UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
S | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2012.
or
£ | 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 001-34998
QKL STORES INC.
(Exact name of registrant as specified in its charter)
Delaware | 75-2180652 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
4 Nanreyuan Street
Dongfeng Road
Sartu District
Daqing, P.R. China 163311
(Address of Principal Executive Offices including zip code)
011-86-459-4607987
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 x 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 if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller reporting company x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
Yes o No x
The Registrant had 31,581,179 shares of common stock outstanding on May 11, 2012.
QKL STORES, INC.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION | 1 | |
Item 1 – Interim Financial Statements | 1 | |
Condensed Consolidated Balance Sheets | 1 | |
Condensed Consolidated Statements of Income | 2 | |
Condensed Consolidated Statements of Cash Flows | 3 | |
Notes to Unaudited Condensed Consolidated Financial Statements | 4 | |
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | |
Item 3 – Quantitative and Qualitative Disclosures about Market Risk | 18 | |
Item 4 – Controls and Procedures | 18 | |
PART II: OTHER INFORMATION | 19 | |
Item 1 – Legal Proceedings | 19 | |
Item 1A – Risk Factors | 19 | |
Item 2 – Unregistered Sales of Equity Securities and Use Of Proceeds | 19 | |
Item 3 – Defaults Upon Senior Securities | 19 | |
Item 4 – Mine Safety Disclosures | 19 | |
Item 5 – Other Information | 19 | |
Item 6 – Exhibits | 19 | |
Signatures | 21 |
i |
PART 1. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
QKL STORES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2012 | December 31, 2011 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash | $ | 28,172,749 | $ | 9,037,550 | ||||
Restricted cash | 253 | 253 | ||||||
Accounts receivable | 103,922 | 115,163 | ||||||
Inventories | 41,984,690 | 54,336,501 | ||||||
Other receivables | 8,816,944 | 11,991,134 | ||||||
Prepaid expenses | 4,935,303 | 6,085,379 | ||||||
Advances to suppliers | 7,919,714 | 10,160,552 | ||||||
Deferred income tax assets | 2,687,174 | 2,972,570 | ||||||
Total current assets | 94,620,749 | 94,699,102 | ||||||
Property, plant and equipment, net | 42,495,462 | 43,042,136 | ||||||
Land use rights, net | 745,422 | 748,410 | ||||||
Goodwill | 26,635,125 | 26,346,942 | ||||||
Other assets | 483,353 | 520,559 | ||||||
Total assets | $ | 164,980,111 | $ | 165,357,149 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Short-term loans | $ | 9,486,616 | $ | 10,998,162 | ||||
Accounts payable | 27,901,462 | 28,417,894 | ||||||
Cash card and coupon liabilities | 17,382,802 | 16,024,437 | ||||||
Customer deposits received | 521,969 | 931,604 | ||||||
Accrued expenses and other payables | 13,128,768 | 14,328,656 | ||||||
Income taxes payable | 219,878 | 227,016 | ||||||
Total current liabilities | 68,641,495 | 70,927,769 | ||||||
Total liabilities | 68,641,495 | 70,927,769 | ||||||
Shareholders’ equity | ||||||||
Common stock, $0.001 par value per share, authorized 100,000,000 shares, issued and outstanding 31,344,590 shares at March 31, 2012 and December 31, 2011 | 31,345 | 31,345 | ||||||
Series A convertible preferred stock, par value $0.01, authorized 10,000,000 shares, issued and outstanding 5,694,549 shares at March 31, 2012 and December 31, 2011 | 56,945 | 56,945 | ||||||
Additional paid-in capital | 91,805,792 | 91,589,634 | ||||||
Retained earnings – appropriated | 7,282,560 | 7,282,560 | ||||||
Retained earnings | (14,927,815 | ) | (15,758,416 | ) | ||||
Accumulated other comprehensive income | 12,089,789 | 11,227,312 | ||||||
Total shareholders’ equity | 96,338,616 | 94,429,380 | ||||||
Total liabilities and shareholders’ equity | $ | 164,980,111 | $ | 165,357,149 |
See notes to unaudited condensed consolidated financial statements.
1 |
QKL STORES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net sales | $ | 112,038,616 | $ | 101,311,096 | ||||
Cost of sales | 92,983,490 | 83,215,616 | ||||||
Gross profit | 19,055,126 | 18,095,480 | ||||||
Operating expenses: | ||||||||
Selling expenses | 15,130,888 | 12,537,203 | ||||||
General and administrative expenses | 2,375,774 | 2,203,617 | ||||||
Total operating expenses | 17,506,662 | 14,740,820 | ||||||
Income from operations | 1,548,464 | 3,354,660 | ||||||
Non-operating income (expense): | ||||||||
Interest income | 26,528 | 289,622 | ||||||
Interest expense | (293,909 | ) | (31,100 | ) | ||||
Total non-operating income (loss) | (267,381 | ) | 258,522 | |||||
Income before income taxes | 1,281,083 | 3,613,182 | ||||||
Income taxes | 450,482 | 1,026,054 | ||||||
Net income | 830,601 | 2,587,128 | ||||||
Comprehensive income statement: | ||||||||
Net income | 830,601 | 2,587,128 | ||||||
Foreign currency translation adjustment | 862,477 | 577,630 | ||||||
Comprehensive income | $ | 1,693,078 | $ | 3,164,758 | ||||
Basic earnings per share of common stock | $ | 0.02 | $ | 0.07 | ||||
Diluted earnings per share | $ | 0.02 | $ | 0.07 | ||||
Weighted average shares used in calculating net income per ordinary share – basic | 31,344,590 | 29,768,444 | ||||||
Weighted average shares used in calculating net income per ordinary share – diluted | 37,039,139 | 37,039,139 |
See notes to unaudited condensed consolidated financial statements.
2 |
QKL STORES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 830,601 | $ | 2,587,128 | ||||
Depreciation | 1,641,431 | 1,299,885 | ||||||
Amortization | 7,224 | 7,433 | ||||||
Share-based compensation | 216,158 | 216,158 | ||||||
Deferred income tax | 304,196 | (93,043 | ) | |||||
Loss on disposal of fixed assets | 6,137 | - | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Accounts receivable | 11,978 | (557,061 | ) | |||||
Inventories | 12,704,657 | 8,397,106 | ||||||
Other receivables | 3,504,787 | 11,474,705 | ||||||
Prepaid expenses | 1,229,951 | (1,472,177 | ) | |||||
Advances to suppliers | 2,306,768 | (281,833 | ) | |||||
Accounts payable | (696,663 | ) | (225,817 | ) | ||||
Cash card and coupon liabilities | 1,257,931 | 2,646,960 | ||||||
Customer deposits received | (415,828 | ) | (455,801 | ) | ||||
Accrued expenses and other payables | (1,398,449 | ) | 1,980,840 | |||||
Income taxes payable | (8,580 | ) | 19,291 | |||||
Net cash provided by operating activities | 21,502,299 | 25,543,774 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (827,585 | ) | (1,942,180 | ) | ||||
Decrease of restricted cash | - | 20,974 | ||||||
Net cash used in investing activities | (827,585 | ) | (1,921,206 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Bank loan repayment | (1,581,103 | ) | - | |||||
Net cash used in financing activities | (1,581,103 | ) | - | |||||
Effect of foreign currency translation | 41,588 | 14,422 | ||||||
Net increase in cash | 19,135,199 | 23,636,990 | ||||||
Cash – beginning of period | 9,037,550 | 17,460,034 | ||||||
Cash – end of period | $ | 28,172,749 | $ | 41,097,024 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | $ | 293,909 | $ | 31,100 | ||||
Income taxes paid | $ | 459,062 | $ | 991,754 | ||||
See notes to unaudited condensed consolidated financial statements.
3 |
QKL STORES INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS
QKL Stores Inc. (“Store”) was incorporated under the laws of the State of Delaware on December 2, 1986. Store currently operates through a wholly owned subsidiary in the British Virgin Islands: Speedy Brilliant Group Ltd. (“Speedy Brilliant (BVI)”), wholly owned subsidiary of Speedy Brilliant (BVI) located in Mainland China: Speedy Brilliant (Daqing) Ltd. (“Speedy Brilliant (Daqing)” or “WFOE”), 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 wholly owned operating subsidiary of Qingkelong Chain located in Mainland China: Daqing Qinglongxin Commerce & Trade Co., Ltd (“Qinglongxin Commerce”).
