QKL Stores Inc. - FORM 10-K/A

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EX-31.1 - EXHIBIT 31.1 - QKL Stores Inc.	v245211_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - QKL Stores Inc.	v245211_ex32-1.htm
EX-23.1 - EXHIBIT 23.1 - QKL Stores Inc.	v245211_ex23-1.htm
EX-31.2 - EXHIBIT 31.2 - QKL Stores Inc.	v245211_ex31-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment No. 1)

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2010

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 001-34498

QKL STORES INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		75-2180652
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)

4 Nanreyuan Street

Dongfeng Road

Sartu District

163300 Daqing, P.R. China

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (011) 86-459-460-7987

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.001 per share		NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No þ

The aggregate market value of the registrant’s common stock, $0.001 par value per share, held by non-affiliates of the registrant on June 30, 2010 was approximately $44,520,596 (based on the closing sales price of the registrant’s common stock on that date ($4.20). Shares of the registrant’s common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ¨ No ¨

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of March 28, 2011 there were 29,769,590 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2011 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K/A.

Explanatory Note

We are filing this Amendment No. 1 (this “Amendment No. 1”) on Form 10-K/A to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on March 31, 2011 (the “Original 2010 Form 10-K”). This Amendment No. 1 amends the Original 2010 Form 10-K, as follows:

(i) to amend Item 8 – Financial Statements and Supplementary Data and certain related areas to reflect the correction of a misstatement related to accounting for basic and dilutive earnings per share, as discussed under “Restatement of Financial Statements” below:

(ii) to amend Item 9A – Controls and Procedures to reflect a reassessment of our disclosure controls and procedures and internal control over financial reporting, as of December 31, 2010, in light of the restatement of our audited financial statements for the year ended December 31, 2010; and

(iii) to amend the Items listed below to provide updated disclosure in response to certain other comments we received from the SEC in connection with the SEC’s periodic review of our SEC filings:

Item 7 –Management’s Discussion and Analysis of Financial Condition and Results of Operations

Under “Our Operations in China”, we have added disclosure about the nature of assets held by, and the operations of, entities apart from the consolidated VIE.

Under “Our Corporate Structure”, we have added disclosure about the risks and uncertainties that may result in deconsolidation of the VIE.

Under “Critical Accounting Policies and Estimates - Goodwill”, we have added disclosure for the probability of future goodwill impairment charges..

Under “About Non-GAAP Financial Measures”, we have added disclosure about reconciliation of net Income (loss) to adjusted net income.

Under “Liquidity and Capital Resources”, we have added disclosure as follows:

(i) how cash is transferred to our PRC subsidiary and variable interest entity, and conversely, how earnings and cash are transferred from our PRC subsidiary and variable interest entity to offshore companies;

(ii) restrictions that impact the ability to transfer cash within the corporate structure and the nature of restrictions on the subsidiary and variable interest entity’s net assets, the amount of those net assets and the potential impact on the company’s liquidity; and

(iii) the amount of cash held by your PRC subsidiary and variable interest entity, and our intention to transfer the funds to your non-PRC entities and the need to accrue and pay withholding and other taxes if funds were transferred to our non-PRC entities.

Under “Notes to Consolidated Financial Statements”, we have added disclosure as follows:

(i) disclose, within our accounting policy footnote, the method and the inputs used in estimating the fair value the warrant liabilities as of 12/31/2009;

(ii) disclose accounting policies regarding the accrual and disclosure of loss contingencies and the procedures undertook to assess the probability of loss related to asserted and unasserted claims or assessments;

(iii) disclose the fact that our control and economic benefits agreements are enforceable under PRC and local law;

(iv) disclose (a) the significant judgments and assumptions made in determining that the Company is the primary beneficiary of QKL-China, (b) whether the Company has provided financial or other support to QKL-China during the years presented that the Company was not previously contractually required to provide including the type and amount of support and the primary reasons for providing the support, (c) how QKL-China is financed, (d) the nature of any restrictions on the assets of QKL-China, (e) whether the creditors of QKL-China have recourse to the general credit of QKL Stores, Inc., Speedy Brilliant (BVI) or Speedy Brilliant (Daqing), (f) the terms of arrangements that could require the Company to provide financial support to QKL-China, (g) the Company's policy regarding how net income is attributed to any noncontrolling interest and (h) quantitative information about the size of QKL-China;

(v) describe the potential impact of risks associated with the Company's involvement with QKL-China, including potential for deconsolidation, if the legal structure and contractual arrangements were found to be in violation of any existing or future PRC laws and regulations; and

(vi) disclose the pertinent rights and privileges of the Company's Series A convertible preferred shares.

We refer to the Original 2010 Form 10-K and this Amendment No. 1 as this “Annual Report on Form 10-K”. Except as discussed above, the Company has not modified or updated disclosures presented in the Original 2010 Form 10-K. Accordingly, except as discussed above, this Amendment No. 1 does not reflect events occurring after the filing of the Original 2010 Form 10-K, nor does it modify or update those disclosures affected by subsequent events or discoveries. Events occurring after the filing of the 2010 Original Form 10-K or other disclosures necessary to reflect subsequent events have been or will be addressed in the Company's reports filed subsequent to the Original 2010 Form 10-K.

