x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
Delaware
|
75-2180652
|
|
(State
or other jurisdiction of incorporation)
|
I.R.S.
Employer Identification
Number
|
Large accelerated filer
|
o
|
Accelerated filer
|
o
|
|
Non-accelerated filer
|
o
|
(Do not check if a smaller reporting company)
|
Smaller reporting company
|
x
|
Page
|
|||
PART I
|
FINANCIAL INFORMATION
|
1
|
|
Item 1.
|
Financial Statements
|
1
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
30
|
|
Item 4.
|
Controls and Procedures
|
43
|
|
PART II
|
OTHER INFORMATION
|
44
|
|
Item 6.
|
Exhibits
|
44
|
|
Signatures
|
45
|
||
Exhibits/Certifications
|
|
Notes
|
March 31,
2009
|
December
31, 2008
|
|||||||||
|
(Unaudited)
|
(Audited)
|
||||||||||
ASSETS
|
||||||||||||
Current
assets
|
||||||||||||
Cash
and cash equivalents
|
$
|
22,626,709
|
$
|
19,285,021
|
||||||||
Pledged
deposits
|
3
|
230,350
|
293,149
|
|||||||||
Trade
receivables
|
-
|
793,352
|
||||||||||
Other
receivables
|
4
|
3,827,883
|
4,189,140
|
|||||||||
Prepaid
expenses
|
2,042,966
|
1,862,591
|
||||||||||
Advances
to suppliers
|
2,894,422
|
3,342,756
|
||||||||||
Inventories
and consumables
|
5
|
13,028,787
|
14,544,341
|
|||||||||
Total
current assets
|
$
|
44,651,117
|
$
|
44,310,350
|
||||||||
Property,
plant and equipment, net
|
6
|
14,019,536
|
12,960,303
|
|||||||||
Intangible
assets, net
|
7
|
770,451
|
776,259
|
|||||||||
Goodwill
|
7
|
19,200,521
|
18,878,823
|
|||||||||
Long
term prepayment
|
8
|
768,766
|
787,741
|
|||||||||
TOTAL
ASSETS
|
$
|
79,410,391
|
$
|
77,713,476
|
||||||||
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
||||||||||||
Current
liabilities
|
||||||||||||
Short-term
bank loans
|
9
|
$
|
-
|
$
|
2,188,439
|
|||||||
Accounts
payable
|
21,928,761
|
21,283,818
|
||||||||||
Cash
card and coupon liabilities
|
4,358,166
|
3,858,514
|
||||||||||
Deposits
received
|
1,445,411
|
2,901,205
|
||||||||||
Accruals
|
718,565
|
681,969
|
||||||||||
Other
PRC taxes payable
|
322,123
|
203,443
|
||||||||||
Other
payables
|
10
|
1,274,422
|
1,476,665
|
|||||||||
Income
taxes payable
|
1,469,150
|
1,252,336
|
||||||||||
Total
current liabilities
|
$
|
31,516,598
|
$
|
33,846,389
|
||||||||
TOTAL
LIABILITIES
|
$
|
31,516,598
|
$
|
33,846,389
|
||||||||
Commitments
and contingencies
|
15
|
$
|
-
|
$
|
-
|
Note
|
March 31,
2009
|
December
31, 2008
|
||||||||||
(Unaudited)
|
(Audited)
|
|||||||||||
STOCKHOLDERS’
EQUITY
|
||||||||||||
Common stock, par value
$0.001, 100,000,000
shares authorized, 20,882,353 shares issued
and outstanding at
March 31, 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 March 31, 2009 and December 31,
2008
|
16 | 91,176 | 91,176 | |||||||||
Additional
paid-in capital
|
21,783,477 | 21,783,477 | ||||||||||
Statutory
reserves
|
3,908,247 | 3,908,247 | ||||||||||
Retained
earnings
|
17,878,687 | 14,204,169 | ||||||||||
Accumulated
other comprehensive
|
||||||||||||
Income
|