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 33 supermarkets, 16 hypermarkets and 4 department stores in northeastern China and Inner Mongolia. The Company’s supermarkets and hypermarkets sell a broad selection of merchandise including groceries, fresh food and non-food items. A supermarket offers various daily necessities on a self-service basis and averages 2,500 square meters in sales area. A hypermarket is similar to a supermarket but has a larger operating scale, and is typically over 4,500 square meters in sales area. The Company currently has three distribution centers servicing its supermarkets.
The Company is the first supermarket chain in northeastern China and Inner Mongolia that is a licensee of the Independent Grocers Alliance, or IGA, a United States-based global grocery network. As a licensee of IGA, the Company is 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.
Principles of Consolidation and Presentation
The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The condensed consolidated financial statements include the financial statements of QKL Stores Inc., and its wholly owned subsidiaries. All intercompany accounts, transactions, and profits have been eliminated upon consolidation.
The accompanying interim unaudited condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2011 included in the Company’s Form 10-K. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments, considered necessary, in management’s opinion, to present fairly the Company’s financial position, the results of operations and cash flows for the interim periods presented. The operating results and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.
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QKL STORES INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
The Company operates in one industry segment, operating retail chain stores. ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Given the economic characteristics of the similar nature of the products sold, the type of customer and the method of distribution, the Company operates as one reportable segment as defined by ASC 280, Segment Reporting.
Revenue Recognition
The Company earns revenue by selling merchandise primarily through its retail stores. Revenue is recognized when merchandise is purchased by and delivered to the customer and is shown net of estimated returns during the relevant period. The allowance for sales returns is estimated based upon historical experience.
Cash received from the sale of cash cards (aka “gift cards”) is recorded as a liability, and revenue is recognized upon the redemption of the cash card or when it is determined that the likelihood of redemption is remote (“cash card breakage”) and no liability to relevant jurisdictions exists. The Company determines the cash card breakage rate based upon historical redemption patterns and recognizes cash card breakage on a straight-line basis over the estimated cash card redemption period. The Company recognized approximately nil in cash card breakage revenue for the three months ended March 31, 2012 and 2011.
The Company records sales tax collected from its customers on a net basis, and therefore excludes it from revenue as defined in ASC 605, Revenue Recognition.
Included in revenue are sales of returned merchandise to vendors specializing in the resale of defective or used products, which accounted for less than 0.5% of net sales in each of the periods reported.
Cost of Sales
Cost of sales includes the cost of merchandise, related cost of packaging and shipping cost, and the distribution center costs.
Selling Expenses
Selling expenses include store-related expense, other than store occupancy costs, as well as advertising, depreciation and amortization, utilities, labour costs, preliminary expenses and certain expenses associated with operating the Company’s corporate headquarters.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense, net of reimbursement from suppliers, amounted to $30,576 and $54,569 for the three months ended March 31, 2012 and 2011, respectively. Advertising expense is included in selling expenses in the accompanying condensed consolidated statements of income. The Company receives co-operative advertising allowances from vendors in order to subsidize qualifying advertising and similar promotional expenditures made relating to vendors’ products. These advertising allowances are recognized as a reduction to selling expenses when the Company incurs the advertising cost eligible for the credit. Co-operative advertising allowances recognized as a reduction to selling expenses amounted to nil for the three months ended March 31, 2012 and 2011.
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Vendor Allowances
The Company receives allowances for co-operative advertising and volume purchase rebates earned through programs with certain vendors. The Company records a receivable for these allowances which are earned but not yet received when it is determined the amounts are probable and reasonably estimable, in accordance with ASC 605. Amounts relating to the purchase of merchandise are treated as a reduction of inventory cost and reduce cost of goods sold as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction in selling and administrative expense. The Company performs detailed analyses to determine the appropriate amount of vendor allowances to be applied as a reduction of merchandise cost and selling expenses.
Inventories
Inventories primarily consist of merchandise inventories and are stated at lower of cost or market and net realizable value. Cost of inventories is calculated on the weighted average basis which approximates cost.
Management regularly reviews inventories and records valuation reserves for damaged and defective returns, inventories with slow-moving or obsolescence exposure and inventories with carrying value that exceeds market value. Because of its product mix, the Company has not historically experienced significant occurrences of obsolescence.
Inventory shrinkage is accrued as a percentage of revenues based on historical inventory shrinkage trends. The Company performs physical inventory count of its stores once per quarter and cycle counts inventories at its distribution centers once per quarter throughout the year. The reserve for inventory shrinkage represents an estimate for inventory shrinkage for each store since the last physical inventory date through the reporting date.
These reserves are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from expectations.
Income Taxes
The Company follows ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company adopted ASC 740-10-25 on January 1, 2007, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company did not recognize any additional liabilities for uncertain tax positions as a result of the implementation of ASC 740-10-25.
Fair Value Measurements
ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:
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· | Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company holds. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
· | Level 2 – Valuation based on quoted prices in markets that are not active for which all significant inputs are observable, either directly or indirectly. |
· | Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The Company adopted ASC 820, Fair Value Measurements and Disclosures, on January 1, 2008 for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Company has also adopted ASC 820, on January 1, 2009 for non financial assets and non financial liabilities, as these items are not recognized at fair value on a recurring basis. The adoption of ASC 820 for all financial assets and liabilities and non-financial assets and non-financial liabilities did not have any impact on the Company’s consolidated financial statements.
Financial instruments include cash, accounts receivable, prepayments and other receivables, short-term borrowings from banks, accounts payable and accrued expenses and other payables. The carrying amounts of cash, accounts receivable, prepayments and other receivables, short-term loans, accounts payable and accrued expenses approximate their fair value due to the short-term maturities of these instruments. See footnote 7 regarding the fair value of the Company’s warrants, which are classified as Level 3 liabilities in the fair value hierarchy.
Recently Issued Accounting Guidance
In January 2011, the FASB issued ASU 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”, which temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The deferral in ASU 2011-01 is effective January 19, 2011 (date of issuance).
In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. A provision in ASU 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU 2010-20. The adoption of ASU 2011-02 is not expected to have a material impact on the Company’s financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-03, Consideration of Effective Control on Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 changes the rules for determining when these transactions should be accounted for as financings, as opposed to sales. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 is not expected to have a material impact on the Company’s financial condition or results of operation.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and IFRS, and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material effect on its operating results or financial position.
In June 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position. However, it will impact the presentation of comprehensive income.
7 |
In September 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
In September 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan. ASU 2011-09 is intended to address concerns from various users of financial statements on the lack of transparency about an employer’s participation in a multiemployer pension plan. Users of financial statements have requested additional disclosure to increase awareness of the commitments and risks involved with participating in multiemployer pension plans. The amendments in this ASU will require additional disclosures about an employer’s participation in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans. ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. For public entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2011. For nonpublic entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2012. Early adoption is permissible for both public and nonpublic entities. ASU 2011-09 should be applied retrospectively for all prior periods presented.
In December 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification. ASU No. 2011-10 is intended to resolve the diversity in practice about whether the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, Consolidation—Overall) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This Update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. ASU 2011-10 should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, ASU 2011-10 is effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is permitted.
In December 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 is intended to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
In December 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-11 is intended to supersede certain pending paragraphs in Accounting Standards Update No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.
The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.
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NOTE 3 – OTHER RECEIVABLES
Other receivables consisted of the following:
March 31, 2012 (Unaudited) | December 31, 2011 | |||||||
Deposits | $ | 1,299,775 | $ | 666,207 | ||||
Purchase deposits | 1,843,505 | 1,324,056 | ||||||
Input value added tax receivables | 3,387,165 | 7,331,965 | ||||||
Rebates receivables | 2,084,646 | 2,363,854 | ||||||
Rent deposits | 173,921 | 277,841 | ||||||
Others | 27,932 | 27,211 | ||||||
Total | $ | 8,816,944 | $ | 11,991,134 |
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following:
March 31, 2012 (Unaudited) | December 31, 2011 | |||||||
Buildings | $ | 6,861,043 | $ | 6,861,043 | ||||
Shop equipment | 19,957,779 | 19,815,360 | ||||||
Office equipment | 4,001,272 | 4,028,789 | ||||||
Motor vehicles | 1,642,125 | 1,642,125 | ||||||
Car park | 20,237 | 20,237 | ||||||
Leasehold improvements | 27,515,996 | 27,515,996 | ||||||
Construction in progress | 3,067,223 | 2,087,368 | ||||||
Total property, plant and equipment | 63,065,675 | 61,970,918 | ||||||
Less: accumulated depreciation and amortization | (20,570,213 | ) | (18,928,782 | ) | ||||
Total property, plant and equipment, net | $ | 42,495,462 | $ | 43,042,136 |
The depreciation expenses for the period ended March 31, 2012 and 2011 were $1,641,431 and $1,299,885, respectively.
