UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2014.

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                   to                   .

Commission File Number 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 1,522,326 shares of common stock outstanding on November 12, 2014.

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	21
Item 4 – Controls and Procedures	21
PART II:  OTHER INFORMATION	22
Item 1 – Legal Proceedings	22
Item 1A – Risk Factors	22
Item 2 – Unregistered Sales of Equity Securities and Use Of Proceeds	22
Item 3 – Defaults Upon Senior Securities	22
Item 4 – Mine Safety Disclosures	22
Item 5 – Other Information	22
Item 6 – Exhibits	22
Signatures	24

PART I. FINANCIAL INFORMATION

Item 1. Interim Financial Statements

QKL STORES INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	September 30,  2014			December 31, 2013
	(Unaudited)
ASSETS
Cash	$	42,605,679		$	9,245,212
Restricted cash		8,609,740			8,668,882
Accounts receivable		320,570			557,745
Inventories		47,453,891			64,724,923
Other receivables		19,231,805			21,979,152
Prepaid expenses		6,933,867			9,915,479
Advances to suppliers		4,942,444			7,822,660
Income taxes receivables		1,695,685			1,739,773
Deferred income tax assets – current portion		2,778,076			2,788,918
Total current assets		134,571,757			127,442,744
Property, plant and equipment, net		38,109,472			40,247,576
Land use rights, net		698,756			718,337
Deferred income tax assets – non-current portion		66,956			66,956
Other assets		17,276			17,276
Total assets	$	173,464,217		$	168,492,889
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term loans	$	60,103,964		$	40,889,761
Accounts payable		33,991,621			35,840,964
Cash card and coupon liabilities		18,045,922			18,465,030
Customer deposits received		977,804			984,308
Accrued expenses and other payables		18,910,586			18,827,472
Total current liabilities		132,029,897			115,007,535
Total liabilities		132,029,897			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 September 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 September 30, 2014 and December 31, 2013		5,294			5,294
Additional paid-in capital		93,644,266			93,337,957
Retained earnings – appropriated		8,329,586			8,329,586
Retained earnings		(74,446,030			(62,145,794	)
Accumulated other comprehensive income		13,899,682	)		13,956,789
Total shareholders’ equity		41,434,320			53,485,354
Total liabilities and shareholders’ equity	$	173,464,217		$	168,492,889

See notes to unaudited condensed consolidated financial statements.

1

QKL STORES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

	(Unaudited)						(Unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net sales	$	61,121,016		$	59,243,560		$	198,809,303		$	215,296,669
Cost of sales		50,855,098			49,118,005			165,124,579			178,397,763
Gross profit		10,265,918			10,125,555			33,684,724			36,898,906
Operating expenses:
Selling expenses		13,062,967			10,031,669			35,800,120			33,235,756
General and administrative expenses		2,022,426			2,095,044			7,219,674			6,693,516
Total operating expenses		15,085,393			12,126,713			43,019,794			39,929,272
Loss from operations		(4,819,475	)		(2,001,158	)		(9,335,070	)		(3,030,366	)
Non-operating income (expense):
Interest income		241,800			190,224			726,416			645,788
Interest expense		(891,855	)		(349,665	)		(3,670,486	)		(873,553	)
Total non-operating expense		(650,055	)		(159,441	)		(2,944,070	)		(227,765	)
Loss before income taxes		(5,469,530	)		(2,160,599	)		(12,279,140	)		(3,258,131	)
Income taxes		11,357			(468,392	)		21,096			(514,983	)
Net loss	$	(5,480,887	)	$	(1,692,207	)	$	(12,300,236	)	$	(2,743,148	)
Comprehensive income statement:
Net loss	$	(5,480,887	)	$	(1,692,207	)	$	(12,300,236	)	$	(2,743,148	)
Foreign currency translation adjustment		675,064			954,945			(57,107	)		2,587,998
Comprehensive loss	$	(4,805,823	)	$	(737,262	)	$	(12,357,343	)	$	(155,150	)
Weighted average number of shares outstanding:
Basic		1,522,326			1,522,326			1,522,326			1,555,978
Diluted		1,522,326			1,522,326			1,522,326			1,555,978
Losses per share:
Basic	$	(3.60	)	$	(1.11	)	$	(8.08	)	$	(1.76	)
Diluted	$	(3.60	)	$	(1.11	)	$	(8.08	)	$	(1.76	)

See notes to unaudited condensed consolidated financial statements.