4,211,324 | 3,859,136 | ||||||||||
$ | 47,893,793 | $ | 43,867,087 | |||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
$ | 79,410,391 | $ | 77,713,476 |
|
Three months ended March
31,
|
|||||||||||
Notes
|
2009
|
2008
|
||||||||||
Net
revenues
|
||||||||||||
Direct
sales
|
$
|
66,105,519
|
$
|
32,352,709
|
||||||||
Other
operating income
|
12
|
1,121,885
|
1,536,790
|
|||||||||
$
|
67,227,404
|
$
|
33,889,499
|
|||||||||
Cost
of inventories sold
|
(54,836,837
|
)
|
(26,382,060
|
)
|
||||||||
Gross
profit
|
$
|
12,390,567
|
$
|
7,507,439
|
||||||||
Selling
expenses
|
(5,810,144
|
)
|
(2,962,974
|
)
|
||||||||
General
and administrative expenses
|
(1,479,598
|
)
|
(485,642
|
)
|
||||||||
Income
from operation
|
$
|
5,100,825
|
$
|
4,058,823
|
||||||||
Other
expenses
|
-
|
(5,751
|
)
|
|||||||||
Interest
income
|
63,670
|
24,707
|
||||||||||
Interest
expenses
|
(20,786
|
)
|
(72,759
|
)
|
||||||||
Income
before income taxes
|
$
|
5,143,709
|
$
|
4,005,020
|
||||||||
Income
taxes
|
13
|
(1,469,191
|
)
|
(1,025,825
|
)
|
|||||||
Net
income
|
$
|
3,674,518
|
$
|
2,979,195
|
||||||||
Basic
earnings per share
|
11
|
$
|
0.18
|
$
|
0.14
|
|||||||
Diluted
earnings per share
|
11
|
$
|
0.12
|
$
|
0.12
|
|||||||
Basic
weighted average share outstanding
|
11
|
20,882,353
|
20,882,353
|
|||||||||
Diluted
weighted average share outstanding
|
11
|
30,000,000
|
25,441,177
|
Series A convertible
|
Accumulated
|
|||||||||||||||||||||||||||||||||||
Common stock
|
preferred stock
|
Additional
|
other
|
|||||||||||||||||||||||||||||||||
No. of
|
No. of
|
paid-in
|
Statutory
|
Retained
|
comprehensive
|
|||||||||||||||||||||||||||||||
share
|
Amount
|
share
|
Amount
|
capital
|
reserves
|
earnings
|
income
|
Total
|
||||||||||||||||||||||||||||
Balance,
January 1, 2008
|
19,082,299 | $ | 19,082 | - | $ | - | $ | 4,457,653 | $ | 2,703,742 | $ | 9,179,694 | $ | 1,424,772 | $ | 17,784,943 | ||||||||||||||||||||
Net
income
|
- | - | - | - | - | - | 8,997,068 | - | 8,997,068 | |||||||||||||||||||||||||||
Reverse
acquisition
|
1,500,055 | 1,500 | - | - | - | - | (851,088 | ) | - | (849,588 | ) | |||||||||||||||||||||||||
Appropriations
to statutory reserves
|
- | - | - | - | - | 1,204,505 | (1,204,505 | ) | - | - | ||||||||||||||||||||||||||
Shares
issued for services
|
299,999 | 300 | - | - | - | - | - | - | 300 | |||||||||||||||||||||||||||
Issuance
of Series A convertible preferred stock
|
- | - | 9,117,647 | 91,176 | 17,325,824 | - | (1,917,000 | ) | - | 15,500,000 | ||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | - | - | 2,434,364 | 2,434,364 | |||||||||||||||||||||||||||
Balance,
December 31, 2008
|
20,882,353 | $ | 20,882 | 9,117,647 | $ | 91,176 | $ | 21,783,477 | $ | 3,908,247 | $ | 14,204,169 | $ | 3,859,136 | $ | 43,867,087 | ||||||||||||||||||||
Balance,
January 1, 2009
|
20,882,353 | $ | 20,882 | 9,117,647 | $ | 91,176 | $ | 21,783,477 | $ | 3,908,247 | $ | 14,204,169 | $ | 3,859,136 | $ | 43,867,087 | ||||||||||||||||||||