NOTE 5 – ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables consisted of the following:
March 31, 2012 (Unaudited) | December 31, 2011 | |||||||
Accrued expenses | $ | 7,114,121 | $ | 8,184,785 | ||||
VAT and other PRC tax payable | 337,607 | 1,695,669 | ||||||
Shop equipment and leasehold improvements payables | 3,406,224 | 2,535,486 | ||||||
Deposit from vendors and employees | 2,270,816 | 1,912,716 | ||||||
Total accrued expenses and other payables | $ | 13,128,768 | $ | 14,328,656 |
9 |
NOTE 6 – EARNINGS PER SHARE
The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Potentially dilutive common shares consist of convertible preferred stock (using the if-converted method) and exercisable warrants and stock options outstanding (using the treasury method). Holder of Class A convertible preferred stock participate in dividends of the Company on the same basis as holders of the Company’s common stock and is therefore included in the calculation of basic earnings per share using the two class method.
The following table sets forth the computation of basic and diluted net income per common share:
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net income to QKL Stores, Inc. for computing basic net income per share | 830,601 | 2,587,128 | ||||||
Undistributed earnings allocated to Series A Convertible Preferred Stock | 127,700 | 507,767 | ||||||
Net income attributable to ordinary shareholders for computing basic net income per ordinary share | 702,901 | 2,079,361 | ||||||
Weighted-average shares of common stock outstanding in computing net income per common stock | ||||||||
Basic | 31,344,590 | 29,768,444 | ||||||
Dilutive shares: | ||||||||
Conversion of Series A Convertible Preferred Stock | 5,694,549 | 7,270,695 | ||||||
Dilutive effect of stock warrants and options | ||||||||
Anti-dilutive effect of preferred stock | ||||||||
Diluted | 37,039,139 | 37,039,139 | ||||||
Basic earnings per share of common stock | $ | 0.02 | $ | 0.07 | ||||
Diluted earnings per share | $ | 0.02 | $ | 0.07 |
The 11,768,860 shares of stock warrants and 2,033,000 options were not included in the computation of diluted net earnings per share as their effects would have been anti-dilutive since the average share price for the three months ended March 31, 2012 were lower than the options and warrants exercise price.
NOTE 7 – STOCK WARRANTS
Series A and Series B Stock Warrants
As a result of a completed sale of 9,117,647 units for cash proceeds of $15,500,000 on March 28, 2008, the Company issued Series A stock warrants to purchase 5,822,655 shares of the Company’s common stock and Series B stock warrants to purchase 5,800,911 shares of the Company’s common stock which can be converted on a one-for-one basis into shares of the Company’s common stock. The stock 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. These stock warrants will expire on March 28, 2013 pursuant to the warrant agreements.
The Company used the Black-Scholes option pricing model to determine the fair value of the Series A and B stock warrants on March 28, 2008 (assumptions used – expected life of 5 years, volatility of 89%, risk free interest rate of 2.51%, and expected dividend yield of 0%).
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 11,623,566 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 were not considered indexed to the Company’s own stock, and as such, all future changes in the fair value of these warrants were recognized in earnings until such time as the warrants are exercised or expire. The Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability. 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 $44,304,034 on December 31, 2009. The Company recognized $35,492,017 loss from the change in fair value of warrants for the year ended December 31, 2009.
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The Company amended Series A and Series B stock warrant agreements deleting the down-round protection (full-ratchet down round protection) provision on March 24, 2010. As a result of this amendment, the Company is no longer required to treat Series A and Series B warrants as a liability and was reclassified to equity as of March 24, 2010 (assumption used – expected life of 3 years, volatility of 57%, and risk free interest rate of 1.67%, and expected dividend yield of 0%). Based on the revaluation, the Company recognized $7,801,649 of income related to this transaction and reclassified $36,502,385 to equity for the year ended December 31, 2010.
Warrant C
On January 22, 2010, the Company issued a warrant (“Warrant C”) to a non-related individual in exchange for consulting services relating to operational and managerial experience. Warrant C can be converted into 200,000 shares of the Company’s common stock at an exercise price of $5.00 per share. Warrants C has a five year term and became exercisable 180 days from the date of issuance of Warrant C.
The Company recognized share-based compensation cost based on the grant-date fair value estimated in accordance with ASC 505-50 “equity based payments to non-employees”. The fair value of these stock warrants on the date of grant was estimated using the Black-Scholes method (assumption used – expected life of 2.75 years, volatility of 54%, and risk free interest rate of 1.25%, and expected dividend yield of 0%). The Company recognized $558,180 of compensation expense related to this transaction in the first quarter of 2010.
A summary of the Company’s stock warrant activities are as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | ||||||||||
Balance – December 31, 2011 | 11,768,860 | $ | 3.84 | 1.27 | ||||||||
Exercised | - | - | - | |||||||||
Cancelled | - | - | - | |||||||||
Balance – March 31, 2012 | 11,768,860 | $ | 3.84 | 1.02 |
NOTE 8 – SHARED BASED COMPENSATION
Under the 2009 Omnibus Securities and Incentive Plan, on September 14, 2009, the Company entered into stock option agreements with its three independent directors, granting each director options to purchase 20,000 shares of the Company’s common stock at an exercise price of $8.00 per share. The options vest in approximately equal amounts on the three subsequent anniversary dates of the grant and expire on the fifth anniversary of the date of agreement of or the date the option is fully exercised. On January 30, 2010, the Company entered into amendment agreements with its three directors to correct the exercise price to $7.50, which was the fair market value on the date of the grant. The correction of this error was considered immaterial.
Under the 2009 Omnibus Securities and Incentive Plan, on June 26, 2010, the Company granted the its Chief Operating Officer, Alan Stewart and 20 employees options to acquire 2,070,000 shares of the Company's common stock at an exercise price of $4.40 per share. The options vest in approximately equal amounts on the four subsequent anniversary dates of the grant and expire on the eighth anniversary of the date of agreement of or the date the option is fully exercised. On June 17, 2011, Mr. Alan Stewart resigned from his position as Chief Operating Officer of QKL Stores Inc. This has no material impact on the Company’s consolidated financial statements.
Under the 2009 Omnibus Securities and Incentive Plan, on December 2, 2010, the Company granted its Chief Financial Officer, Tsz-Kit Chan options to acquire 100,000 shares of the Company's common stock at an exercise price of $3.42 per share. The options vest in approximately equal amounts on the four subsequent anniversary dates of the grant and expire on the eighth anniversary of the date of agreement of or the date the option is fully exercised.
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The Company accounts for its share-based compensation in accordance with ASC 718 and recognizes compensation expense using the fair-value method on a straight-line basis over the requisite service period for share option awards and non-vested share awards granted which vested during the period. The fair value for these awards was estimated using the Black-Scholes option pricing model on the date of grant with the following assumptions:
September 14, 2009 | June 26, 2010 | December 2, 2010 | ||||||||||
Expected life (years) | 3.5 | 3.25 | 3.25 | |||||||||
Expected volatility | 41.2 | % | 53 | % | 44.9 | % | ||||||
Risk-free interest rate | 1.69 | % | 1.49 | % | 0.96 | % | ||||||
Dividend yield | - | - | - |
The expected volatilities are based on the historical volatility of the Company’s common stock. The observation is made on a weekly basis. The observation period covered is consistent with the expected life of the options. The expected life of stock options is based on the minimum vesting period required. The risk-free rate is consistent with the expected terms of the stock options and is based on the United States Treasury yield curve in effect at the time of grant.
Stock-based compensation expenses recognized was $216,158 for the three months months ended March 31, 2012. A summary of the Company’s stock options activities under the 2009 Omnibus Securities and Incentive Plan are as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term(Years) | Intrinsic Value | |||||||||||||
Outstanding – December 31, 2011 | 2,033,000 | $ | 4.44 | 2.52 | $ | - | ||||||||||
Granted | - | - | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Forfeited | - | - | - | - | ||||||||||||
- | - | - | - | |||||||||||||
Outstanding– March 31, 2012 | 2,033,000 | $ | 4.44 | 2.27 | $ | - | ||||||||||
Exercisable – March 31, 2012 | 414,601 | $ | 4.35 | 2.27 | $ | - |
As of March 31, 2012, there was $1,858,672 of total unrecognized compensation cost related to non-vested share option awards granted. Such cost is expected to be recognized over a weighted-average period of 3-4 years.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Leases
Certain of our real properties and equipment are operated under lease agreements. Rental expense under operating leases was as follows:
(Unaudited) | ||||||||
Three Months Ended March 31 | ||||||||
2012 | 2011 | |||||||
Rent expense | $ | 2,763,837 | $ | 2,202,850 | ||||
Less: Sublease income | (585,032 | ) | (600,064 | ) | ||||
Total rent expense, net | $ | 2,178,805 | $ | 1,602,786 |
Annual minimum payments under operating leases are as follows:
As of March 31, | Minimum Lease Payment | Sublease Income | Net Minimum Lease Payment | |||||||||
2013 | $ | 8,091,806 | $ | 543,347 | $ | 7,548,459 | ||||||
2014 | 8,038,332 | 23,365 | 8,014,967 | |||||||||
2015 | 7,997,394 | 13,258 | 7,984,136 | |||||||||
2016 | 7,875,781 | 8,041 | 7,867,740 | |||||||||
2017 | 7,490,874 | 1,393 | 7,489,481 | |||||||||
Thereafter | 67,964,001 | - | 67,964,001 | |||||||||
Total | $ | 107,458,188 | $ | 589,404 | $ | 106,868,784 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the QKL Stores Inc. and subsidiaries (“we”, “our”, “us”) financial condition and results of operations includes information with respect to our plans and strategies for our business and should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes (“Interim Financial Statements”) included herein and our consolidated financial statements and related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the fiscal year ended December 31, 2011.