2

QKL STORES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

	(Unaudited)
	Nine Months Ended September 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(12,300,236	)	$	(2,743,148	)
Depreciation		5,084,837			5,034,492
Amortization		24,173			24,361
Share-based compensation		306,309			612,351
Deferred income tax		(8,770	)		880,073
Loss on disposal of fixed assets		-			25,755
Adjustments to reconcile net income to net cash provided by operating activities:
Accounts receivable		233,589			23,117
Inventories		16,845,228			20,708,613
Other receivables		2,599,829			523,424
Prepaid expenses		2,916,696			1,963,042
Advances to suppliers		2,829,497			4,947,618
Accounts payable		(1,606,320	)		(3,428,459	)
Cash card and coupon liabilities		(293,403	)		1,748,812
Customer deposits received		212			(234,533	)
Accrued expenses and other payables		211,765			(3,819,724	)
Income taxes payable		32,248			20,408
Net cash provided by operating activities		16,875,654			26,286,202
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(3,229,057	)		(787,373	)
Net cash used in investing activities		(3,229,057	)		(787,373	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loan borrowing		35,771,021			11,251,270
Bank loan repayment		(16,259,555	)		(16,073,243	)
Net cash provided by (used in) financing activities		19,511,466			(4,821,973	)
Effect of foreign currency translation		202,404			457,364
Net increase in cash		33,360,467			21,134,220
Cash – beginning of period		9,245,212			8,479,413
Cash – end of period	$	42,605,679		$	29,613,633
Supplemental disclosures of cash flow information:
Interest paid	$	3,670,486		$	873,553
Income taxes paid	$	65,184		$	205,905

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, wholly owned operating subsidiary of Qingkelong Chain located in Mainland China:  Daqing Qinglongxin Commerce & Trade Co., Ltd (“Qinglongxin Commerce”) and wholly owned operating company located in Mainland China: Daqing Longqing Microcredit Co., Ltd. (“QKL-LQ”), which Qingkelong Chain controls, through arrangement that absorbs operations risk, as if QKL-LQ were a wholly-owned subsidiary of Qingkelong Chain.

Store and its subsidiaries (hereinafter, collectively referred to as the “Company”) are engaged in the operation of retail chain stores in the PRC. The principal business activity of QKL-LQ is money lending.

The Company is a regional supermarket chain that currently operates 26 supermarkets, 17 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 two 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, 2013 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.

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.

4

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 nine months and three months ended September 30, 2014 and 2013.

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, labor 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 $127,205 and $233,643 respectively for the nine months ended September 30, 2014 and 2013, and amounted to $66,631 and $60,574 respectively for the three months ended September 30, 2014 and 2013, 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 nine months and three months ended September 30, 2014 and 2013.

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.

5

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:

· 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

The FASB has issued Accounting Standards Update (ASU) No. 2014-06, Technical Corrections and Improvements Related to Glossary Terms. The amendments in this ASU relate to glossary terms and cover a wide range of Topics in the FASB’s Accounting Standards Codification™ (Codification). These amendments are presented in four sections:

1. Deletion of Master Glossary Terms (Section A) arising because of terms that were carried forward from source literature (e.g., FASB Statements, EITF Issues, and so forth) to the Codification but were not utilized in the Codification.

2. Addition of Master Glossary Term Links (Section B) arising from Master Glossary terms whose links did not carry forward to the Codification.

3. Duplicate Master Glossary Terms (Section C) arising from Master Glossary terms that appear multiple times in the Master Glossary with similar, but not identical, definitions.

4. Other Technical Corrections Related to Glossary Terms (Section D) arising from miscellaneous changes to update Master Glossary terms.
The amendments do not have transition guidance and are effective upon issuance for both public entities and nonpublic entities.