Net
income
|
- | - | - | - | - | - | 3,674,518 | - | 3,674,518 | |||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | - | - | 352,188 | 352,188 | |||||||||||||||||||||||||||
Balance,
March 31, 2009
|
20,882,353 | $ | 20,882 | 9,117,647 | $ | 91,176 | $ | 21,783,477 | $ | 3,908,247 | $ | 17,878,687 | $ | 4,211,324 | $ | 47,893,793 |
Three months ended March
31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$
|
3,674,518
|
$
|
2,979,195
|
||||
Depreciation
|
569,605
|
425,317
|
||||||
Amortization
|
6,782
|
1,580
|
||||||
Loss
on disposal of plant and equipment
|
-
|
5,751
|
||||||
Adjustments to
reconcile net income to net cash
provided by operating activities:
|
||||||||
Other
receivables
|
1,160,701
|
(99,190
|
)
|
|||||
Inventories
and consumables
|
1,533,604
|
(848,870
|
)
|
|||||
Advances
to suppliers
|
452,468
|
56,803
|
||||||
Prepaid
expenses
|
(158,048
|
)
|
250,818
|
|||||
Accounts
payable
|
618,116
|
2,399,996
|
||||||
Cash
card and coupon liabilities
|
494,734
|
664,566
|
||||||
Deposits
received
|
(1,459,228
|
)
|
(870,719
|
)
|
||||
Accruals
|
35,802
|
45,230
|
||||||
Other
PRC taxes payable
|
118,406
|
51,351
|
||||||
Other
payables
|
(251,723
|
)
|
(175,196
|
)
|
||||
Income
taxes payable
|
215,210
|
643,697
|
||||||
Net
cash provided by operating activities
|
$
|
7,010,947
|
$
|
5,530,329
|
||||
Cash
flows from investing activities
|
||||||||
Purchase
of plant and equipment
|
$
|
(1,612,406
|
)
|
$
|
(353,422
|
)
|
||
Payment
of lease prepayments
|
-
|
(10,949
|
)
|
|||||
Decrease
in pledged deposits
|
62,799
|
-
|
||||||
Net
cash used in investing activities
|
$
|
(1,549,607
|
)
|
$
|
(364,371
|
)
|
|
Three months ended March
31,
|
|||||||
2009
|
2008
|
|||||||
Cash
flows from financing activities
|
||||||||
Issuance
of Series A convertible preferred stock
|
$
|
-
|
$
|
13,539,921
|
||||
Bank
loan repayments
|
(2,190,872
|
)
|
(1,393,596
|
)
|
||||
Net
cash (used in)/provided by financing
activities
|
$
|
(2,190,872
|
)
|
$
|
12,146,325
|
|||
Net
cash and cash equivalents sourced
|
$
|
3,270,468
|
$
|
17,312,283
|
||||
Effect
of foreign currency translation on cash and cash
equivalents
|
71,220
|
528,977
|
||||||
Cash
and cash equivalents–beginning of year
|
19,285,021
|
10,742,064
|
||||||
Cash
and cash equivalents–end of year
|
$
|
22,626,709
|
$
|
28,583,324
|
Supplementary
cash flow information:
|
||||||||
Interest
paid
|
$
|
20,786
|
$
|
72,759
|
||||
Tax
paid
|
1,220,800
|
382,127
|
(a)
|
Method
of accounting
|
(b)
|
Principles
of consolidation
|
(b)
|
Principles
of consolidation (Continued)
|
Name of Subsidiary
|
Place & date of
Incorporation
|
Equity
Interest
Attributable
to the
Company
(%)
|
Registered
Capital
($)
|
Registered Capital
(RMB)
|
||||||||||
Speedy
Brilliant Group Ltd.
(“Speedy
Brilliant (BVI)”)
|
BVI/February
23, 2007
|
100 | $ | 50,000 | - | |||||||||
Speedy
Brilliant (Daqing) Ltd.