Overview
We are a regional supermarket chain that currently operates 33 supermarkets, 16 hypermarkets and 4 department stores in northeastern China and Inner Mongolia. Our supermarkets and hypermarkets sell a broad selection of merchandise including groceries, fresh food and non-food items. A supermarket offers various daily necessities on a self-service basis and averages 2,500 square meters in sales area. A hypermarket is similar to a supermarket but has a larger operating scale, and is typically over 4,500 square meters in sales area. We currently have three distribution centers servicing our supermarkets.
We are the first supermarket chain in northeastern China and Inner Mongolia that is a licensee of the Independent Grocers Alliance, or IGA, a United States-based global grocery network. 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.
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 and also raised additional financing in our public offering in the fourth quarter of 2009. Under our expansion plan, we opened:
· | ten new stores in 2008 that have in the aggregate approximately 42,000 square meters of space |
· | seven new stores in 2009 that have, in the aggregate, approximately 32,000 square meters of space |
· | nine new stores in 2010 that have in the aggregate approximately 74,189 square meters of space |
· | fourteen new stores in the 2011 that have in the aggregate approximately 101,000 square meters of space |
In 2012, we plan to open 5 hypermarkets, supermarkets and department stores having, in the aggregate, approximately 40,600 square meters of space. We closed 1 store due to the expiration of the lease contract in the first quarter of 2012. We are making improvements to our logistics and information systems to support our supermarkets. We expect to finance our expansion plan from funds generated from operations and bank loans.
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 this area 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 2003, 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.
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Our Strategy for Growth and Profitability
Our strategic plan includes the following principal components: expanding by opening stores in new strategic locations, and improving profitability by decreasing the cost through resource purchase, setting up distribution centers and increasing the percentage of our sales attributable to private label merchandise, membership sales and buying card sales.
Expanded Operations
As of March 31, 2012, we operated 33 supermarkets, 16 hypermarkets, 4 department stores, and 3 distribution centers in Daqing, Harbin and Shenyang. In 2012, we plan to open 5 hypermarkets, supermarkets and department stores having, in the aggregate, approximately 40,600 square meters of space. We closed 1 store due to the expiration of the lease contract in the first quarter of 2012. 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 and bank loans. Based on our previous experience, we believe it takes twelve months for a new store to achieve profitability.
Private Label Merchandise
Some of the merchandise we sell is made to our specifications by manufacturers using the QKL brand name. We refer to such merchandise as “private label” merchandise. With private label merchandise, we entrust the manufacturer to make the product and to select the name and design. Under our agreements with the private label manufacturer, the private label manufacturers cannot sell the product to any other party. Sales of private label merchandise accounted for approximately 6.0% and 5.5% of our total revenues for the first three months ended March 31, 2012 and 2011, respectively. In June 2008, we established a specialized department for designing and purchasing private label merchandise, in which 7 full-time employees currently work. Our goal is to increase private label sales to 20% of our total revenues.
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 Day (March 8), the Back to School Day (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 Store – 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.
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 have opened a new distribution center in Shenyang in November 2011. 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.
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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.
Critical Accounting Estimates
As discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, we consider our estimates on revenue recognition, vendor allowances, and inventory valuation to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. Except for the disclosure below, there have been no significant changes to these estimates in the three months ended March 31, 2012:
Goodwill
We perform an annual goodwill impairment test as of December 31 each year in accordance with ASC subtopic 350-20, Goodwill (formerly SFAS No. 142), and update the test between annual tests if events or circumstances occur that indicate an impairment might exist. We perform the annual review for goodwill impairments.
Reporting units are determined based on the organizational structure at the date of the impairment test. A separate goodwill impairment test is performed for each reporting unit on the goodwill that has been allocated to it.
Reporting units are the component business units from our operating segment where discrete financial information exists for them. Management regularly reviews their operating results. Also, for each reporting unit, their economic characteristics are dissimilar from each other. Currently, we have 12 reporting units under goodwill impairment testing.
The annual test of the potential impairment of goodwill requires a two-step process. Step one of the impairment test involves comparing the estimated fair values of reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, step two must be performed to determine the amount, if any, of the goodwill impairment loss. If the carrying amount is less than fair value, further testing of goodwill impairment is not performed.
Step two of the goodwill impairment test involves comparing the implied fair value of the reporting unit’s goodwill against the carrying value of the goodwill. Under step two, determining the implied fair value of goodwill requires the valuation of a reporting unit’s identifiable tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination on the testing date. The difference between the fair value of the entire reporting unit as determined in step one and the net fair value of all identifiable assets and liabilities represents the implied fair value of goodwill. The goodwill impairment charge, if any, would be the difference between the carrying amount of goodwill and the implied fair value of goodwill upon the completion of step two.
For purposes of the step one analyses, determination of reporting units’ fair value is based on the income approach, which estimates the fair value of our reporting units based on discounted future cash flows.
As at March 31, 2012, we updated our goodwill impairment tests because our market capitalization is significantly below the carrying value of our net assets. The result is that the fair values of our reporting units are substantially in excess of their carry values. Therefore, we believed no goodwill was subject to the risk of impairment.
Recently Issued Accounting Guidance
See Note 2 to condensed consolidated financial statements included in Item 1, Financial Information, of this Quarterly Report on Form 10-Q.
15 |
Results of Operations
The following table sets forth selected items from our condensed consolidated statements of income by dollar and as a percentage of our net sales for the periods indicated:
(Unaudited) | (Unaudited) | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2012 | March 31, 2011 | |||||||||||||||
Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||
Net sales | $ | 112,038,616 | 100.0 | % | $ | 101,311,096 | 100.0 | % | ||||||||
Cost of sales | 92,983,490 | 83.0 | 83,215,616 | 82.1 | ||||||||||||
Gross profit | 19,055,126 | 17.0 | 18,095,480 | 17.9 | ||||||||||||
Selling expenses | 15,130,888 | 13.5 | 12,537,203 | 12.4 | ||||||||||||
General and administrative expenses | 2,375,774 | 2.1 | 2,203,617 | 2.2 | ||||||||||||
Operating income | 1,548,464 | 1.4 | 3,354,660 | 3.3 | ||||||||||||
Interest income | 26,528 | 0.0 | 289,622 | 0.3 | ||||||||||||
Interest expense | (293,909 | ) | 0.3 | (31,100 | ) | - | ||||||||||
Income before income taxes | 1,281,083 | 1.1 | 3,613,182 | 3.6 | ||||||||||||
Income taxes | 450,482 | 0.4 | 1,026,054 | 1.0 | ||||||||||||
Net (loss) income | $ | 830,601 | 0.7 | % | $ | 2,587,128 | 2.6 | % |
Net Sales – Net sales increased by $10.7 million, or 10.6%, to $112.0 million for the three months ended March 31, 2012 from $101.3 million for the three months ended March 31, 2011. The change in net sales was primarily attributable to the following:
§ | Same store sales represents sales from stores that were opened for at least one year before the beginning of the comparison period, or by January 1, 2011. Same store (39 stores) sales generated approximately $93.7 million sales in the first quarter of 2012, an increase of $4.1 million, or 4.6% compared with $89.6 million net sales in the first quarter of 2011. |
§ | New store sales increased, reflecting the net opening of 14 new stores since January 1, 2011. These 14 stores generated approximately $18.3 million in sales in the first quarter of 2012. |
§ | The number of stores including supermarkets/hypermarkets and department stores at March 31, 2012 was 53 versus 49 at March 31, 2011. |
Cost of Sales – Our cost of sales for the three months ended March 31, 2012 was approximately $93.0 million, representing an increase of $9.8 million, or 11.7%, from approximately $83.2 million for the same period in 2011. The increase was due to the increase in volume of sales. Our cost of sales primarily consists of the cost for our merchandise; it also includes costs related to packaging and shipping and the distribution center costs.