6

The FASB has issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.

 
Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.

 
In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations.

 
The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations.

 
The amendments in this ASU enhance convergence between U.S. GAAP and International Financial Reporting Standards (IFRS). Part of the new definition of discontinued operation is based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.

The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it is effective for annual financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted.

The FASB has issued Accounting Standards Update (ASU) No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The issue is the result of a consensus of the FASB Emerging Issues Task Force.

The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.

The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities.

Entities may apply the amendments in this ASU either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost.

The FASB has issued Accounting Standards Update (ASU) No. 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. The amendments in this ASU will apply to a reporting entity that is required to consolidate a collateralized financing entity under the Variable Interest Entities guidance when: (1) the reporting entity measures all of the financial assets and the financial liabilities of that consolidated collateralized financing entity at fair value in the consolidated financial statements based on other Codification Topics; and (2) the changes in the fair values of those financial assets and financial liabilities are reflected in earnings.

The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. For entities other than public business entities, the amendments are effective for annual periods ending after December 15, 2016, and interim periods beginning after December 15, 2016. Early adoption is permitted as of the beginning of an annual period.

The fair value of the financial assets of a collateralized financing entity, as determined under GAAP, may differ from the fair value of its financial liabilities even when the financial liabilities have recourse only to the financial assets. Before this ASU, there was no specific guidance in GAAP on how a reporting entity should account for that difference.

7

 
The amendments in this ASU provide an alternative to Topic 820 Fair Value Measurement for measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity to eliminate that difference. When the measurement alternative is not elected for a consolidated collateralized financing entity within the scope of this ASU, the amendments clarify that: (1) the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured using the requirements of Topic 820; and (2) any differences in the fair value of the financial assets and the fair value of the financial liabilities of that consolidated collateralized financing entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income (loss).

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.

Under Generally Accepted Accounting Principles (GAAP), financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.

Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures.

This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.

The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued.

NOTE 3 – OTHER RECEIVABLES

Other receivables consisted of the following:

	September 30, 2014  (Unaudited)		December 31, 2013
Deposits	$	4,180,789	$	5,281,030
Purchase deposits		6,948		8,777
Input value added tax receivables		3,815,790		4,819,976
Rebates receivables		3,263,663		4,122,547
Loans to customers		7,806,158		7,546,665
Others		158,457		200,157
Total other receivables	$	19,231,805	$	21,979,152

8

 NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consisted of the following:

	September 30, 2014 (Unaudited)			December 31, 2013
Buildings	$	7,297,443		$	6,997,206
Shop equipment		20,398,732			19,559,473
Office equipment		4,432,613			4,250,243
Motor vehicles		1,441,239			1,381,943
Car park		21,970			21,066
Leasehold improvements		27,777,126			26,634,300
Construction in progress		10,253,128			9,831,287
Total property, plant and equipment		71,622,251			68,675,518
Less:  accumulated depreciation and amortization		(33,512,779	)		(28,427,942	)
Total property, plant and equipment, net	$	38,109,472		$	40,247,576

The depreciation expenses for the nine months period ended September 30, 2014 and 2013 were $ 5,084,837 and $5,034,492, respectively.

NOTE 5 – ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables consisted of the following:

	September 30, 2014 (Unaudited)		December 31, 2013
Accrued expenses	$	15,572,727	$	15,504,283
VAT and other PRC tax payable		333,558		332,092
Shop equipment and leasehold improvements payables		313,596		312,218
Deposit from vendors and employees		2,690,705		2,678,879
Total accrued expenses and other payables	$	18,910,586	$	18,827,472

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 Series 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.