“Speedy
Brilliant (Daqing)” or “WFOE”
|
PRC/August
1, 2007
|
100 | $ | 13,000,000 | RMB | 101,453,542 |
(b)
|
Principles
of consolidation (Continued)
|
Name of Variable Interest Entity
|
Place & date of
incorporation
|
Equity
interest
attributable
to the
Company
(%)
|
Registered
capital ($)
|
Registered capital
(RMB)
|
||||||||||
Daqing
Qingkelong Chain
Commerce
& Trade Co., Ltd
|
PRC/November
2, 1998
|
100 | $ | 15,363,774 | RMB | 113,800,000 | ||||||||
Daqing
Qinglongxin
Commerce
& Trade Co., Ltd.
|
PRC/July
10, 2006
|
100 | $ | 62,642 | RMB | 500,000 |
(c)
|
Use
of estimates
|
(d)
|
Economic
and political risks
|
(e)
|
Inventories
and consumables
|
(f)
|
Property,
plant and equipment
|
Buildings
|
30-40
years
|
Motor
vehicles
|
8
years
|
Shop
equipment
|
6
years
|
Car
park
|
43
years
|
Office
equipment
|
5
years
|
Leasehold
improvements
|
5
years
|
(g)
|
Maintenance
and repairs
|
(h)
|
Lease
prepayments
|
(i)
|
Goodwill
|
QKL
STORES INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
|
(Stated
in US Dollars)(Unaudited)
|
(j)
|
Accounting
for the impairment of long-lived
assets
|
(k)
|
Foreign currency
translation
|
|
March 31,
2009
|
December
31, 2008
|
March 31,
2008
|
|||||||||
Twelve
months ended
|
||||||||||||
RMB
: USD exchange rate
|
-
|
6.8542
|
-
|
|||||||||
Three
months ended
|
||||||||||||
RMB
: USD exchange rate
|
6.8456
|
-
|
7.0222
|
|||||||||
Average
three months ended
|
||||||||||||
RMB
: USD exchange rate
|
6.8466
|
-
|
7.1757
|
(l)
|
Cash
card and coupon liabilities
|
(m)
|
Cash
and cash equivalents
|
(n)
|
Revenue
recognition
|
(m)
|
Revenue
recognition (Continued)
|
(n)
|
Suppliers
and consignees
|
(o)
|
Leases
|
(p)
|
Advertising
|
(q)
|
Income
taxes
|
(r)
|
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.
|
(s)
|
Cash
and concentration of risk
|
(t)
|
Statutory
reserves
|
(i)
|
Making
up cumulative prior years’ losses, if any;
|
(ii)
|
Allocations
to the “Statutory surplus reserve” of at least 10% of income after tax, as
determined under PRC accounting rules and regulations, until the fund
amounts to 50% of the Company's registered capital, which is restricted
for set off against losses, expansion of production and operation or
increase in registered capital; and
|
(iii)
|
Allocations
to the discretionary surplus reserve, if approved in the shareholders’
general meeting.
|
(u)
|
Segment
|
(v)
|
Comprehensive
income
|
(w)
|
Recent
accounting pronouncements
|
|
March 31,
2009
|
December
31,
2008
|
||||||
Deposits
to employee for purchases and disbursements
(1)
|
$
|
923,390
|
$
|
1,889,291
|
||||
Coupon
sales receivables
|
586,471
|
719,317
|
||||||
Input
VAT receivables (2)
|
391,257
|
196,207
|
||||||
Loans
to unrelated companies (3)
|
643,617
|
893,435
|
||||||
Prepaid
rent
|
407,436
|
490,890
|
||||||
Rebate
receivables
|
875,712
|
-
|
||||||
$
|
3,827,883
|
$
|
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.