Gross Profit – Gross profit, or total revenue minus cost of sales, increased by $1.0 million, or 5.3%, to $19.1 million, or 17.0% of net sales, in the first quarter of 2012 from $18.1 million, or 17.9% of net sales, in the first quarter of 2011. The change in gross profit was primarily attributable to an increase in net sales of $10.7 million in the first quarter of 2012 compared to the first quarter of 2011.
We believe that our gross margin is likely to be between 17.0% and 17.5%, over the next few business quarters. 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 increased by $2.6 million, or 20.7%, to $15.1 million, or 13.5% of net sales, in the first quarter of 2012 from $12.5 million, or 12.4% of net sales, in the first quarter of 2011. The change in selling expenses was mainly due to an increase in labor costs resulting from an increase in the number of store employees and pay increases, depreciation, rent expense, and utilities in the three months ended March 31, 2012 compared to the same period in 2011 primarily resulting from , or associated with, an increase in store count. In specific, labor costs increased by $ 1.4 million or 36.1%, to $5.44 million in the first quarter of 2012 from $4.0 million in the first quarter of 2011. Depreciation increased by $0.3 million, or 25.6%, to $1.5 million in the first quarter of 2012 from $1.2 million in the first quarter of 2011. Rent expenses increased by $0.6 million, or 38.7%, to $2.1 million in the first quarter of 2012 from $1.5 million in the first quarter of 2011. Utilities increased by $0.5 million, or 33.7%, to $2.1 million in the first quarter of 2012 from $1.6 million in the first quarter of 2011.
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General and Administrative Expense –General and administrative expenses increased by $0.2 million, or 7.8%, to $2.4 million, or 2.1% of net sales, in the first quarter of 2012 from $2.2 million, or 2.2% of net sales, in the first quarter of 2011. The increase was mainly due to the appreciation of Chinese Renminbi.
Income Taxes –The provision for income taxes was $0.5 million for the first quarter of 2012 compared with $1.0 million for the first quarter of 2011. Our effective tax rate was 35.2% for three months ended March 31, 2012, compared with 28.4% for the same period in 2011. This increase was primarily due to higher proportion of non-deductible expenses relating to stock based compensation in the first quarter of 2012.
Net Income – For the three months ended March 31, 2012, our net income for the first three months of 2012 decreased 67.9% to $0.8 million, or $0.02 per diluted share, from $2.6 million, or $0.07 per diluted share in the prior year period. This decrease was due to higher selling expenses related to staff costs, rent and utilities in the first quarter of 2012. The number of shares used in the computation of diluted EPS was 37.0 million shares.
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital and capital expenditures. We fund our liquidity requirements primarily through cash on hand, cash flow from operations and borrowings from our revolving credit facility. We believe our cash on hand, future funds from operations and borrowings from our revolving credit facility will be sufficient to fund our cash requirements for at least the next twelve months. There is no assurance, however, that we will be able to generate sufficient cash flow or that we will be able to maintain our ability to borrow under our revolving credit facility.
At March 31, 2012, we had $28.2 million of cash compared to $41.1 million at March 31, 2011. The following table sets forth a summary of our cash flows for the periods indicated:
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net cash provided by operating activities | $ | 21,502,299 | $ | 25,543,774 | ||||
Net cash used in investing activities | (827,585 | ) | (1,921,206 | ) | ||||
Net cash used in financing activities | (1,581,103 | ) | - | |||||
Effect of foreign currency translation | 41,588 | 14,422 | ||||||
Net increase in cash | $ | 19,135,199 | $ | 23,636,990 |
Seasonality
The seasonality of our business historically provides greater cash flow from operations during the holiday and winter selling season, with the fourth quarter net sales traditionally generating the strongest profits of each year. Typically, we use operating cash flow and borrowings under our revolving credit facility to fund inventory increases in anticipation of the holidays and our inventory levels are at their highest in the months leading up to Chinese Spring Festival. As holiday sales significantly reduce inventory levels, this reduction, combined with net income, historically provides us with strong cash flow from operations at the end of each year.
Operating Activities –Net cash provided by operating activities for the three months ended March 31, 2012 and 2011 was $21.5 million and $25.5 million, respectively. The decrease in cash provided by operating activities for the three months ended March 31, 2012 compared to the same period in 2011 primarily reflects net cash inflow caused by the increase in accrued expenses, decrease of inventories and decrease of other receivables. The increase in accrued expenses was in line with our increase in operating expenses due to inflation and new store openings. The decrease of inventories was caused by reducing the inventory on hand after the peak Chinese New Year season. The decrease of other receivables is largely attributable to the recovery of money from vendors.
Investing Activities – Net cash used in investing activities for the first three months of 2012 was $0.8 million and net cash provided by investing activities for the first three months of 2011 was $1.9 million. Capital expenditures represented substantially all of the net cash used in investing activities for each period. Capital expenditures were higher in the first quarter of 2012. Our capital spending is primarily for new store openings and store-related remodeling.
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Financing Activities – Net cash used in financing activities for the first three months of 2012 and 2011 was $1.6 million and nil, respectively. Cash used in financing activities was used to repay short-term bank loans.
Loan Facility – On July 6, 2011, QKL Chain entered into a working capital agreement with Longjiang Commercial Bank. Under this agreement, QKL Chain has a credit line up to approximately $7.7 million (RMB50.0 million). The term of any loan under the agreement is one year after the date the loan is issued, with the annual interest rate of 6.941%. The loan under this financing agreement is secured by buildings with apprasial value of approximately $11.9 million (RMB 77.0 million).
On July 6, 2011, Qinglongxin Commerce also entered into a working capital agreement with Longjiang Commercial Bank. Under this agreement, Qinglongxin Commerce has a credit line up to approximately $7.7 million (RMB50.0 million). The term of any loan under the agreement is one year after the date the loan is issued, with the annual interest rate of 6.941%. The loan under this financing agreement is guaranteed by QKL Chain.
Future Capital Requirements – We had cash on hand of $28.2 million as of March 31, 2012. We expect capital expenditures for the remainder of 2012 primarily to fund the opening of new stores, store-related remodeling and relocation.
We believe we will be able to fund our cash requirements, for at least the next 12 months from cash on hand, operating cash flows and borrowings from our revolving credit facility. However, our ability to satisfy our cash requirements depends upon our future performance, which in turn is subject to general economic conditions and regional risks, and to financial, business and other factors affecting our operations, including factors beyond our control. There is no assurance that we will be able to generate sufficient cash flow or that we will be able to maintain our ability to borrow under our credit facility.
If we are unable to generate sufficient cash flow from operations to meet our obligations and commitments, we will be required to refinance or restructure our indebtedness or raise additional debt or equity capital. Additionally, we may be required to sell material assets or operations, suspend or further reduce dividend payments or delay or forego expansion opportunities. We might not be able to implement successful alternative strategies on satisfactory terms, if at all.
Off-Balance Sheet Arrangements and Contractual Obligations – Our material off-balance sheet arrangements are operating lease obligations. We excluded these items from the balance sheet in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Operating lease commitments consist principally of leases for our retail store facilities and distribution center. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term. With respect to most of those leases, we intend to renegotiate those leases as they expire.
In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise in advance of expected delivery. Because most of these purchase orders do not contain any termination payments or other penalties if cancelled, they are not included as outstanding contractual obligations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures –We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules13a15(e) and 15d15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures are not effective, at a reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
In particular, we did not maintain effective controls over the financial reporting process due to an insufficient complement of personnel with a level of accounting knowledge, experience and training in the application of U.S. GAAP commensurate with the Company’s financial requirements. Also, there is an insufficient quantity of dedicated resources and experienced personnel involved in the general controls over information technology on our new ERP system implementation. The lack of sufficient and adequately trained personnel resulted in ineffective top level review, which in turn may affect the timeliness of our periodic financial reporting.
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The conclusion that our internal control over financial reporting was not effective was based on material weaknesses we identified in relation to our financial closing process.
