
September 30
2008
|
|||||||
U.S.
statutory rate
|
|
34
|
%
|
|
34
|
%
|
||
Foreign
income not recognized in the U.S. PRC EIT
|
(34
|
)%
|
(34
|
)%
|
||||
PRC
EIT
|
25
|
%
|
25
|
%
|
||||
Total
|
|
25
|
%
|
|
25
|
%
|
The PRC
EIT rate was 25% for the years ended September 30, 2009 and 2008, respectively.
Income before income taxes excluding changes in fair value of warrants of
$11,281,424 and $6,999,665 for the nine months ended September 30, 2009 and
2008, respectively, was attributed to subsidiaries with operations in China.
Income taxes related to China income for the nine months ended September 30,
2009 and 2008 are $2,986,599 and $2,343,631 respectively. No deferred tax has
been provided as there are no material temporary differences arising during the
nine months ended September 30, 2009 and 2008.
24
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
10 – Segment Information
The
Company is principally engaged in the operation of retail chain store which are
located in the PRC. Nearly all identifiable assets of the Company are located in
the PRC. All revenues are derived from customers in the PRC. Accordingly, no
analysis of the Company’s sales and assets by geographical market is
presented.
For the
nine months ended September 30, 2009 and 2008, the Company’s net sales from
external customers for products and services are as follows:
(Unaudited)
Nine Months Ended
|
||||||||
September 30,
2009
|
September 30,
2008
|
|||||||
Sale
of general merchandise
|
$
|
172,301,378
|
$
|
87,880,021
|
||||
Rental
income
|
2,434,934
|
1,836,230
|
||||||
Other
income
|
1,115,741
|
620,653
|
||||||
Total
|
$
|
175,852,053
|
$
|
90,336,904
|
For the
nine months ended September 30, 2009 and 2008, the Company’s net revenues from
external customers for sale of general merchandise by categories of product are
as follows:
(Unaudited)
Nine Months Ended
|
||||||||
September 30,
2009
|
September 30,
2008
|
|||||||
Grocery
|
$
|
57,984,298
|
$
|
30,388,376
|
||||
Fresh
food
|
81,225,234
|
42,754,767
|
||||||
Non-food
|
33,091,846
|
14,736,878
|
||||||
Total
|
$
|
172,301,378
|
$
|
87,880,021
|
NOTE
11 - COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company has entered into tenancy agreements for retail stores expiring through
2021. Total rental expenses for nine months ended September 30, 2009 and 2008
amounted to $1,411,310 and $804,984 respectively. Rent expense related to the
operating lease was $382,064and $248,169 for the three months ended September
30, 2009 and 2008, respectively.
As at
September 30, 2009, the Company’s commitments for minimum lease payments under
these leases for the next five years and thereafter are as follows: $2,096,238
(2010), $1,998,115 (2011), $1,959,537 (2012), $1,804,128 (2013), and $11,689,213
(thereafter), total of $19,547,231.
Litigation
The
Company is not involved in legal proceedings and claims .
25
QKL
STORES INC.
Notes
to Unaudited Condensed Financial Statements
NOTE
12 – SUBSEQUENT EVENTS
In May
2009, the FASB issued new guidance on subsequent events. The standard provides
guidance on management’s assessment of subsequent events and incorporates this
guidance into accounting literature. The standard is effective prospectively for
interim and annual periods ending after June 15, 2009. The implementation
of this standard did not have a material impact on our consolidated financial
position and results of operations. In preparing these financial statements, the
Company evaluated the events and transactions that occurred from October 1,
2009 through November 16, 2009, the date these financial statements were
issued. The Company has made the required additional disclosures in reporting
periods in which subsequent events occur.
The
Company amended Series A and Series B warrant agreements deleting or amending
the down-round protection (full-ratchet down round protection) provision on
March 30, 2010. As a result of this amendment, the Company will no
longer required to treat Series A and Series B warrants as a liability and will
be reclassified to equity subsequently.
26
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Forward
Looking Statements
This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon beliefs of, and information currently available to, the Company’s
management as well as estimates and assumptions made by Company’s management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof.
When used in the filings, the words “anticipate”, “believe”, “estimate”,
“expect”, “future”, “intend”, “plan”, or the negative of these terms and similar
expressions as they relate to the Company or the Company’s management identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors, including the risks contained in the “Risk
Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 filed with the Securities and Exchange Commission,
relating to the Company’s industry, the Company’s operations and results of
operations, and any businesses that the Company may acquire. Should one or more
of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ significantly from those
anticipated, believed, estimated, expected, intended, or planned.
Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking statements to conform these statements to
actual results.
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application.
There are also areas in which management’s judgment in selecting any available
alternative would not produce a materially different result. The following
discussion should be read in conjunction with our consolidated financial
statements and notes thereto appearing elsewhere in this report.
Overview
We are a
regional supermarket chain that currently operates 31 supermarkets and 2
department stores in northeastern China and Inner Mongolia. Our supermarkets
sell a broad selection of merchandise including groceries, fresh food and
non-food items. We currently have one distribution center servicing our
supermarkets.