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The following table sets forth the computation of basic and diluted earnings per common stock:

	(Unaudited)						(Unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net loss to QKL Stores, Inc. for computing basic net income per share	$	(5,480,887	)	$	(1,692,207	)	$	(12,300,236	)	$	(2,743,148	)
Undistributed earnings allocated to Series A Convertible Preferred Stock		-			-
Net loss attributable to ordinary shareholders for computing basic net loss per ordinary share	$	(5,480,887	)	$	(1,692,207	)	$	(12,300,236		$	(2,743,148	)
Weighted-average shares of common stock outstanding
Basic		1,522,326			1,522,326			1,522,326			1,555,978
Dilutive shares:
Conversion of series A convertible preferred stock		22,059			28,043			22,059			28,043
Dilutive effect of stock warrants and options		-			-			-			-
Anti-dilutive effect of preferred stock		(22,059	)		(28,043			(22,059			(28,043	)
Diluted		1,522,326			1,522,326			1,522,326			1,555,978
Basic earnings per share	$	(3.60	)	$	(1.11	)	$	(8.08	)	$	(1.76	)
Diluted earnings per share	$	(3.60		$	(1.11	)	$	(8.08	)	$	(1.76	)

The 84,708 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 and nine months ended September 30, 2014 and 2013 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 of 242,611 and Series B stock warrants of 241,705 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 $81.60 per share and the Series B are exercisable at an equivalent price of $102.00 per share. These stock warrants expired on March 28, 2014 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 484,315 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 8,333 shares of the Company’s common stock at an exercise price of $120 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. 

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, 2013		490,369		$	92.24	$	0.31
Exercised		-			-		-
Cancelled – Warrant A		(241,344	)		81.60		-
Cancelled – Warrant B		(240,692	)		102.00		-
Balance – September 30, 2014		8,333		$	120.00	$	0.31

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 833 shares of the Company’s common stock at an exercise price of $192.00 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 $180.00, 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 its Chief Operating Officer, Alan Stewart and 20 employees options to acquire 86,250 shares of the Company's common stock at an exercise price of $105.60 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 4,167 shares of the Company's common stock at an exercise price of $82.08 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 $ 102,014 and $306,042 for the three months and nine months ended September 30, 2014 respectively. 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, 2013		84,708		$	106.64		0.49	$	-
Granted		-			-		-		-
Exercised		-			-		-		-
Forfeited		(2,500	)		180		-		-
Outstanding– September 30, 2014		82,208		$	104.41		0.01	$	-
Exercisable – September 30, 2014		65,767		$	104.41		0.01	$	-

As of September 30, 2014, there was $ $101,915 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 0-1 year.

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)						(Unaudited)
	Three Months Ended  September 30						Nine Months Ended September 30
	2014			2013			2014			2013
Rent expense	$	1,443,206		$	2,083,861		$	5,734,770		$	6,251,583
Less: Sublease income		(491,912	)		(497,768	)		(983,552	)		(1,493,304	)
Total rent expense, net	$	951,294		$	1,586,093		$	4,751,218		$	4,758,279

Annual minimum payments under operating leases are as follows:

As of September 30,	Minimum Lease Payment		Sublease Income		Net Minimum Lease Payment
2015	$	10,731,873		1,229,438		9,502,435
2016		10,637,333		139,859		10,497,474
2017		10,427,370		137,939		10,289,431
2018		9,805,050		123,167		9,681,883
2019		9,439,430		21,505		9,417,925
Thereafter		81,876,822		-		81,876,822
Total	$	132,917,878		1,651,908		131,265,970

NOTE 10 – SUBSEQUENT EVENT

On October 17 2014, the Company filed a Certificate of Amendment to the Company’s Certificate of Incorporation, as amended to date, with the Secretary of State of the State of Delaware to reduce the number of authorized shares from 200,000,000 shares to 6,000,000 shares. As a result of the amendment, the total number of shares which the Company shall have the authority to issue is 6,000,000, consisting of 5,000,000 shares of common stock, par value $.001 per share and 1,000,000 shares of preferred stock, par value $.01per share. The rights and privileges of the holders of common stock are unaffected by the amendment.

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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, 2013.

Overview

We are a regional supermarket chain that currently operates 26 supermarkets, 17 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 two 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

· one new store in 2012 that has approximately 5,700 square meters of space

· three new stores in first nine months of 2014 that have approximately 27,100 square meters of space

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.

On March 28, 2012, QKL-China formed QKL-LQ for money lending business. Currently, the business activity of QKL-LQ is immaterial.