Remediation Measures for Material Weaknesses – We have begun to take steps to remediate the material weaknesses described above in “Evaluation of Disclosure Controls and Procedures” and plan to implement the new measures described below in our ongoing efforts to address the internal control deficiencies described above. We plan to further develop policies and procedures governing the hiring and training of personnel to better ensure sufficient personnel with the requisite knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting and U.S. GAAP requirements. We plan to utilize qualified internal control consultants and supervisors to ensure that our staff has adequate professional knowledge and to monitor the need for additional or better qualified staff. In addition, we plan to utilize appropriate training programs on accounting principles and procedures to better ensure the adequacy of our accounting and finance personnel. We plan to continue to develop our corporate culture toward emphasizing the importance of internal controls and to ensure that all personnel involved in maintaining proper internal controls recognize the importance of strictly adhering to accounting principles accepted in the United States of America. We plan to continue to provide additional training to the Company’s internal audit staff on appropriate controls and procedures necessary to document and evaluate our internal control procedures.
Changes in Internal Control over Financial Reporting – During the fiscal quarter ended March 31, 2012, no changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, 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. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6: EXHIBITS
The exhibits listed on the Exhibit Index are provided as part of this report.
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EXHIBIT INDEX
Exhibit No. | Name of Exhibit | |
3.1 | Amended and Restated Bylaws | |
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 and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QKL STORES INC. | ||
Dated: May 15, 2012 | By: | /s/ Zhuangyi Wang |
Zhuangyi Wang | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ Tsz-Kit Chan | |
Tsz-Kit Chan | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
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AMENDED AND RESTATED
BYLAWS OF
QKL STORES INC.
(the “Corporation”)
ARTICLE I
Offices
Section 1.1. Offices. The registered office of the Corporation shall be at 615 South DuPont Highway, County of Kent, Dover, Delaware 19901. The Corporation may have such other offices within or without the State of Delaware as the Board of Directors may from time to time establish.
ARTICLE II
Capital Stock
Section 2.1. Certificate Representing Shares. Shares of the classes of capital stock of the Corporation shall be represented by certificates in such form or forms as the Board of Directors may approve; provided that, such form or forms shall comply with all applicable requirements of law or of the Certificate of Incorporation. Such certificates shall be signed by the president or a vice president, and by the secretary or an assistant secretary, of the Corporation and may be sealed with the seal of the Corporation or imprinted or otherwise marked with a facsimile of such seal In the case of any certificate countersigned by any transfer agent or registrar, provided such countersigner is not the Corporation itself or an employee thereof, the signature of any or all of the foregoing officers of the Corporation may be represented by a printed facsimile thereof. If any officer whose signature, or a facsimile thereof, shall have been set upon any certificate shall cease, prior to the issuance of such certificate, to occupy the position in light of which his signature, or facsimile thereof, was so set upon such certificate, the Corporation may nevertheless adopt and issue such certificate with the same effect as if such officer occupied such position as of such date of issuance; and, issuance and delivery of such certificate by the Corporation shall constitute adoption thereof by the Corporation. The certificates shall be consecutively numbered, and as they are issued, a record of such issuance shall be entered in the books of the Corporation.
Section 2.2. Stock Certificate Book and Shareholders of Record. The secretary of the Corporation shall maintain, among other records, a stock certificate book, the stubs in which shall set forth the names and addresses of the holders of all issued shares of the Corporation, the number of shares held by each, the number of certificates representing such shares, the date of issue of such certificates, and whether or not such shares originate from original issue or from transfer. The names and addresses of shareholders as they appear on the stock certificate book shall be the official list of shareholders of record of the Corporation for all purposes. The Corporation shall be entitled to treat the holder of record of any shares as the owner thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or any rights deriving from such shares on the part of any other person, including, but without limitation, a purchaser, assignee, or transferee, unless and until such other person becomes the holder of record of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such other person.
Section 2.3. Shareholder’s Change of Name or Address. Each shareholder shall promptly notify the secretary of the Corporation, at its principal business office, by written notice sent by certified mail, return receipt requested, of any change in name or address of the shareholder form that as it appears upon the official list of shareholders of record of the Corporation. The secretary of the Corporation shall then enter such changes into all affected Corporation records, including, but not limited to, the official list of shareholders of records.
Section 2.4. Transfer of Stock. The shares represented by any certificate of the Corporation are transferable only on the books of the Corporation by the holder of record thereof or by his duly authorized attorney or legal representative upon surrender of the certificate for such shares, properly endorsed or assigned. The Board of Directors may make such rules and regulations concerning the issue, transfer, registration and replacement of certificates as they deem desirable or necessary.
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Section 2.5. Transfer Agent and Registrar. The Board of Directors may appoint one (1) or more transfer agents or registrars of the shares, or both, and may require all share certificates to bear the signature of a transfer agent or registrar, or both.
Section 2.6. Lost, Stolen or Destroyed Certificates. The Corporation may issue a new certificate for shares of stock in the place of any certificate theretofore issued and alleged to have been lost, stolen or destroyed; but, the Board of Directors may require the owner of such lost, stolen or destroyed certificate, or his legal representative, to furnish an affidavit as to such loss, theft, or destruction and to give a bond in such form and substance, and with such surety or sureties, with fixed or open penalty, as the Board may direct, in order to indemnify the Corporation and its transfer agents and registrars, if any, against any claim that may be made on account of the alleged loss, theft or destruction of such certificate.
Section 2.7. Fractional Shares. Only whole shares of the stock of the Corporation shall be issued. In case of any transaction by reason of which a fractional share might otherwise be issued, the directors, or the officers in the exercise of powers delegated by the directors, shall take such measures consistent with the laws, the Certificate of Incorporation and these Bylaws, including (for example, and not by way of limitation) the payment in cash of an amount equal to the fair value of any fractional share, as they may deem proper to avoid the issuance of any fractional share.
ARTICLE III
The Shareholders
Section 3.1. Annual Meeting. Commencing in the calendar year 1988, the Annual Meeting of the Shareholders, for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held at the principal office of the Corporation, at 10:00 a.m. local time, on the 1st day of May of each year unless such day is a legal holiday, in which case such meeting shall be held at such hour on the first day thereafter which is not a legal holiday; or, at such other place and time as may be designated by the Board of Directors. Failure to hold any annual meeting or meetings shall not work a forfeiture or dissolution of the Corporation.
Section 3.2. Special Meeting. Except as otherwise provided by law or by the Certificate of Incorporation, special meetings of the shareholders may be called by the chairman of the Board of Directors, the president, any one of the directors, or the holders of not less than one-tenth of all the shares having voting power at such meeting, and shall be held at the principal office of the Corporation or at such other place, and at such time, as may be stated in the notice calling such meeting. Business transacted at any special meeting of shareholders shall be limited to the purpose stated in the notice of such meeting given in accordance with the terms of Section 3.3.
Section 3.3. Notice of Meeting – Waiver. Written notice of each meeting of shareholders, stating the place, day and hour of any meeting and, in case of a special shareholders’ meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of such meeting, either personally or by mail, by or at the direction of the president, the secretary, or the persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. Such further or earlier notice shall be given as may be required by law. The signing by a shareholder of a written waiver of notice of any shareholder’ meeting, whether before or after the time stated in such waiver, shall be equivalent to the receiving by him of all notice required to be given with respect to such meeting. Attendance by a person at a shareholders’ meeting shall constitute a waiver of notice of such meeting except when a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. No notice of any adjournment of any meeting shall be required.
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Section 3.4. Closing of Transfer Books and Fixing Record Date. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (6) days prior to any other action. If no record date is fixed, the record date shall be as follows: the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; the record date for determining shareholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and, the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
Section 3.5. Voting List. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be subject to lawful inspection by any shareholder at any time during the usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting.
Section 3.6. Quorum and Officers. Except as otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, the holders of a majority of the shares entitled to vote and represented in person or by proxy shall constitute a quorum at a meeting of shareholders, but the shareholders present at any meeting, although representing less than a quorum, may from time to time adjourn the meeting to some other day and hour, without notice other than announcement at the meeting. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. The vote of the holders of a majority of the shares entitled to vote and thus represented at a meeting at which a quorum is present shall be the act of the shareholders’ meeting, unless the vote of a greater number is required by law. The Chairman of the Board shall preside at, and the secretary shall keep the records of, each meeting of shareholders, and in the absence of either such officer, his duties shall be performed by any other officer authorized by these Bylaws or any person appointed by resolution duly adopted at the meeting.
Section 3.7. Voting at Meetings. Each outstanding share shall be entitled to one (1) vote on each matter submitted to a vote at a meeting of shareholders except to the extent that the Certificate of Incorporation or the laws of the State of Nevada provide otherwise.
Section 3.8. Proxies. A shareholder may vote either in person or by proxy executed in writing by the shareholder; but, no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally.