We
believe that we are the only supermarket chain in northeastern China and Inner
Mongolia that is a licensee of the International Grocers Alliance, or IGA, a
United States-based global grocery network with aggregate retail sales of more
than $21.0 billion per year. As a licensee of IGA, we are able to engage in
group bargaining with suppliers and have access to more than 2,000 private IGA
brands, including many that are exclusive IGA brands.
27
Our
expansion strategy emphasizes growth through geographic expansion in
northeastern China and Inner Mongolia, where we believe local populations can
support profitable supermarket operations, and where we believe competition from
large foreign and national supermarket chains, which generally have resources
far greater than ours, is limited. Our strategies for profitable
operations include buy-side initiatives to reduce supply costs; focusing on
merchandise with higher margins, such as foods we prepare ourselves and private
label merchandise; and increasing reliance on the benefits of membership in the
international trade group IGA.
We
completed the initial steps in the execution of our expansion plan in March
2008, when we raised financing through the combination of our reverse merger and
private placement. Under that plan, we opened four new stores in 2009 that have,
in the aggregate, approximately 20,000 square meters of space and 10 new stores
in 2008 that have, in the aggregate, approximately 50,000 square meters of
space. Six stores opened in 2008 were opened by us and four of the new stores
were opened through the acquisition of existing businesses by us. We plan to
open three additional supermarkets in 2009 that will have, in the aggregate,
approximately 17,300 square meters of space and one additional distribution
center that will have approximately 19,600 square meters of space. In 2010, we
plan to open hypermarkets, as well as additional supermarkets and department
stores having, in the aggregate, approximately 120,000 square meters of space.
We are also making improvements to our logistics and information systems to
support our supermarkets. We expect to finance our expansion plan from funds
generated from operations, bank loans and proceeds from this
offering.
Our
Operations in China
Our
headquarters and all of our stores are located in the provinces of northeastern
China and Inner Mongolia. The economy of northeastern China has grown rapidly
over the last four to five years and we believe that the national government is
committed to enhancing economic growth in the region. In December 2007, a
major economic-development plan for northeastern China, the “Plan for
Revitalizing Northeast China,” was announced by an office of the
national government’s State Council.
Based on
our own research, we believe there are approximately 200 to 300 small and
medium-sized cities in northeast China without modern supermarket chains. We
believe the number of supermarket customers and the demand for supermarkets in
these cities are likely to grow significantly over the next several years as the
region continues to experience urbanization.
Our
Strategy for Growth and Profitability
Our
strategic plan includes two principal components: expanding by
opening stores in new strategic locations, and improving profitability by
increasing the percentage of our sales attributable to private label
merchandise.
28
Expanded
Operations
As of
September 30, 2009, we operated 31 supermarkets, 2 department stores and one
distribution center. Under our expansion plan, in the second quarter of 2009, we
opened three new stores that have, in the aggregate, approximately 16,000
square meters of space. Two of these stores were opened by us and the other
one was opened through an acquisition. We opened one store with 4,000 on
September 30, 2009. We plan to open three additional supermarkets in 2009,
which will have, in the aggregate, approximately 17,300 square meters of space
and one additional distribution center that will have approximately 19,600
square meters of space. In 2010, we plan to open hypermarkets, as well as
additional supermarkets and department stores having, in the aggregate,
approximately 120,000 square meters of retail space. Some of the stores
will be opened by us and others will be opened by acquisition. We are also
making improvements to our logistics and information systems to support our
supermarkets. We expect to finance our expansion plan from funds generated from
operations, bank loans and proceeds from our pending public equity offering.
Based on our previous experience, we believe it takes approximately three
months for a new store to achieve profitability.
Private
Label Merchandise
Sales of
private label merchandise accounted for approximately 5% of our total revenues
for the nine months of 2009 (compared to 3% for the first nine months of 2008).
Sales of private label merchandise accounted for approximately 3% of our total
revenues for 2008 (up from 1% in the prior year). In June 2008, we
established a specialized department for designing and purchasing private label
merchandise. Six full-time employees currently work in this department. We
plan to increase the proportion of private label merchandise sold over the next
several quarters. Our goal is to increase private label sales to 20% of our
total revenues in the near future.
Principal
Factors Affecting Our Results
The
following factors have had, and we expect they will continue to have, a
significant effect on our business, financial condition and results of
operations.
Seasonality: Our
business is subject to seasonality, with increased sales in the first quarter
and fourth quarter, due to increases in shopping and consumer activity as a
result of the holidays such as New Year (January 1), Chinese Lunar New
Year (January or February), the Dragon Festival (February 2), Women’s
Holiday (March 8), the end of the school year (March 1), National Day
(October 1), Mid-Autumn Festival (September or October) and Christmas (December
25).