|
|
March 31,
2009
|
December
31,
2008
|
||||||
Merchandise
for resale
|
$
|
12,503,166
|
$
|
14,036,699
|
||||
Production
supplies
|
514,759
|
440,459
|
||||||
Low
value consumables
|
10,862
|
67,183
|
||||||
$
|
13,028,787
|
$
|
14,544,341
|
|
March 31,
2009
|
December
31,
2008
|
||||||
At
cost
|
||||||||
Buildings
|
$
|
6,249,404
|
$
|
6,241,563
|
||||
Shop
equipment
|
9,781,305
|
8,498,599
|
||||||
Office
equipment
|
881,783
|
834,563
|
||||||
Motor
vehicles
|
940,037
|
562,876
|
||||||
Car
park
|
18,815
|
18,791
|
||||||
Leasehold
improvements
|
3,589,484
|
3,736,509
|
||||||
$
|
21,460,828
|
$
|
19,892,901
|
|||||
Less:
accumulated depreciation
|
(7,441,292
|
)
|
(6,932,598
|
)
|
||||
$
|
14,019,536
|
$
|
12,960,303
|
|
March 31,
2009
|
December
31,
2008
|
||||||
Intangible
assets, gross
|
||||||||
Goodwill
|
$
|
19,200,521
|
$
|
18,878,823
|
||||
Lease
prepayments
|
858,174
|
857,097
|
||||||
$
|
20,058,695
|
$
|
19,735,920
|
|||||
Accumulated
amortization
|
(87,723
|
)
|
(80,838
|
)
|
||||
$
|
19,970,972
|
$
|
19,655,082
|
|
March 31,
2009
|
December
31,
2008
|
||||||
Loans
from Daqing City Commercial
Bank, interest rate
at 7.425% per
annum, due on May
22, 2009
|
$
|
-
|
$
|
2,188,439
|
||||
$
|
-
|
$
|
2,188,439
|
|
March 31,
2009
|
December
31,
2008
|
||||||
Repair,
maintenance, and purchase of equipment
payables
|
$
|
835,992
|
$
|
1,034,993
|
||||
Staff
and promoters bond deposits
|
438,430
|
441,672
|
||||||
$
|
1,274,422
|
$
|
1,476,665
|
For the three months ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
Earnings:
|
||||||||
Earnings
for the purpose of basic earnings per share
|
$
|
3,674,518
|
$
|
2,979,195
|
||||
Effect
of dilutive potential common stock
|
-
|
-
|
||||||
Earnings
for the purpose of dilutive earnings per
share
|
$
|
3,674,518
|
$
|
2,979,195
|
Number
of shares:
|
||||||||
Weighted
average number of common stock for the purpose of basic earnings
per share
|
20,882,353
|
20,882,353
|
||||||
Effect
of dilutive potential common stock
|
||||||||
–
conversion of Series A
|
||||||||
convertible
preferred stock
|
9,117,647
|
4,558,824
|
||||||
Weighted
average number of common stock
for the purpose of dilutive earnings per
share
|
30,000,000
|
25,441,177
|
For the three months ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
Rental
income from leasing of shop premises
|
$
|
801,230
|
$
|
500,754
|
||||
Income
from suppliers and consigners
|
||||||||
- Administration and management
fee
|
39,685
|
8,307
|
||||||
- Promotion
|
-
|
78,464
|
||||||
- Sponsorship
|
7,011
|
796,406
|
||||||
- Transportation
|
157,141
|
84,529
|
||||||
Gain
on sales of consumables to third parties
|
45,870
|
24,070
|
||||||
Training
income
|
7,138
|
-
|
||||||
Equipment
rental income
|
26,559
|
-
|
||||||
Rebate
|
5,042
|
-
|
||||||
Others
|
32,209
|
44,260
|
||||||
$
|
1,121,885
|
$
|
1,536,790
|
(a)
|
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 income tax. The subsidiaries are Speedy Brilliant (BVI),
Speedy Brilliant (Daqing), Qingkelong Chain, Qingkelong Commerce. (see
note 1).
|
For the three months
ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
U.S.
statutory rate
|
34 | % | 34 | % | ||||
Foreign
income not recognized in the U.S.
|
(34 | )% | (34 | )% | ||||
PRC
EIT
|
25 | % | 25 | % | ||||
Provision
for income taxes
|
25 | % | 25 | % |
(b)
|
The
PRC EIT rate was 25% for the years ended March 31, 2009 and 2008,
respectively.
|
(c)
|
No
deferred tax has been provided as there are no material temporary
differences arising during the three months ended March 31, 2009 and
2008.