Section 3.9. Balloting. All elections of directors shall be by written ballot. Upon the demand of any shareholder, the vote upon any other question before the meeting shall be by ballot. At each meeting, inspectors of election may be appointed by the presiding officer of the meeting; and, at any meeting for the election of directors, inspectors shall be so appointed on the demand of any shareholder present or represented by proxy and entitled to vote in such election of directors. No director or candidate for the office of director shall be appointed as such inspector. The number of votes cast by shares in the election of directors shall be recorded in the minutes.
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Section 3.10. Voting Rights, Prohibition of Cumulative Voting for Directors. Each outstanding share of common stock shall be entitled to one (1) vote upon each matter submitted to a vote at a meeting of shareholders. No shareholder shall have the right to cumulate his votes for the election of directors but each share shall be entitled to one (1) vote in the election of each director. In the case of any contested election for any directorship, the candidate for such position receiving a plurality of the votes cast in such election shall be elected to such position.
Section 3.11. Record of Shareholders. The Corporation shall keep at its principal business office, or the office of its transfer agents or registrars, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each.
Section 3.12. Action Without Meeting. Any action required by statute to be taken at a meeting of the shareholders of the Corporation, or any acting which may be taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by a majority of the shareholders entitled to vote with respect to the subject matter thereof and such consent shall have the same force and effect as a majority vote of the shareholders. Any such signed consent, or a signed copy thereof, shall be placed in the minute book of the Company.
ARTICLE IV
The Board of Directors
Section 4.1. Number, Qualifications and Term. The business and affairs of the Corporation shall be managed and controlled by the Board of Directors; and, subject to any restrictions imposed by law, by the Articles of Incorporation, or by these Bylaws, the Board of Directors may exercise all the powers of the Company. The Board of Directors shall consist of not less than one nor more than five members. Such number may be increased or decreased by amendment of these Bylaws, provided that no decrease shall effect a shortening of the term of any incumbent director. Directors need not be residents of Delaware or shareholders of the Company absent provision to the contrary in the Articles of Incorporation or laws of the State of Delaware. Except as otherwise provided in Section 4.3 of these Bylaws, each position on the Board of Directors shall be filled by election at the annual meeting of shareholders. Any such election shall be conducted in accordance with Section 3.7 of these Bylaws. Each person elected a director shall hold office, unless removed in accordance with Section 4.2 of these Bylaws, until the next annual meeting of the shareholders and until his successor shall have been duly elected and qualified.
Section 4.2. Removal. Any director or the entire Board of Directors may be removed from office, with or without cause, at any special meeting of shareholders by the affirmative vote of the holders of a majority of the shares of the shareholders present in person or by proxy and entitled to vote at such meeting, if notice of the intention to act upon such matter shall have been given in the notice calling such meeting. If the notice calling such meeting shall have so provided, the vacancy caused by such removal may be filled at such meeting by the affirmative vote of a majority in number of the shares of the shareholders present in person or by proxy and entitled to vote.
Section 4.3. Vacancies. Any vacancy occurring on the Board of Directors may be filled by a majority of the remaining directors, even is such remaining directors comprise less than a quorum, of the Board of Directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any position on the Board of Directors to be filled by reason of an increase in the number of directors shall be filled by the vote of a majority of the directors, election at an annual meeting of the shareholders, or at a special meeting of shareholders duly called for such purpose, provided that the Board of Directors may fill no more than two such directorships during the period between any two successive annual meetings of shareholders.
Section 4.4. Regular Meetings. Regular meetings of the Board of Directors shall be held immediately following each annual meeting of shareholders, at the place of such meeting, and at such other times and places as the Board of Directors shall determine. No notice of any kind of such regular meetings need be given to either old or new members of the Board of Directors.
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Section 4.5. Special Meetings. Special meetings of the Board of Directors shall be held at any time by call of the Chairman of the board, the president, the secretary or any one director. The secretary shall give notice of each special meeting to each director at his usual business or residence address by mail at least three (3) days before the meeting or by telegraph or telephone at least one (1) day before such meeting. Except as otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws, such notice need not specify the business to be transacted at, or the purpose of, such meeting. No notice shall be necessary for any adjournment of any meeting. The signing of a written waiver of notice of any special meeting by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the receiving of such notice. Attendance of a director at a meeting shall also constitute a waiver of notice of such meeting, except where a director attends a meeting for the express and announced purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened.
Section 4.6. Quorum. A majority of the number of directors fixed by these Bylaws shall constitute a quorum for the transaction of business and the act of not less than a majority of such quorum of the directors shall be required in order to constitute the act of the Board of Directors, unless the act of a greater number shall be required by law, by the Certificate of Incorporation or by these Bylaws.
Section 4.7. Procedure at Meetings. The Board of Directors, at each regular meeting held immediately following the annual meeting of shareholders, shall appoint one (1) of their member as Chairman of the Board of Directors. The Chairman of the Board shall preside at meetings of the Board. In his absence at any meeting, any officer authorized by these Bylaws or nay member of the Board selected by the members present shall preside. The secretary of the Corporation shall act as secretary at all meetings of the Board. In his absence, the presiding officer of the meeting may designate any person to act as secretary. At meetings of the Board of Directors, the business shall be transacted in such order as the Board may from time to time determine.
Section 4.8. Presumption of Assent. Any director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.
Section 4.9. Action Without a Meeting. Any action required by statute or permitted to be taken at a meeting of the directors of the Corporation, or of any committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all directors or all committee members as the case may be, and if the consent in writing shall be filed with the minutes of the proceedings of the Board or committee.
Section 4.10. Compensation. Directors as such shall not receive any stated salary for their service, but by resolution of the Board of Directors, a fixed sum and reimbursement for reasonable expenses of attendance, if any ,may be allowed for attendance at each regular or special meeting of the Board of Directors or at any meeting of the executive committee of directors, if any, to which such director may be elected in accordance with the following Section 4.11; but, nothing herein shall preclude any director from serving the Corporation in any other capacity or receiving compensation therefor.
Section 4.11. Executive Committee. The Board of Directors, by resolution adopted by a majority of the number of directors fixed by these Bylaws, may designate an executive committee, which committee shall consist of two (2) or more of the directors of the Corporation. Such executive committee may exercise such authority of the Board of Directors in the business and affairs of the corporation as the Board of Directors may be resolution duly delegate to it except as prohibited by law. The designation of such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. Any member of the executive committee may be removed by the Board of Directors by the affirmative vote of a majority of the number of directors fixed by the Bylaws whenever in the judgment of the Board the best interests of the Corporation will be served thereby.
The executive committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. The minutes of the proceedings of the executive committee shall be placed in the minute book of the Corporation.
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Section 4.12. Advisory Committees. The Board of Directors may for its convenience, and at its discretion, appoint one (1) or more advisory committees of two (2) or more directors each; but, not such advisory committees shall have any power or authority except to advise the Board of Directors, any such committee shall exist solely at the pleasure of the Board of Directors, not minutes of the proceedings of any such committee shall be kept, and no member of any such committee shall receive any compensation for such membership except by way of reimbursement for reasonable expenses actually incurred by him by reason of such membership.
ARTICLE V
Officers
Section 5.1. Number. The officers of the Corporation shall consist of a president, one (1) or more vice presidents, a secretary and a treasurer; and , in addition, such other officers and assistant officers and agents as may be deemed necessary or desirable. Officers shall be elected or appointed by the Board of Directors. Any two (2) or more offices may be held by the same person except that the president and secretary shall not be the same person. In its discretion, the Board of Directors may leave unfilled any office except those of president, treasurer and secretary.
Section 5.2. Election; Term; Qualifications. Officers shall be chosen by the Board of Directors annually at the meeting of the Board of Directors following the annual shareholders’ meeting. Each officer shall hold office until his successor has been chosen and qualified, or until his death, resignation, or removal.
Section 5.3. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby; but, such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create any contract rights.
Section 5.4. Vacancies. Any vacancy in any office for any cause may be filled by the Board of Directors at any meeting.
Section 5.5. Duties. The officers of the Corporation shall have such powers and duties except as modified by the Board of Directors, as generally pertain to their officers, respectively, as well as such powers and duties as from time to time shall be conferred by the Board of Directors and by these Bylaws.
Section 5.6. The President. The president shall have general direction of the affairs of the Corporation and general supervision over its several officers, subjects however, to the control of the Board of Directors. He shall at each annual meeting, and from time to time, report to the shareholders and to the Board of Directors all matters within his knowledge which, in his opinion, the interest of the Corporation may require to be brought to the notice of such persons. He may sign, with the secretary or an assistant secretary, any or all certificates of stock of the Corporation. He shall preside at all meetings of the shareholders, shall sign and execute in the name of the Corporation (i) all contracts or other instruments authorized by the Board of Directors, and (ii) all contracts or instruments in the usual and regular course of business, pursuant to Section 6.2 hereof, except in cases when the signing and execution thereof shall be expressly delegated or permitted by the Board or by these Bylaws to some other officer or agent of the Corporation; and, in general, shall perform all duties incident to the office of president, and such other duties as from time to time may be assigned to him by the Board of Directors or as are prescribed by these Bylaws.