Timing of New Store
Openings. Growth through new store openings is a fundamental part of
our strategy. Our new stores typically operate at a loss for approximately
three months due to start-up inventory and other costs, promotional discounts
and other marketing costs and strategies associated with new store openings,
rental expenses and costs related to hiring and training new
employees. Our operating results, and in particular our gross margin,
have and will continue to vary based in part on the pace of our new store
openings.
Locations for new stores.
Good commercial space that meets our standards, in locations that meet our
needs, may be scarce in some of the cities we wish to enter. One option for
entering certain target markets within our intended timeframe may be to
begin operations in a location that is not optimal and wait for an
opportunity to move to a better location. Alternatively, we may seek to
enter into a target market through acquisitions. As such, the timing and
costs associated with entry into new markets can be difficult to
predict. Identifying and pursuing opportunities will be a
resource-intensive challenge, and if we do not perform or if actual costs of
entering new markets exceed our expectations, our total revenues, cash
flows, and liquidity could suffer.
29
Logistics of geographic
expansion. Opening additional stores in cities further from our
headquarters in Daqing will mean that the transportation of our supplies and
personnel among our stores will become more difficult and subject to disruption.
To alleviate this, we plan to expand our distribution capabilities by opening a
second distribution center in the fourth quarter of 2009. We started using
our regional purchasing systems in 2008. All fresh food is ordered by
individual stores based on their needs from local vendors designated by our
headquarters or regional purchasing department and is delivered directly by the
local vendors to individual stores. A portion of our non-perishable food and
non-food items are distributed from our distribution center to our
different stores, and the remaining portion is purchased by our regional
purchasing department or headquarters and delivered directly to individual
stores. Long-distance transportation for both food and non-food items from our
distribution center to our stores can be challenging in the winter as the
roads can be covered with snow. As we expand in territories further from
our existing or planned distribution facilities, the costs of delivering food
and merchandise may become less /predictable and more volatile.
Human resources. In our
experience, it takes approximately three months to train new employees to
operate a new store. Training and supervision is organized by experienced
teachers in our training school. The management team for a new store is
hired first and is trained in our training school, where they learn our culture
and operations. Employees are hired afterwards, and are trained by both our
teachers and the management team. In addition, the management team and the
employees are sent to existing stores to get practical training from the
employees and management team members in those stores. Eventually, local
employees must learn to perform the training and supervisory roles themselves.
If we do not perform well in response to these challenges, our operating
costs will rise and our margins will fall.
Shortages of trained staff in our
new locations. Opening stores in locations with little or no competition
from other large supermarkets is a major part of our strategy. However,
there are disadvantages to this approach, which relate to human resources. Where
competitors operate supermarkets nearby, their trained staff is a potential
source for our own human resources needs, especially if we offer a superior
compensation package. Cities that have no large supermarkets also have no
sources of trained employees. Although we believe we have a good training
school, from time to time we have to send experienced management team members
from our headquarters or other stores to new stores to provide assistance. This
increases our cost of operating and decreases our
gross margin.
30
Results
of Operations
The
results of the interim periods are not necessarily indicative of results for the
entire fiscal year.
Three
months ended September 30, 2009 compared with three months ended September 30,
2008
Three Months Ended
September 30, 2009
|
Three Months Ended
September 30, 2008
|
|||||||||||||||
Net
sales
|
$ | 57,078,873 | 100.0 | $ | 31,582,422 | 100.0 | ||||||||||
Cost
of sales
|
46,607,907 | 81.7 | 23,788,325 | 75.3 | ||||||||||||
Gross
profit
|
10,470,966 | 18.3 | 7,794,097 | 24.7 | ||||||||||||
Selling
expenses
|
6,348,030 | 11.1 | 3,945,824 | 12.5 | ||||||||||||
General
and administrative expense
|
1,051,608 | 1.8 | 647,002 | 2.0 | ||||||||||||
Income
from operation
|
3,071,328 | 5.4 | 3,201,271 | 10.1 | ||||||||||||
Changs
in fair value of warrants
|
(31,612,218 | ) | (55.4 | ) | - | - | ||||||||||
Interest
income
|
35,342 | 0.1 | 89,683 | 0.3 | ||||||||||||
Interest
expenses
|
(4 | ) | (0.0 | ) | (41,533 | ) | (0.1 | ) | ||||||||
Income
(Loss)before income taxes
|
(28,505,552 | ) | (49.9 | ) | 3,249,421 | 10.3 | ||||||||||
Income
taxes
|
829,840 | 1.5 | 824,344 | 2.6 | ||||||||||||
Net
income(loss)
|
$ | (29,335,392 | ) | (51.4 | )% | $ | 2,425,077 | 7.7 | % |
Revenues
Total revenues
consist of retail sales revenue ( 97.7% and 96.8% of total revenues in the
three months ended September 30, 2009 and 2008, respectively), and
other total revenues ( 2.3% and 3.2% of total revenues in the three
months ended September 30, 2009 and 2008, respectively). Other total
revenues come from rental income from leasing spaces in our supermarkets
(approximately $813,039 and $734,857 in the three months ended September 30,
2009 and 2008, respectively), and is more fully described
below. Total revenues for the three month ended September 30, 2009
were approximately $57.1 million, an increase of $ 25.5 million, or 80.7%,
compared with total revenues of approximately $31.6 million for the three
months ended September 30, 2008. The increase in total revenues is due
primarily to the opening of new stores and an increase in sales volume due to
sales growth in stores that have been in existence for more than one
year. The stores that have been operating for more than one year attracted
more customers, and therefore generated more revenue in 2009 than in 2008 as
they benefited from more than 12 months’ operating experience and became better
established in their communities over time.