On June 11, 2012, we completed a 1-for-3 reverse stock split of our common stock (the “2012 Stock Split”), such that for each three shares outstanding prior to the 2012 Stock Split there was one share outstanding after the 2012 Stock Split.

On February 4, 2013, we completed a 1-for-8 reverse stock split of our common stock (the “2013 Stock Split”), such that for each eight shares outstanding prior to the 2013 Stock Split there was one share outstanding after the 2013 Stock Split.

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 gift card sales.

Expanded Operations

As of September 30, 2014, we operated 26 supermarkets, 17 hypermarkets, 4 department stores, and 2 distribution centers, one in Daqing, and one in Harbin. 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.

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% of our total revenues for the first three months ended September 30, 2014 and 2013. 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. 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, 2013, 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. There have been no significant changes to these estimates in the nine months ended September 30, 2014.

Recently Issued Accounting Guidance

See Note 2 to condensed consolidated financial statements included in Item 1, Interim Financial Statements, of this Quarterly Report on Form 10-Q.

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Results of Operations

Three months ended September 30, 2014 compared with three months ended September 30, 2013

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
	September 30, 2014						September 30, 2013
	Amount			% of Net Sales			Amount			% of Net Sales
Net sales	$	61,121,016			100.0	%	$	59,243,560			100.0	%
Cost of sales		50,855,098			83.2			49,118,005			82.9
Gross profit		10,265,918			16.8			10,125,555			17.1
Selling expenses		13,062,967			21.4			10,031,669			16.9
General and administrative expenses		2,022,426			3.3			2,095,044			3.5
Operating loss		(4,819,475	)		(7.9	)		(2,001,158	)		(3.4	)
Interest income		241,800			0.4			190,224			0.3
Interest expense		891,855			1.5			349,665			0.6
Loss before income taxes		(5,469,530	)		(8.9	)		(2,160,599	)		(3.6	)
Income taxes		11,357			0.0			(468,392	)		(0.8	)
Net loss	$	(5,480,887	)		(9.0	)%	$	(1,692,207	)		(2.9	)%

Net Sales – Net sales increased by $1.9 million, or 3.2%, to $61.1 million for the three months ended September 30, 2014 from $59.2 million for the three months ended September 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 $56.2 million in sales in the third quarter of 2014, a decrease of $1.5 million, or 2.6% compared with $57.7 million in net sales in the third quarter of 2013.

§ New store sales increased, reflecting the opening of three new stores since January 1, 2013. These stores generated approximately $4.3 million in sales in the third quarter of 2014.

§ The number of stores including supermarkets/hypermarkets and department stores at September 30, 2014 was 47 versus 45 at September 30, 2013.

Cost of Sales – Our cost of sales for the three months ended September 30, 2014 was approximately $50.9 million, representing an increase of $1.7 million, or 3.5%, from approximately $49.1 million for the same period in 2013. 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 $0.1 million, or 1.4%, to $10.3 million, or 16.8% of net sales, in the third quarter of 2014 from $10.1 million, or 17.1% of net sales, in the third quarter of 2013. The change in gross profit was primarily attributable to an increase in net sales of $1.9 million and an increase in cost of sales of $1.7 million in the third quarter of 2014 compared to the third quarter of 2013.

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 $3.0 million, or 30.2%, to $13.1 million, or 21.4% of net sales, in the third quarter of 2014, from $10.0 million, or 16.9% of net sales, in the third quarter of 2013. The increase in selling expenses relative to net sales was due to the realize of significant preliminary expenses of new stores opening of $1.8 million in the three months ended September 30, 2014 compared to nil in the same period in 2013.

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General and Administrative Expense –General and administrative expenses decreased by $0.1 million, or 3.5%, to $2.0 million, or 3.3% of net sales, in the third quarter of 2014 from $2.1 million, or 3.5% of net sales, in the third quarter of 2013. There is no significant change to our general and administrative expense.

Interest Expense –Interest expenses increased by $0.5 million to $0.9 million in the third quarter of 2014 from $0.3 million in the third quarter of 2013. The increase in interest expenses was due to the increase in our short term bank loans.