|
Three
months ended March 31,
|
||||
2010
|
$
|
1,827,158
|
||
2011
|
1,717,416
|
|||
2012
|
1,668,150
|
|||
2013
|
1,521,645
|
|||
2014
and thereafter
|
8,837,548
|
|||
$
|
15,571,917
|
|
For the three months
ended
March 31,
|
|||||||
2009
|
2008
|
|||||||
Sale
of general merchandise
|
$
|
66,105,519
|
$
|
32,352,709
|
||||
Rental
income
|
801,230
|
500,754
|
||||||
Other
income
|
320,655
|
1,036,036
|
||||||
Total
|
$
|
67,227,404
|
$
|
33,889,499
|
|
For the three months
ended
March 31,
|
|||||||
2009
|
2008
|
|||||||
Grocery
|
$
|
23,426,472
|
$
|
11,655,995
|
||||
Fresh
food
|
31,417,802
|
16,106,765
|
||||||
Non-food
|
11,261,245
|
4,589,949
|
||||||
Total
|
$
|
66,105,519
|
$
|
32,352,709
|
·
|
performance
of a new store is dependent on its
location;
|
·
|
there
are some existing supermarkets and traditional stores in some of the
cities we are planning to enter;
|
·
|
some
residents are used to shopping at traditional/farmer markets and may be
reluctant to shop in supermarket such as ours;
and
|
·
|
we
need approximately 3 months to train new staff for our new
stores.
|
·
|
Locations for new
stores. Good commercial space that meets our standards, in
locations that meet our needs, may become less available in some of the
cities we wish to enter. Our only option for entering some
target markets within our intended timeframe may be to begin operations in
a location that we are not very satisfied with, including by taking over
operations of existing supermarket stores, and then waiting for an
opportunity to move to a better location. Alternatively we may seek to
enter into a target market through acquisitions. Keeping track
of and taking advantage of all the available opportunities will be a
resource-intensive challenge, and if we do not perform well our revenues,
cash flows, and liquidity will all
suffer.
|
·
|
Logistics of geographic
expansion. Opening more stores in more cities further from our
headquarters in Daqing will mean that transportation of our supplies and
our personnel among our stores will become more difficult and subject to
breakdown. To alleviate this we plan to open a second
distribution center during 2009. We intend to keep using our
current distribution center. We started using our regional
purchasing systems in 2008. All fresh food is ordered by
individual stores from vendors designated by our headquarters or regional
purchasing department in our system and is delivered directly from vendors
to individual stores as ordered based on their needs. Part of our food and
non-food items are distributed from our distribution center to our
different stores, the other part 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 for
several days in the winter as the roads can be covered with snow. If we do
not plan ahead of time and perform well in response to these challenges,
our operating costs will rise and our margins will
fall.
|
·
|
Human resources. In our
experience, we require approximately three months to train new employees
to operate a new store. Training and supervision is organized by teachers
in our training school within our company. The management
team for a new store is hired first and are trained in our training school
regarding 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 employees and management team 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.
|
·
|
Disadvantages of lack of
competition. Opening stores in locations with little or no
competition from other large supermarkets is a major part of our strategy
because of the advantages we believe it brings, but there are also
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 headquarters or other stores to new stores to
help from time to time. This increases our cost of operating, and
decreases our margin at the beginning of the store
opening.
|
·
|
Financing. As of the
date of this report, we believe the U.S. capital markets are facing many
difficulties. Potential sources of additional financing for us may be
unwilling or unable to provide us with the additional financing we need to
fully carry out our expansion plans. Finding additional financing could be
a major challenge. If we are unable to obtain additional financing, we
will have to rely solely on available funds from operations to fund our
expansion and may not be able to carry out fully our expansion plans and
will not benefit from the increased revenue that growth is intended to
bring.