Retail
Sales Revenue
Retail
sales revenue for the three months ended September 30, 2009 was approximately
$55.8 million, representing an increase of $25.2 million, or 82.5%, from
approximately $30.6 million for the three months ended September 30,
2008. Approximately $20.8 million, or 82.4% of the increase in retail sales
revenue was attributable to 12 new stores that opened after July 1, 2008.
Approximately $4.4 million, or 17.6% of the increase was attributable to an
increase in comparable store sales. Comparable stores are stores that were
open for at least one year before the beginning of the comparison period, or, in
this case, by July 1, 2008. The 19 comparable stores generated
approximately $30.3 million in retail sales revenue in the three months ended
September 30, 2009.
31
Other
Operating Income
The
portion of our total revenues that is not retail sales revenue (2.3% and
3.2% in the three months ended September 30, 2009 and 2008, respectively) is
other operating income. Other operating income for the three months ended
September 30, 2009 was approximately $1.3 million, representing an increase of
$0.3 million, or 23.1%, compared with $1.0 million for the three months ended
September 30, 2008.
The main
components of other operating income is income from renters. Income
from renters was approximately $813,039 in the three months ended September 30,
2009, representing an increase of $78,182, or 10.6%, from $734,857 in the three
months ended September 30, 2008. The increase is due primarily to the rents we
charge to lessees in the new stores we opened after January 1, 2008. The
increase accounts for approximately 28.4% of the total increase in other
operating income. Our renters are sellers operating small shops between the
front doors and the cash registers in our supermarkets.
Income
from suppliers came from the following sources:
|
·
|
Fees
paid to us in connection with administration and management fees ($87,053
in the three months ended September 30, 2009 and $28,926 in the three
months ended September 30, 2008). This increase was due to an increase in
sales volume and did not have a significant effect on our financial
results. These fees include fees for merchandise administration and
related management activity.
|
|
·
|
Savings
relating to transportation ($102,080 in the three months ended September
30, 2009 and $83,017 in the three months ended September 30,
2008). Savings relating to transportation include amounts that
our suppliers pay to us when our own transportation team handles the
transportation of supplies for which the suppliers are typically
responsible. We record transportation income when it is
received.
|
We
anticipate that our total revenues will continue to increase over the next
several quarters as we implement our expansion plan, open new stores and
increase the volume of merchandise we sell.
Gross
Profit
Gross
profit, or total revenues minus cost of sales, was approximately $10.5 million
for the three months ended September 30, 2009, representing an increase of $2.7
million, or 34.3%, from approximately $7.8 million for the three months ended
September 30, 2008. This increase was due primarily to increased sales
volume, which resulted from the opening of new stores and an increase in
comparable store sales.
Our gross
profit as a percentage of total revenues, or “gross margin,” decreased to 18.3%
for the three months ended September 30, 2009 from 24.7 % for the three months
ended September 30, 2008. This decrease in gross margin is due to an
increase in promotional price reductions incurred as part of our competitive
strategy. We believe that our gross margin is likely to be between 18.0%
and 20.0%, over the next few business quarters. The main reason for the
expected decline is that our expansion plan calls for us to open a large number
of new stores. New stores tend to be less profitable during their early months
of operation. In addition, China’s retail industry in general, and its
supermarket industry in particular, are becoming more competitive every year. In
this competitive marketplace, it is likely that we will focus on providing our
customers with low prices in order to increase our market share and long-term
sales volume.
Selling
Expenses
Selling
expenses, which principally include promotional, marketing and advertising
expenses, and also include rental payments, were approximately $6.3 million for
the three months ended September 30, 2009 representing an increase of $2.4
million, or 60.9 %, from approximately $3.9 million for the three months ended
September 30, 2008. This increase was due primarily to the increase of new labor
cost, utilities, depreciation and rent due to the new stores opened during the
past year. We anticipate that marketing expenses will continue to increase over
the next several quarters as we implement our expansion plan, open new stores,
increase our sales volumes and increase our advertising
activities.
32
Selling
expenses as a percentage of net sales was 11.1% for the three months ended
September 30, 2009, decreased 1.4% compared to 12.5% for the three months ended
September 30, 2008, due to the fact that net sales increased commensurately with
the increase in selling expenses.
General
and Administrative Expenses
General
and administrative expenses, which include salaries, rents and general overhead,
were approximately $1.1 million for the three months ended September 30, 2009,
representing an increase of $0.4 million, or 62.5%, from approximately $0.6
million for the three months ended September 30, 2008. The increase was due
primarily to salaries we paid the new employees we recruited to staff our
headquarter and manage our growing business in the three months ended September
30, 2009.