Income Taxes –The provision for income taxes was $11,357 for the third quarter of 2014 compared with $0.5 million of tax credit for the third quarter of 2013.

Net Loss – Our net loss for the third quarter of 2014 was $5.5 million, or $3.60 per diluted share, from net loss of $1.7 million, or $1.11 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 third quarter of 2014 and 2013.

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Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

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) Nine Months Ended September 30, 2014						(Unaudited) Nine Months Ended   September 30, 2013
	Amount			% of Net Sales			Amount			% of Net Sales
Net sales	$198,809,303			100.0		%	$215,296,669			100.0		%
Cost of sales		165,124,579			83.1			178,397,763			82.9
Gross profit		33,684,724			16.9			36,898,906			17.1
Selling expenses		35,800,120			18.0			33,235,756			15.4
General and administrative expenses		7,219,674			3.6			6,693,516			3.1
Operating loss		(9,335,070	)		(4.7	)		(3,030,366	)		(1.4	)
Interest income		726,416			0.4			645,788			0.3
Interest expense		3,670,486			1.8			873,553			0.4
Income loss before income taxes		(12,279,140	)		(6.2	)		(3,258,131	)		(1.5	)
Income taxes		21,096			0.0			(514,983	)		(0.2	)
Net loss	$	(12,300,236	)		(6.2	)%	$	(2,743,148	)		(1.3	)%

Net Sales – Net sales decreased by $16.5 million, or 7.7%, to $198.8 million for the nine months ended September 30, 2014 from $215.3 million for the nine months ended September 30, 2013. The change in net sales was primarily attributable to the following:

§ Same store sales represent 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 $187.5 million sales in the first nine months of 2014, a decrease of $25.9 million, or 12.1% compared with $213.4 million net sales in the first nine months of 2013.

§ New store sales increased, reflecting the opening of three new stores since January 1, 2013. These stores generated approximately $10.7 million sales in the first nine months of 2014.

§ The number of stores including supermarket/hypermarket and department stores at September 30, 2014 was 47 versus 45 at September 30, 2013.

Cost of Sales – Our cost of sales for the nine months ended September 30, 2014 was approximately $165.1 million, representing a decrease of $13.3 million, or 7.4%, from approximately $178.4 million for the same period in 2013. The decrease was due to the decrease 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, decreased by $3.2 million, or 8.7%, to $33.7 million, or 16.9% of net sales, in the first nine months of 2014 from $36.9 million, or 17.1% of net sales, in the first nine months of 2013. The change in gross profit was primarily attributable to net sales decreased by $16.5 million and a decrease in cost of sales of $13.3 million in the first nine months of 2014 compared to the first nine months of 2013.

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 7.7%, to $35.8 million, or 18.0% of net sales, in the first nine months of 2014 from $33.2 million, or 15.4% of net sales in the first nine months of 2013. The increase in selling expenses relative to net sales was due to the realize of significant preliminary expenses of new stores opening of $2.3 million in the first nine months of 2014 compared to nil in the same period in 2013.

General and Administrative Expense –General and administrative expenses increased by $0.5 million, or 7.9%, to $7.2 million, or 3.6% of net sales, in the first nine months of 2014 from $6.7 million, or 3.1% of net sales, in the first nine months of 2013. We have expanded our resources buying team in the first quarter and the related expenses were $0.5 million.

Interest Expense –Interest expenses increased by $2.8 million to $3.7 million in the first nine months of 2014 from $0.9 million in the first nine months of 2013. The increase in interest expenses was due to the increase in short term bank loans.

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Income Taxes –The provision for income taxes was $21,096 for the first nine months of 2014 compared with $0.5 million of tax credit for the first nine months of 2013.

Net Income – Net loss for the first nine months of 2014 was $12.3 million, or $8.08 per diluted share compared with net loss of $2.7 million, or $1.76 per diluted share, in the prior year period. The number of shares used in the computation of diluted EPS was 1,522,326 and 1,555,978 for the first nine months of 2014 and 2013, respectively.