|
Three months ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
Net
revenues
|
||||||||
Direct
sales
|
$
|
66,105,519
|
$
|
32,352,709
|
||||
Other
operating income
|
1,121,885
|
1,536,790
|
||||||
$
|
67,227,404
|
$
|
33,889,499
|
|||||
Cost
of inventories sold
|
(54,836,837
|
)
|
(26,382,060
|
)
|
||||
Gross
profit
|
$
|
12,390,567
|
$
|
7,507,439
|
||||
Selling
expenses
|
(5,810,144
|
)
|
(2,962,974
|
)
|
||||
General
and Administrative expenses
|
(1,479,598
|
)
|
(485,642
|
)
|
||||
Operating
income
|
5,100,825
|
4,058,823
|
||||||
Other
expenses
|
-
|
(5,751)
|
||||||
Interest
income
|
63,670
|
24,707
|
||||||
Interest
expenses
|
(20,786
|
)
|
(72,759
|
)
|
||||
Income
before income taxes
|
$
|
5,143,709
|
$
|
4,005,020
|
||||
Income
taxes
|
(1,469,191
|
)
|
(1,025,825
|
)
|
||||
Net
income
|
$
|
3,674,518
|
$
|
2,979,195
|
Number
of supermarkets stores open and operating as of January 1,
2009
|
28
|
|||
Number
of supermarkets stores open and operating as of March 31,
2009
|
28
|
|||
Number
of supermarkets opened during three months period ended March
31, 2009
|
0
|
Number
of department stores open as of January 1, 2009
|
2
|
|||
Number
of department stores open as of March 31, 2009
|
2
|
|||
Number
of department stores opened during three months period ended
March 31, 2009
|
0
|
·
|
Income
from renters. This income was approximately $801,230 in the
first quarter of 2009, representing an increase of $300,476, or 60%, from
$500,754 in the first quarter of 2008. The increase is due primarily to
the additional rental space we have in the stores we opened during 2008.
Our renters operate small shops in space in our supermarkets located
between the front doors and the cash
registers.
|
·
|
Income
from suppliers and concessionaires. This income was
approximately $320,655 for the first quarter of 2009, representing a
decrease of $715,381 or 69.0%, from approximately $ 1,036,036 for the
first quarter of 2008. The decrease accounts for approximately
45.8% of the total decrease in other operating income. Our suppliers are
the vendors that sell us the goods we sell in our stores. Our
concessionaires are sellers who sell their own merchandise, usually cooked
foods, in space we provide within the main selling area of our
supermarkets. Our concessionaires pay us a percentage of their sales as a
concession fee and pay us separate amounts for advertising and promotional
services.
|
·
|
Fees
paid to us in connection with merchandise administration and management
services we provide to vendors (approximately $39,685 in the first quarter
of 2009 and $8,307 in the first quarter of 2008). This increase was due to
our increase in volume of sales, and did not have significant effects on
our financial results. These fees include primarily fees for merchandise
administration and related management activity.
|
|
·
|
Savings
relating to transportation were approximately $157,141 in the first
quarter of 2009 and $84,529 in the first quarter of 2008. Savings relating
to transportation include amounts that our suppliers pay to us when our
own transportation team handles the transportation of supplies for which
the suppliers are responsible. We record transportation income when it is
received.
|
Q1 09
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Net
income ($)
|
3,674,518 | 8,997,068 | 5,782,391 | 4,984,603 | 3,391,529 | |||||||||||||||
Total
net revenue ($)
|
67,227,404 | 161,481,353 | 92,372,812 | 74,666,336 | 53,724,865 | |||||||||||||||
Net
profit margin
|
5.46 | % | 5.57 | % | 6.26 | % | 6.68 | % | 6.31 | % |
2009 1Q
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Net
cash from operating activities ($)
|
7,010,947
|
18,661,267
|
5,417,099
|
7,436,834
|
2,762,282
|
2009 1Q
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Net
cash used in investing activities ($)
|
1,549,607
|
24,528,810
|
1,427,839
|
6,982,556
|
238,047
|
Buildings
|
30-40 years
|
Shop
equipment
|
6 years
|
Office
equipment
|
5 years
|
Motor
vehicles
|
8 years
|
Car
Park
|
43 years
|
Leasehold
Improvements
|
5 years
|
|
·
|
On
September 30, 2008 we entered into an agreement with Daqing Xinguangtiandi
Shopping Center Co., Ltd. to acquire from them all of the
business and assets of a supermarket store located in the Xinguangtiandi
shopping center in Daqing. The assets included the lease, the
inventory and all licenses held. The transfer was completed on
December 12, 2008. The Xinguangtiandi store occupies
approximately 3,700 square meters in a commercial shopping center in
Daqing. The purchase price of RMB 13.80 million (approximately
U.S. $2.0196 million) was paid in two installments: a deposit of RMB
100,000 (approximately U.S. $14,635) was paid prior to October 15, 2008
and the remaining balance was paid on December 2, 2008, the date of the
completion of the transfer of the Seller’s assets and the relevant
registration procedures regarding the change of the ownership with the
Bureau of Industry and Commerce.