As a
percentage of total revenues, general and administrative expenses decreased
to 1.8% for the three months ended September 30, 2009 from 2.0% for the three
months ended September 30, 2008. This decrease generally indicates that our
sales increased more than we spent on the salaries, rents and overhead we used
to generate each dollar of revenue in the three months ended September 30,
2009.
We
anticipate that our general and administrative expenses, measured in terms of
dollars, will grow over the next few business quarters. We believe
that general and administrative expense as a percentage of total revenues
will remain at the same level as we implement our expansion plan and open new
stores, restructure our management to meet the requirements of an expanding
enterprise, and make considerable investments in assessing, improving and
modifying our reporting, compliance, internal-control and corporate-governance
systems as is appropriate for a United States public company.
Changes
in fair value of warrants
For the
three months ended September 30,2009, we incurred a non-cash expense of $31.6
million related the Company’s issuance of warrants in March 2008 pursuant to
provision of FAB ASC Topic815,”Derivative and Hedging”(“ASC815”).The accounting
treatment of the warrants resulted from a provision providing anti-dilution
protection to the warrant holders. The warrant holders have permanently waived
the “down-round” protection from the warrants as of March
30,2010. Therefore, we believe that the non-cash charges affecting
net income will not be applied after December 31,2009.See note 12”Subsequent
events”.
Interest
Expense
Interest
expense for the three months ended September 30, 2009 was $4, decreasing from
$41,533 for the three months ended September 30, 2008. We paid off an
outstanding loan during the first quarter of 2009.
33
Income
Taxes
Provision
for income taxes was $829,840 for the three months ended September 30, 2009,
compared to $824,344 for the three months ended September 30, 2008. Our
income tax rate was reduced from 33% to 25% effective January 1, 2008, due to
changes in PRC tax laws. We do not expect further reductions in our income
tax rate.
Nine
months ended September 30, 2009 compared with Nine months ended September 30,
2008
(Unaudited
- Restated)
|
Unaudited
|
|||||||||||||||
Nine Months Ended
September 30, 2009
|
Nine Months Ended
September 30, 2008
|
|||||||||||||||
Net
sales
|
$ | 175,852,053 | 100.0 | $ | 90,336,904 | 100.0 | ||||||||||
Cost
of sales
|
143,096,587 | 81.4 | 69,080,122 | 76.5 | ||||||||||||
Gross
profit
|
32,755,466 | 18.6 | 21,256,782 | 23.5 | ||||||||||||
Selling
expenses
|
18,424,432 | 10.5 | 10,280,984 | 11.4 | ||||||||||||
General
and administrative expense
|
3,217,258 | 1.8 | 2,025,131 | 2.2 | ||||||||||||
Income
from operation
|
11,113,776 | 6.3 | 8,950,667 | 9.9 | ||||||||||||
Other
expense
|
- | - | (1,976,470 | ) | (2.2 | ) | ||||||||||
Changes
in fair value of warrants
|
(45,050,638 | ) | (25.6 | ) | - | - | ||||||||||
Interest
income
|
188,448 | 0.1 | 196,143 | 0.2 | ||||||||||||
Interest
expenses
|
(20,800 | ) | (0.0 | ) | (170,675 | ) | (0.2 | ) | ||||||||
Income
(Loss)before income taxes
|
(33,769,214 | ) | (19.2 | ) | 6,999,665 | 7.7 | ||||||||||
Income
taxes
|
2,986,599 | 1.7 | 2,343,631 | 2.6 | ||||||||||||
Net
income(Loss)
|
$ | (36,755,813 | ) | (20.9 | ) % | $ | 4,656,034 | 5.2 | % |
Revenues
Total revenues
consist of retail sales revenue (98.0% and 97.3% of total revenues in the
first nine months of 2009 and 2008, respectively), and other total revenues
(2.0% and 2.7% of total revenues in the first nine months of 2009 and 2008,
respectively). Other total revenues come from rental income from
leasing spaces in our supermarkets (approximately $2.4 million in the first nine
months of 2009 and $1.8 million in the first nine months of 2008), and is more
fully described below. Total revenues for the nine months ended
September 30, 2009 were approximately $175.9 million, an increase of $85.5
million, or 94.7%, compared with total revenues of approximately $90.3
million for the nine months ended September 30, 2008. The increase
in total revenues is due primarily to the opening of new stores and an
increase in sales volume due to sales growth in stores that have been in
existence for more than one year. The stores that have been operating for
more than one year attracted more customers, and therefore generated more
revenue in 2009 than in 2008 as they benefited from more than 12 months’
operating experience and became better established in their communities over
time.
Retail
Sales Revenue
Retail
sales revenue for the nine months ended September 30, 2009 was approximately
$172.3 million, representing an increase of $84.4 million, or 96.1%, from
approximately $87.9 million for the nine months ended September 30,
2008. Approximately $63.4 million, or 75.2% of the increase in retail sales
revenue was attributable to 12 new stores that opened after July 1, 2008.