Section 5.7. The Vice Presidents. At the request of the president, or in his absence or disability, the vice president , in the order of their election, shall perform the duties of the president, and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the president. Any action taken by a vice president in the performance of the duties of the president shall be conclusive evidence of the absence or inability to act of the president at the time such action was taken. The vice presidents shall perform such action was taken. The vice presidents shall perform such other duties as may, from time to time, be assigned to them by the Board of Directors or the president. A vice president may sign, with the secretary or an assistant secretary, certificates of stock of the Corporation.
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Section 5.8. Secretary. The secretary shall keep the minutes of all meetings of the shareholders, of the Board of Directors, in one or more books provided for such purpose and shall see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law. He shall be custodian of the corporate records and of the seal (if any) of the Corporation and see, if the Corporation and see, if the Corporation has a seal, that the seal of the Corporation is affixed to all documents the execution of which on behalf of the Corporation under its seal is duly authorized; shall have general charge of the stock certificate books, transfer books and stock ledgers, and such other books and papers of the Corporation as the Board of Directors may direct, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the office of the Corporation during business hours; and in general shall perform all duties and exercise all powers incident to the office of the secretary and such other duties and powers as the Board of Directors or the president from time to time may assign to or confer on him.
Section 5.9. Treasurer. The treasurer shall keep complete and accurate records of account, showing at all times the financial condition of the Corporation. He shall be the legal custodian of all money, notes, securities and other valuables which may from time to time come into the possession of the Corporation. He shall furnish at meetings of the Board of Directors, or whenever requested, a statement of the financial condition of the Corporation, and shall perform such other duties as these Bylaws may require or the Board of Directors may prescribe.
Section 5.10. Assistant Officers. Any assistant secretary or assistant treasurer appointed by the Board of Directors shall have power to perform, and shall perform, all duties incumbent upon the secretary or treasurer of the Corporation, respectively, subject to the general direction of such respective officers, and shall perform such other duties as these Bylaws may require or the Board of Directors may prescribe.
Section 5.11. Salaries. The salaries or other compensation of the officers shall be fixed from time to time by the Board of Directors. No officers shall be prevented from receiving such a\salary or other compensation by reason of the fact that he is also a director of the Corporation.
Section 5.12. Bonds of Officers. The Board of Directors may secure the fidelity of any officer of the Corporation by bond or otherwise, on such terms and with such surety or sureties, conditions, penalties or securities as shall be deemed proper by the Board of Directors.
Section 5.13. Delegation. The Board of Directors may delegate temporarily the powers and duties of any officer of the Corporation, in case of his absence or for any other reason, to any other officer, and may authorize the delegation by any officer of the Corporation of any of his powers and duties to any agent or employee, subject to the general supervision of such officer.
ARTICLE VI
Miscellaneous
Section 6.1. Dividends. Dividends on the outstanding shares of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid by the Corporation in cash, in property, or in the Corporation’s own shares, but only out of the surplus of the Corporation, except as otherwise allowed by law.
Subject to limitations upon the authority of the Board of Directors imposed by law or by the Certificate of Incorporation, the declaration of and provision for payment of dividends shall be at the discretion of the Board of Directors.
Section 6.2. Contracts. The president shall have the power and authority to execute, on behalf of the Corporation, contracts or instruments in the usual and regular course of business, and in addition the Board of Directors may authorize any officer or officers, agent or agents, of the Corporation to enter into any contract or execute and deliver any instruments in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Unless so authorized by the Board of Directors or by these Bylaws, no officers, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement, or to pledge its credit or to render it pecuniarily liable for any purpose or in any amount.
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Section 6.3. Checks, Drafts, etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officers or employees of the Corporations shall from time to time be authorized pursuant to these Bylaws or by resolution of the Board of Directors.
Section 6.4. Depositories. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks or other depositories as the Board of Directors may from time to time designate, and upon such terms and conditions as shall be fixed by the Board of Directors. The Board of Directors may from time to time authorize the opening and maintaining within any such depository as it may designate, of general and special accounts, and may make such special rules and regulations with respect thereto as it may deem expedient.
Section 6.5. Endorsement of Stock Certificates. Subject to the specific directions of the Board of Directors, any share or shares of stock issued by any corporation and owned by the Corporation, including reacquired shares of the Corporation’s own stock, may, for sale or transfer, be endorsed in the name of the Corporation by the president or any vice president; and such endorsement may be attested or witnessed by the secretary or and assistant secretary either with or without the affixing thereto of the corporate seal.
Section 6.6. Corporate Seal. The corporate seal, if any shall be in such form as the Board of Directors shall approve, and such seal, or a facsimile thereof, may be impressed on, affixed to, or in any manner reproduced upon, instruments of any nature required to be executed by officers of the Corporation.
Section 6.7. Fiscal Year. The fiscal year of the Corporation shall begin and end on such dates as the Board of Directors at any time shall determine.
Section 6.8. Books and Records. The Corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders and Board of Directors, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each.
Section 6.9. Resignations. Any directors or officer may resign at any time. Such resignations shall be made in writing and shall take effect at the time specified therein, or, if no time is specified, at the time of its receipt by the president or secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.
Section 6.10. Indemnification of Officers, Directors, Employees and Agents. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
The Corporation shall indemnify any person who was or is in a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and expect that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper.
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Any indemnification under this Section shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification is proper because the director, officer, employee or agent has met the applicable standard of conduct set forth above. Such determination shall be made as follows: by the Board of Directors by a majority vote of a quorum consisting of directors who are not partied to such action, suit or proceeding; or if such a quorum is not obtainable, or even if obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or by the shareholders.
Any right of indemnification granted by this Section 6.10 shall be in addition to and not in lieu of any other such right which an officer , director, employee or agent of the Corporation may at any time be entitles under the law of the State of Delaware.
Section 6.11. Meetings by Telephone. Subject to the provisions required or permitted by these Bylaws or the laws of the State of Delaware for notice of meetings, members of the Board of Directors, or members of any committee designated by the Board of Directors, may participate in and hold any meeting required or permitted under these Bylaws by telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section shall constitute presence in person at such a meeting, except where a person participates in the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened.
ARTICLE VII
Amendments
Section 7.1. Amendments. If permitted by the Certificate of Incorporation, these Bylaws may be altered, amended or repealed, or new bylaws may be adopted, by the Directors at any duly held meeting or by the holders of a majority of the shares represented at any duly held meeting of shareholders; provided that notice of such proposed action shall have been contained in the notice of any such meeting.
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Certificate by Chief Executive Officer
The undersigned, being the Chief Executive Officer of QKL Stores Inc., hereby certifies that the foregoing code of Bylaws was duly adopted by the Board of Directors of said Corporation effective on April 24, 2012.
/s/ Zhuangyi Wang | ||
Chief Executive Officer |
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Certification of Chief Executive Officer
Pursuant to Rule 13A-14(A)/15D-14(A)
of the Securities Exchange Act of 1934
I, Zhuangyi Wang, Chief Executive Officer (Principal Executive Officer), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2012 of QKL Stores Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Dated: May 15, 2012 | By: | /s/Zhuangyi Wang |
Zhuangyi Wang | ||
Chief Executive Officer |
Certification of Chief Financial Officer
Pursuant to Rule 13A-14(A)/15D-14(A)
of the Securities Exchange Act of 1934
I, Tsz-Kit Chan, Chief Financial Officer (Principal Financial and Accounting Officer), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2012 of QKL Stores Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Dated: May 15, 2012 | By: | /s/Tsz-Kit Chan |
Tsz-Kit Chan | ||
Chief Financial Officer (Principal Financial and Accounting Officer) |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 AND EXCHANGE ACT RULES 13a-14(b) AND 15d-14(b)
(Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Quarterly Report of QKL Stores Inc. on Form 10-Q for the period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company.
Dated: May 15, 2012 | By: | /s/Zhuangyi Wang |
Zhuangyi Wang | ||
Chief Executive Officer |
Dated: May 15, 2012 | By: | /s/Tsz-Kit Chan |
Tsz-Kit Chan | ||
Chief Financial Officer |
PROPERTY, PLANT AND EQUIPMENT, NET
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3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2012
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PROPERTY, PLANT AND EQUIPMENT, NET | NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following:
The depreciation expenses for the period ended March 31, 2012 and 2011 were $1,641,431 and $1,299,885, respectively. |