QKL Stores Inc. Announces Second Quarter 2014 Financial Results

— 2Q14 Revenue decreased by 12.4% to $51.7 million from $59.0 million in 2Q13 —

— 2Q14 Gross Profit decreased by 14.3% to $8.7 million from $10.1 million in 2Q13 —

DAQING, China, August 14, 2014 /PRNewswire/ — QKL Stores Inc. (the “Company”) (Nasdaq: QKLS), a leading regional supermarket chain in Northeastern China and Inner Mongolia, today announced its financial results for the second quarter ended June 30, 2014.

Mr. Zhuangyi Wang, Chairman and CEO, said, “The second quarter was a period in which we focused on improving efficiency in our business. Our existing stores opened for more than a year continued to show stable gross profit margin of 16.8% which helps support the ramp up period of our newer stores, which typically take longer to reach profitability.

“We plan to open 2 additional stores this year. These two new stores we will open in the future will be located in the Heilongjiang Province where we have stronger relationships with local vendors and the cost of goods is slightly lower than the other two provinces (Liaoning and Jilin) in which we operate.”

“As QKL expands its market presence in northeast China, we are uniquely positioned against our local competitors through our large product offering, strong supplier relationships, efficient distribution network and state-of-the-art IT system. We are comfortable with our opportunities in the second half of the year and believe we’ll see an improvement in operating expenses and net result from the current quarter.”

Second Quarter 2014 Financial Results

Net Sales -Net sales decreased by $7.3 million, or 12.4%, to $51.7 million for the three months ended June 30, 2014 from $59.0 million for the three months ended June 30, 2013. 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, 2013. Same store (44 stores) sales generated approximately $49.6 million in sales in the second quarter of 2014, a decrease of $3.8 million, or 7.1% compared with $53.4 million in net sales in the second quarter of 2013. New store sales increased, reflecting the opening of two new stores since January 1, 2013. These stores generated approximately $2.1 million in sales in the second quarter of 2014. The number of stores including supermarkets/hypermarkets and department stores at June 30, 2014 was 46 versus 45 at June 30, 2013.

Gross profit, or total revenue minus cost of sales, decreased by $1.4 million, or 14.3%, to $8.7 million, or 16.8% of net sales, in the second quarter of 2014 from $10.1 million, or 17.2% of net sales, in the second quarter of 2013. The change in gross profit was primarily attributable to a decrease in net sales of $7.3 million and a decrease in cost of sales of $5.9 million in the second quarter of 2014 compared to the second quarter of 2013. We believe that our gross margin is likely to be between 16.8% and 17.3%, 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 decreased by $0.4 million, or 4.3%, to $9.5 million, or 18.3% of net sales, in the second quarter of 2014, and $9.9 million, or 16.7% of net sales, in the second quarter of 2013. The increase in selling expenses relative to net sales was due to the significant decrease in net sales in the three months ended June 30, 2014 compared to the same period in 2013.

General and administrative expenses decreased by $0.1 million, or 5.6%, to $2.0 million, or 3.8% of net sales, in the second quarter of 2014 from $2.1 million, or 3.5% of net sales, in the second quarter of 2013. There is no significant change to our general and administrative expense.

Our net loss for the second quarter of 2014 was $3.8 million, or $2.47 per diluted share, from net loss of $1.5 million, or $0.96 per diluted share in the prior year period. The number of shares used in the computation of diluted EPS was 1,522,326 for the second quarter of 2014 and 2013.

Conference Call

Management will host a conference call at 8:30 am ET on Thursday, August 14th. To participate, please dial one of the local access numbers, listed below. The conference call identification number is 10017432.

Participant Dial In (Toll Free):

1-877-870-4263

Participant International:

1-412-317-0790

Canadian Dial In (Toll Free):

1-855-669-9657

China (N) Toll Free:

4001-201213

China (S) Toll Free:

4001-201213

Hong Kong Toll Free:

800-905945

About QKL Stores Inc.:

Based in Daqing, China, QKL Stores, Inc. is a leading regional supermarket chain company operating in Northeastern China and Inner Mongolia. QKL Stores sells a broad selection of merchandise, including groceries, fresh food, and non-food items, through its retail supermarkets, hypermarkets and department stores; the company also has its own distribution centers that service its supermarkets. For more information, please access the Company’s website at: www.qklstoresinc.com.

Safe Harbor Statement

Certain statements in this release and other written or oral statements made by or on behalf of the Company are “forward looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as management’s expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. The forward looking statements are subject to a number of risks and uncertainties including market acceptance of the Company’s services and projects and the Company’s continued access to capital and other risks and uncertainties. The actual results the Company achieves may differ materially from those contemplated by any forward-looking statements due to such risks and uncertainties. These statements are based on our current expectations and speak only as of the date of such statements.

Contact Information

QKL Stores, Inc.