Approximately $21.0 million, or 24.8% of the increase was attributable to an
increase in comparable store sales. Comparable stores are stores that were
open for at least one year before the beginning of the comparison period, or, in
this case, by July 1, 2008. The 19 comparable stores generated
approximately $106.2 million in retail sales revenue in the first nine months of
2009.
34
Other
Operating Income
The
portion of our total revenues that is not retail sales revenue (2.0% in the
first nine months of 2009; 2.7% in the first nine months of 2008) is other
operating income. Other operating income for the first nine months of 2009 was
approximately $3.6 million, representing an increase of $1.1 million, or 44.5%,
compared with approximately $2.5 million for the first nine months of
2008.
The main
components of other operating income are:
Income from renters. Income
from renters was approximately $2.4 million in the first nine months of 2009,
representing an increase of $0.6 million, or 32.6%, from approximately $1.8
million in the first nine months of 2008. The increase is due primarily to the
rents we charge to lessees in the new stores we opened after July 1, 2008. The
increase accounts for approximately 54.7% of the total increase in other
operating income. Our renters are sellers operating small shops between the
front doors and the cash registers in our supermarkets.
Income
from suppliers came from the following sources:
|
·
|
Fees
paid to us in connection with administration and management fees ($185,095
in the first nine months of 2009 and $83,497 in the first nine months of
2008). This increase was due to an increase in sales volume and did not
have a significant effect on our financial results. These fees include
fees for merchandise administration and related management
activity.
|
|
·
|
Savings
relating to transportation ($387,067 in the first nine months of 2009 and
$248,660 in the first nine months of 2008). Savings relating to
transportation include amounts that our suppliers pay to us when our own
transportation team handles the transportation of supplies for which the
suppliers are typically responsible. We record transportation income when
it is received.
|
We
anticipate that our total revenues will continue to increase over the next
several quarters as we implement our expansion plan, open new stores and
increase the volume of merchandise we sell.
Gross
Profit
Gross
profit, or total revenues minus cost of sales, was approximately
$32.8 million for the first nine months of 2009, representing an increase
of $11.5 million, or 54.1%, from approximately $21.3 million for the first nine
months of 2008. This increase was due primarily to increased sales volume,
which resulted from the opening of new stores and an increase in comparable
store sales.
Our gross
profit as a percentage of total revenues, or “gross margin,” decreased to 18.6%
for the first nine months of 2009 from 23.5% for the first nine months of
2008. This decrease in gross margin is due to an increase in promotional
price reductions incurred as part of our competitive strategy. We believe
that our gross margin is likely to be between 18.0% and 20.0%, over the next few
business quarters. The main reason for the expected decline is that our
expansion plan calls for us to open a large number of new stores. New stores
tend to be less profitable during their early months of operation. In
addition, China’s retail industry in general, and its supermarket industry in
particular, are becoming more competitive every year. In this competitive
marketplace, it is likely that we will focus on providing our customers with low
prices in order to increase our market share and long-term sales
volume.
35
Selling
Expenses
Selling
expenses, which principally include promotional, marketing and advertising
expenses, and also include rental payments, were approximately $18.4 million for
the first nine months of 2009, representing an increase of $8.1 million, or
79.2%, from approximately $10.3 million for the first nine months of 2008. This
increase was due primarily to marketing expenses relating to promotional and
marketing events during the first nine months of 2009, especially for the New
Year and Chinese New Year holidays, the Labor Day and the National Day. We
anticipate that marketing expenses will continue to increase over the next
several quarters as we implement our expansion plan, open new stores, increase
our sales volumes and increase our advertising activities.
Selling
expenses as a percentage of net sales decreased to 10.5% for the first nine
months of 2009, compared to 11.4% for the first nine months of 2008, due to the
fact that net sales increased faster than selling expenses.
General
and Administrative Expenses
General
and administrative expenses, which include salaries for headquarter management
team and employees, rents and general overhead, were approximately $3.2 million
for the first nine months of 2009, representing an increase of $1.2 million, or
58.9%, from approximately $2.0 million for the first nine months of 2008. The
increase was due primarily to salaries we paid the new employees we recruited to
build up our management team to an international standard in the first nine
months of 2009.
As a
percentage of total revenues, general and administrative expenses decreased
to 1.8% for the first nine months of 2009 from 2.2% for the first nine months of
2008. This decrease generally indicates that our sales increased more than we
spent on the salaries, rents and overhead we used to generate each dollar of
revenue in the first nine months of 2009.
We
anticipate that our general and administrative expenses, measured in terms of
dollars, will grow over the next few business quarters. We believe
that general and administrative expense as a percentage of total revenues
will remain at the same level as we implement our expansion plan and open new
stores, restructure our management to meet the requirements of an expanding
enterprise, and make considerable investments in assessing, improving and
modifying our reporting, compliance, internal-control and corporate-governance
systems as is appropriate for a United States public company.