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 September 30, 2014, we had $42.6 million of cash compared to $29.6 million at September 30, 2013. The following table sets forth a summary of our cash flows for the periods indicated:

	(Unaudited)
	Nine Months Ended September 30,
	2014			2013
Net cash provided by operating activities	$	16,875,654		$	26,286,202
Net cash used in investing activities		(3,229,057	)		(787,373	)
Net cash provided by (used in) financing activities		19,511,466			(4,821,973	)
Effect of foreign currency translation		202,404			457,364
Net increase in cash	$	33,360,467		$	21,134,220

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.

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Operating Activities –Net cash provided by operating activities for the nine months ended September 30, 2014 and 2013 were $16.9 million and $26.3 million, respectively. The decrease in cash provided by operating activities for the nine months ended September 30, 2014 compared to the same period in 2013 primarily reflects the decrease in net sales for the nine months ended September 30, 2014.

Investing Activities – Net cash used in investing activities for the first nine months of 2014 and 2013 were $3.2 million and $0.8 million, respectively. Capital expenditures represented substantially all of the net cash used in investing activities for each period. Our capital spending is primarily for new store openings and store-related remodeling.

Financing Activities – Net cash provided by (used in) financing activities for the first nine months of 2014 and 2013 was $19.5 million and ($4.8) million, respectively. Cash provided by (used in) financing activities was sourced from and repayment to short-term bank loans.

Loan Facility – On July 6, 2011, Qingkelong Chain entered into a working capital agreement with Longjiang Commercial Bank. Under this agreement, Qingkelong 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 current annual interest rate of 7.2%%. The loan under this financing agreement is secured by buildings with appraisal value of approximately $11.9 million (RMB 77.0 million).

On September 30, 2013, Qingkelong Chain entered into a working capital agreement with China CITIC Bank. Under this agreement, Qingkelong Chain borrowed $3.3 million (RMB20 million). The loan is repayable on September 29, 2014 with the current interest rate of 6.6%. The loan is secured by personal guarantee of Zhuangyi Wang.

On October 22, 2013, Qingkelong Chain entered into a working capital agreement with China CITIC Bank. Under this agreement, Qingkelong Chain borrowed $4.9 million (RMB30 million). The loan is repayable on October 23, 2014 with the current interest rate of 6.6%. The loan is secured by personal guarantee of Zhuangyi Wang.

On October 23, 2013, Qingkelong Chain entered into a working capital agreement with China CITIC Bank. Under this agreement, Qingkelong Chain borrowed $8.2 million (RMB50 million). The loan is repayable on October 22, 2014 with the current interest rate of 6.6%. The loan is secured by pledged deposit of $8.7million.

On December 4, 2013, Qingkelong Chain entered into a working capital agreement with Industrial and Commercial Bank of China Limited. Under this agreement, Qingkelong Chain borrowed $16.4million (RMB100 million). The loan is repayable on December 2, 2014 with the current interest rate of 7.2%.

On February 19, 2014, Qingkelong Chain entered into a working capital agreement with China CITIC Bank. Under this agreement, Qingkelong Chain borrowed $11.4 million (RMB70 million). The loan is repayable on February 18, 2015 with the current interest rate of 7.2%.

On March 19, 2014, Qingkelong Chain entered into a working capital agreement with China CITIC Bank. Under this agreement, Qingkelong Chain borrowed $8.1 million (RMB50 million). The loan is repayable on March 18, 2015 with the current interest rate of 6.6%.

On April 1, 2014, Qingkelong Chain entered into a working capital agreement with Industrial and Commercial Bank of China Limited. Under this agreement, Qingkelong Chain borrowed $16.3million (RMB100 million). The loan is repayable on March 31, 2015 with the current interest rate of 7.2%.

Future Capital Requirements – We had cash on hand of $42.6 million as of September 30, 2014. We expect capital expenditures for the remainder of 2014 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.

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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 internal control deficiencies. 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 three months ended September 30, 2014, 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
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.
101	The following financial statements from QKL Stores Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Income; (iii) the Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements, tagged in detail.

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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: November 14, 2014	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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