In China:
Mike Li, Investor Relations
+86-459-460-7987

QKL STORES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

June 30,
2014

December 31,
2013

(Unaudited)

ASSETS

Cash

$

47,167,228

$

9,245,212

Restricted cash

8,607,363

8,668,882

Accounts receivable

331,294

557,745

Inventories

47,439,533

64,724,923

Other receivables

22,232,748

21,979,152

Prepaid expenses

4,813,266

9,915,479

Advances to suppliers

4,926,266

7,822,660

Income taxes receivables

1,760,382

1,739,773

Deferred income tax assets – current portion

2,768,651

2,788,918

Total current assets

140,046,731

127,442,744

Property, plant and equipment, net

38,289,047

40,247,576

Land use rights, net

698,564

718,337

Deferred income tax assets – non-current portion

66,956

66,956

Other assets

17,276

17,276

Total assets

$

179,118,574

$

168,492,889

LIABILITIES AND SHAREHOLDERS’ EQUITY

Short-term loans

$

60,087,370

$

40,889,761

Accounts payable

34,221,996

35,840,964

Cash card and coupon liabilities

18,040,939

18,465,030

Customer deposits received

1,050,325

984,308

Accrued expenses and other payables

19,580,082

18,827,472

Total current liabilities

132,980,712

115,007,535

Total liabilities

132,980,712

115,007,535

Shareholders’ equity

Common stock, $0.001 par value per share, authorized 100,000,000 shares, issued and outstanding 1,522,326 shares at June 30, 2014 and December 31, 2013

1,522

1,522

Series A convertible preferred stock, par value $0.01, authorized 10,000,000 shares, issued and outstanding 529,412 shares at June 30, 2014 and December 31, 2013

5,294

5,294

Additional paid-in capital

93,541,985

93,337,957

Retained earnings – appropriated

8,329,586

8,329,586

Retained earnings

(68,965,143)

(62,145,794)

Accumulated other comprehensive income

13,224,618

13,956,789

Total shareholders’ equity

46,137,862

53,485,354

Total liabilities and shareholders’ equity

$

179,118,574

$

168,492,889

QKL STORES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income

(Unaudited)

(Unaudited)

Three Months
Ended June 30,

Six Months
Ended June 30,

2014

2013

2014

2013

Net sales

$

51,655,611

$

58,995,918

$

137,688,287

$

156,053,109

Cost of sales

42,968,964

48,862,015

114,269,481

129,279,758

Gross profit

8,686,647

10,133,903

23,418,806

26,773,351

Operating expenses:

Selling expenses

9,456,970

9,879,874

22,737,153

23,204,087

General and administrative expenses

1,963,838

2,080,136

5,197,248

4,598,472

Total operating expenses

11,420,808

11,960,010

27,934,401

27,802,559

Loss from operations

(2,734,161)

(1,826,107)

(4,515,595)

(1,029,208)

Non-operating income (expense):

Interest income

254,517

261,991

484,616

455,564

Interest expense

(1,279,388)

(226,280)

(2,778,631)

(523,888)

Total non-operating income (expense)

(1,024,871)

35,711

(2,294,015)

(68,324)

Loss before income taxes

(3,759,032)

(1,790,396)

(6,809,610)

(1,097,532)

Income taxes

3,867

(336,185)

9,739

(46,591)

Net loss

$

(3,762,899)

$

(1,454,211)

$

(6,819,349)

$

(1,050,941)

Comprehensive income statement:

Net loss

$

(3,762,899)

$

(1,454,211)

$

(6,819,349)

$

(1,050,941)

Foreign currency translation adjustment

21,002

447,273

(732,171)

1,633,053

Comprehensive (loss) income

$

(3,741,897)

$

(1,006,938)

$

(7,551,520)

$

582,112

Weighted average number of shares outstanding:

Basic

1,522,326

1,522,326

1,522,326

1,516,140

Diluted

1,522,326

1,522,326

1,522,326

1,516,140

Losses per share:

Basic

$

(2.47)

$

(0.96)

$

(4.48)

$

(0.69)

Diluted

$

(2.47)

$

(0.96)

$

(4.48)

$

(0.69)

QKL STORES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended June 30,

2014

2013

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$

(6,819,349)

$

(1,050,941)

Depreciation

3,279,750

3,280,567

Amortization

14,708

16,172

Share-based compensation

204,029

408,234

Deferred income tax

390,291

Loss on disposal of fixed assets

25,646

Adjustments to reconcile net income to net cash provided by operating activities:

Accounts receivable

222,985

40,727

Inventories

16,863,267

21,299,200

Other receivables

(314,995)

1,669,983

Prepaid expenses

5,042,852

2,861,272

Advances to suppliers

2,847,162

7,603,073

Accounts payable

(1,367,629)

(4,713,502)

Cash card and coupon liabilities

(293,696)

501,696

Customer deposits received

73,164

(117,765)

Accrued expenses and other payables

447,597

(2,776,056)

Income taxes payable

(33,029)

20,322

Net cash provided by operating activities

20,166,816

29,458,919

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property, plant and equipment

(1,603,149)

(538,595)

Net cash used in investing activities

(1,603,149)

(538,595)

CASH FLOWS FROM FINANCING ACTIVITIES:

Bank loan borrowing

35,806,650

Bank loan repayment

(16,275,750)

(16,005,275)

Net cash provided by (used in) financing activities

19,530,900

(16,005,275)

Effect of foreign currency translation

(172,551)

295,196

Net increase in cash

38,094,567

12,915,049

Cash – beginning of period

9,245,212

8,479,413

Cash – end of period

$

47,167,228

$

21,689,658

Supplemental disclosures of cash flow information:

Interest paid

$

2,789,480

$

523,888

Income taxes paid

$

23,252

$

205,035