Other
Expenses
On March
28, 2008, we expensed all $ 2.0 million of the transaction costs of our reverse
merger and recapitalization transactions. These transaction costs include
legal and investment banking fees, and stock issuance fees. The accounting
treatment is in line with the SEC staff view on reverse acquisitions that
an operating company’s reverse acquisition of a non-operating company having
some cash be viewed as the issuance of equity by the accounting acquirer for the
cash of the shell company, and therefore transaction costs may be charged
directly to equity only to the extent of the cash received, while all costs in
excess of cash received should be charged to expenses. The amount of cash held
by the non-operating company at the time the reverse merger was consummated was
immaterial.
Changes
in fair value of warrants
For the
nine months ended September 30,2009, we incurred a non-cash expense of $45.0
million related to the Company’s issuance of warrants in March 2008 pursuant to
provision of FAB ASC Topic 815,”Derivative and Hedging”(“ASC815”).The accounting
treatment of the warrants resulted from a provision providing anti-dilution
protection to the warrant holders. The warrant holders have
permanently waived the “down-round” protection from the warrants as of March
30,2010.Therefore, we believe that the non-cash charges affecting net income
will not be applied after December 31,2009.See note 12”Subsequent
events”.
Interest
Expense
Interest
expense for the first nine months of 2009 was $20,800, representing a decrease
of $149,875, or 87.8%, from $170,675 for the first nine months of 2008. In
the first nine month of 2009 we paid down our short-term borrowings with cash
from operations and proceeds from the private placement completed on March
28, 2008.
36
Income
Taxes
Provision
for income taxes was approximately $3.0 million for the first nine months of
2009, compared to $2.3 million for the first nine months of 2008. Our
income tax rate was reduced from 33% to 25% effective January 1, 2008, due to
changes in PRC tax laws. We do not expect further reductions in our income
tax rate.
Liquidity
and Capital Resources
We
generally finance our business with cash flows from operations and short-term
bank loans. The large-scale capital expenditures relating to our current
expansion plan was funded by the private placement that closed March 28, 2008
and funds from operations.
Our
working capital requirement consists mainly of inventory, salaries, operating
overhead (including auxiliary materials and utilities) and finance expenses.
Inventory accounts for the majority of our working capital. Our working capital
requirements may be influenced by many factors, including cash flow,
competition, our relationships with suppliers, and the availability of credit
facilities and financing alternatives, none of which can be predicted with
certainty. We have a revolving credit facility of 37 million RMB (approximately
$5.4 million) with Daqing City Commercial Bank.
Our 2008
expansion activities were financed primarily by the $13.5 million of net
proceeds we received from the private placement that closed on March 28, 2008.
In addition, the purchase price for the stores acquired during 2008 were funded
in part with funds from operations. In the first nine months of 2009, we opened
four stores and six stores were under construction. This was funded with funds
from the net proceeds we received from the private placement, bank loans and
from funds from operations. We plan to open three additional supermarkets in
2009 that will have, in the aggregate, approximately 17,300 square meters of
space and one additional distribution center that will have approximately 19,600
square meters of space. We are also making improvements to our logistics and
information systems to support our supermarkets and department stores. We expect
to finance our expansion plan from funds generated from operations, bank loans
and proceeds from future equity offerings. If we are unable to obtain financing
needed in the future on a timely basis and with acceptable terms, we will not be
able to fully implement our expansion plan. In such a situation, our ability to
expand would be entirely dependent on funds generated from operations and our
financial position, competitive condition, growth and profitability may be
adversely affected.
We
regularly review our cash funding requirements and attempt to meet those
requirements through a combination of cash on hand, cash provided by operations
and available borrowings under bank lines of credit.
Cash
from Operating Activities
First
Nine Months of 2009 Compared With First Nine Months of 2008
Net cash
generated from operating activities for the first nine months of 2009 was
approximately $15.2 million, representing an increase of $4.8 million, or 46.2%,
from approximately $10.4 million for the first nine months of 2008. The increase
was due primarily to the $3.6 million increase in net income and the increase in
accounts payable that resulted from having more favorable payment terms with
suppliers and the cash card payments we received from customers within the first
nine months of 2009.
37
Analysis
and Expectations
Our net
cash from operating activities fluctuates significantly due to changes in our
accounts payable, cash card and coupon liabilities and other receivables such as
those described just above. Other factors that may vary significantly include
the amounts of other payables, advances to suppliers and prepayments of general
expenses and our income taxes.
Looking
forward, as we implement our expansion plan over the next several quarters, we
expect the net cash we generate from operating activities to continue to
fluctuate as our inventories, other receivables, accounts payables and the other
factors described above, change with the opening and operation of new stores.
These fluctuations could cause net cash from operating activities to fall, even
if, as we expect, our net income grows as we expand. Although we expect that net
cash from operating activities will rise over the long term, we cannot predict
how these fluctuations will affect our cash flows in any particular
quarter.