|
|
·
|
On
October 31, 2008 we entered into an agreement with Hulunbeier Huahui
Department Store Co., Ltd. to acquire from them all of the
business and assets of a supermarket store located in
Hailar. The assets included the lease, the inventory and all
licenses held. The transfer was completed on October 31,
2008. The Hailar store occupies approximately 7,600 square
meters in the commercial center in Hailar. The purchase price
of RMB 66 million (approximately U.S. $9.659 million) was paid
in two installments: a deposit of RMB 300,000 (approximately U.S. $43,904)
was paid prior to November 15, 2008 and the remaining balance was paid on
December 5, 2008, the date of the completion of the transfer of the
Seller’s assets and the relevant registration procedures regarding the
change of the ownership with the Bureau of Industry and
Commerce.
|
|
·
|
On
August 31, 2008 we entered into an agreement with Heilongjiang Longmei
Commerce Co., Ltd. to acquire from them all of the business and assets of
a supermarket store located in Anda. The assets included the lease, the
inventory and all licenses held. The transfer of the assets occurred on
August 31, 2008. The Anda store occupies approximately 2,490
square meters in the largest commercial center in Anda. The
purchase price of RMB 22.74 million (approximately U.S. $3.33 million),
was paid in two installments: a deposit of RMB 100,000 (approximately U.S.
$14,635) was paid prior to September 15, 2008 and the remaining balance
was paid on October 8, 2008 the date of the completion of the transfer of
the Seller’s assets and the relevant registration procedures regarding the
change of the ownership with the Bureau of Industry and
Commerce.
|
|
·
|
On
October 31, 2008 we entered into an agreement with Fuyu County Xinshuguang
Real Estate Development Co., Ltd. to acquire from them all of the business
and assets of a supermarket store located in Fuyu. The assets
included the lease, the inventory and all licenses held. The
transfer occurred on October 31, 2008. The Fuyu store occupies
approximately 2,700 square meters in the commercial center in Fuyu. The
purchase price of RMB 17.40 million (approximately U.S. $2.546 million)
was paid in two installments: a deposit of RMB 300,000 (approximately U.S.
$43,904) was paid on October 31, 2008 and the remaining balance was paid
on November 13, 2008 the date of the completion of the transfer of the
Seller’s assets and the relevant registration procedures regarding the
change of the ownership with the Bureau of Industry and
Commerce.
|
|
·
|
On
September 30, 2008 we entered into an agreement with Nehe City Wanlong
Commercial Building Co., Ltd, to acquire from them all of the
business and assets of a supermarket store located in Nehe. The
tranfer of the assets occurred on September 30, 2008. The
assets included the lease, the inventory and all licenses
held. The Nehe store occupies approximately 2,800 square meters
of leased space in the commercial center in Nehe. The purchase
price of RMB 16.80 million (approximately U.S. $2.4587 million) was paid
in two installments: a deposit of RMB 100,000 (approximately U.S. $14,635)
was paid prior to October 15, 2008 and the remaining balance was paid on
December 15, 2008 the date of the completion of the transfer of the
seller’s assets and the relevant registration procedures regarding the
change of the ownership with the Bureau of Industry and
Commerce.
|
QKL
STORES INC.
|
||
|
|
|
Date:
July 21 2009
|
By:
|
/s/ Zhuangyi Wang
|
Zhuangyi
Wang
|
||
Chief
Executive Officer
(principal
executive officer)
|
||
Date:
July 21, 2009
|
By:
|
/s/ Crystal Chen
|
Crystal
Chen
|
||
Chief
Financial Officer
(principal
financial officer and accounting
officer)
|