Cash
from Investing Activities
First
Nine Months of 2009 Compared With First Nine Months of 2008
Net cash
used in investing activities for the first nine months of 2009 was approximately
$4.1 million, an increase of $2.2 million from approximately $1.9 million for
the first nine months of 2008. Nearly all of this cash was used for plant and
equipment expenses.
Analysis
and Expectations
Our net
cash used in investing activities can fluctuate significantly due to changes in
our plant and equipment expenses for new stores and the amounts of our lease
prepayments. Our investing activities are likely to consume greater amounts of
our cash over the next several quarters as our opening of new stores (whether
through acquisitions or organically) causes our plant and equipment expenses to
increase. This consumption of cash will be offset by our efforts, to the extent
we are successful, to obtain additional financing.
Cash
from Financing Activities
First
Nine Months of 2009 Compared With First Nine Months of 2008
Net cash
used by financing activities for the first nine months of 2009 was approximately
$2.2 million, which was solely the result of paying back bank loans. Net cash
provided by financing activities for the first nine months of 2008 was
approximately $12.6 million, which was the result of our raising net proceeds of
$13.5 million from the private placement transaction, which closed on March 28,
2008, partially offset by our repayment of $2.8 million of bank debt in the
first half of 2008.
Loans. We had no
outstanding short-term bank loans on September 30, 2009, compared with $2.2
million as of September 30, 2008. As we expand over the next several quarters,
we anticipate that our working capital needs will increase, and we may need to
increase our short-term bank borrowing.
As of
September 30, 2009, we had a credit line of up to RMB 37 million (approximately
$5.4 million). We believe that this credit line is sufficient for our working
capital needs over the next several quarters.
38
Analysis
and Expectations
The
proceeds of the private placement that closed March 28, 2008 caused our cash
provided by financing activities in 2008 to be high. If our expansion proceeds
as we expect in 2009, our cash provided by financing activities in 2009 will
increase significantly in comparison to the cash provided by financing
activities in 2008. If we are unable to expand as we expect in 2009 and do not
raise significant outside financing through our pending public offering, our
bank loan repayments could cause our financing activities to use cash as opposed
to generating cash.
Future
Cash Commitments
Under our
expansion plan, in 2009, we opened four new stores that have, in the aggregate,
approximately 20,000 square meters of space and, in 2008, we opened 10 new
stores which have, in the aggregate, approximately 50,000 square meters of
space. Six of the stores opened in 2008 were opened by us and four of the stores
were opened through the acquisition of existing businesses by us. Under our
expansion plan, we plan to open three additional supermarkets in 2009 that will
have, in the aggregate, approximately 17,300 square meters of space and one
additional distribution center that will have approximately 19,600 square meters
of space. In 2010, we plan to open hypermarkets and additional supermarkets and
department stores having, in the aggregate, approximately 120,000 square meters
of space. We are also making improvements to our logistics and information
systems to support our supermarkets. We expect to finance our expansion plan
from funds generated from operations, bank loans and proceeds from our pending
public offering.
As of
September 30, 2009, we had cash and cash equivalents equal to approximately
$26.7 million, a decrease of $6.5 million or 19.6%, compared to $33.2 million as
of September 30, 2008. The decrease is primarily due to net proceeds of
approximately $15.5 million that we received from our private placement
transaction in the first quarter of 2008, while we did not complete any
financing yet in 2009.
Off-balance
sheet arrangements
We have
no off-balance sheet arrangements, and there are no such arrangements that have
or are likely to have a current or future effect on our financial
condition.
Recently
Issued Accounting Guidance
See Note
2 to Interim Financial Statements included in Part I, Item 1,
Financial Statements, of this Quarterly Report on Form 10-Q.
39
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As a
smaller reporting company, the Company is not required to make disclosures under
this Item 3.
ITEM
4T. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
As
required by Rule 13a-15 under the Exchange Act, in connection with the filing of
this Quarterly Report on Form 10-Q, our management, including our chief
executive officer and chief financial officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2009
and based upon that evaluation, our chief executive officer and chief financial
officer concluded that the Company’s disclosure controls and procedures were
effective.
Changes
in Internal Controls over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the three months ended September 30, 2009, that has materially affected,
or is reasonably likely to materially affect our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
None.
ITEM
1A. RISK FACTORS
As a
smaller reporting company, the Company is not required to make disclosures under
this Item 1A.
ITEM
2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM
5. OTHER INFORMATION.
None.
40
ITEM
6: EXHIBITS
(a)
Exhibits
31.1 -
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 -
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 -
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 -
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
41
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.
QKL
STORES INC.
|
||
Date:
May 17, 2010
|
By:
|
/s/ Zhuangyi Wang
|
Zhuangyi
Wang
|
||
Chief
Executive Officer
(principal
executive officer)
|
||
Date:
May 17, 2010
|
By:
|
/s/ Crystal Chen
|
Crystal
Chen
|
||
Chief
Financial Officer
(principal
financial officer and accounting
officer)
|
42