Restatement of Financial Statements

In connection with a review of the Company's Annual Report among the Audit Committee and the Company's management, with the assistance of BDO China Shu Lun Pan Certified Public Accountants LLP and Albert Wong & Co LLP, the Company's former and current independent registered public accounting firms, the Company has reassessed the computation of basic and diluted earnings per share . The review was conducted to respond to certain comments raised by the staff of the SEC in connection with its periodic review of the Company's SEC filings.

The errors in our computations of basic and diluted (loss) earnings per share were caused by errors in the numerator of these computations relating to our convertible preferred stock and outstanding warrants.

For basic EPS, ASC 260-10-45-60A states that “all securities that meet the definition of a participating security, irrespective of whether the securities are convertible, nonconvertible, or potential common stock securities, shall be included in the computation of basic EPS using the two-class method.” The company has determined that holders of its Class A convertible preferred stock participate in dividends of the Company on the same basis as holders of the Company’s common stock. Accordingly, the Class A preferred must be included in the calculation of basic earnings per share using the two class method to allocate earnings. Since we did not use the two class method to calculate basic earnings per share in our originally filed financial statements, we have restated basic earnings per share using the two class method.

For diluted earnings per share, the warrants, which were recorded as a derivative liability on our balance sheet, were presumed to be settled in our common shares. The resulting potential common shares are included in the denominator of our diluted earnings per share in accordance with ASC 260-10-45-45 and calculated using the treasury stock method. Our denominator for the potential common shares outstanding remains unchanged as a result of the restatement. However, the numerator in our prior computations did not include an adjustment for the change in fair value of the derivative liability relating to our dilutive warrants. ASC 260-10-45-46 states that “a contract that is reported as an asset or liability for accounting purposes may require an adjustment to the numerator for any changes in income or loss that would result if the contract had been reported as an equity instrument for accounting purposes during the period.”

In order to correct the error in our diluted earnings per share computation, we adjusted the numerator to effectively reverse the derivative for the gains (losses) that were recorded in our statement of operations relating to the change in the fair value of the warrants (derivative liability) to the extent such adjustments had a dilutive effect on the computations.

Except as specifically referenced herein, this 10-K/A does not reflect any event occurring subsequent to March 31, 2011, the filing date of the original annual report, and no other changes have been made to the annual report

CAUTIONARY STATEMENT

This 10-K/A contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. In particular, these include statements relating to future actions, future performance, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

Any or all of our forward-looking statements in this annual report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this annual report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur and you should not place undue reliance on these forward-looking statements.

Part II

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Throughout this section, our fiscal years ended December 31, 2010 and December 31, 2009 are referred to as fiscal 2010 and 2009, respectively. The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements.

Overview

We are a regional supermarket chain that currently operates 29 supermarkets, 11 hypermarkets and 3 department stores in northeastern China and Inner Mongolia. Our supermarkets sell a broad selection of merchandise including groceries, fresh food and non-food items. We have 2 distribution centers servicing our supermarkets, one for fresh food and one for grocery and non-food merchandise.

We believe that 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 with aggregate retail sales of more than $21.0 billion per year. As a licensee of IGA, we are able to engage in group bargaining with suppliers and have access to more than 2,000 private IGA brands, including many that are exclusive IGA brands.

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

In 2011, we plan to open 12 hypermarkets, supermarkets and department stores having, in the aggregate, approximately 70,000 square meters of space. We are also making improvements to our logistics and information systems to support our supermarkets. We expect to finance our expansion plan from funds generated from operations, bank loans and proceeds from our public offering in the fourth quarter of 2009, and our long-term target is to increase our total number of stores to 200 over the next five years, including hypermarkets, supermarkets and department stores.

Our Operations in China

We operate our business in the PRC through our variable interest entity (“VIE”), QKL-China. QKL, Speedy Brilliant (BVI) and Speedy Brilliant (Daqing) did not have significant operations and their major assets are cash and pledge deposits. Total cash held by entities apart from the consolidated VIE was $7,300,794 and $8,842,494 as at December 31, 2010 and December 31, 2009, respectively. Total pledge deposits held by entities apart from the consolidated VIE was $77,205 and $181,836 as at December 31, 2010 and December 31, 2009, respectively. QKL-China holds the licenses, approvals and assets necessary to operate our business in the PRC.

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.

Our Corporate Structure

We have no equity ownership interest in QKL-China and rely on contractual arrangements with QKL-China and its shareholders that allow us to substantially control and operate QKL-China. These contractual arrangements may not be as effective as direct ownership in providing control over QKL-China because QKL-China or its shareholders could breach the arrangements. For example, the VIE may be unwilling or unable to perform their obligations under our contractual arrangements with it, including payments under the consigned management and technology service agreements as they become due. The legal environment in the PRC is not as developed as in the United States and uncertainties in the Chinese legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, our business, financial condition and results of operations could be materially and adversely affected.

Our contractual arrangements with QKL-China are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. Although we believe our current business operations are in compliance with the current laws in China, we cannot be sure that the PRC government would view our contractual arrangements to be in compliance with PRC regulations that may be adopted in the future. If we are determined not to be in compliance, the PRC government could levy fines, revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our business, corporate structure or operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business. As a result, our business in the PRC could be materially adversely affected, which in turn may result in the deconsolidation of the VIE.

Our Strategy for Growth and Profitability

Our strategic plan includes the following principal components: expanding by opening stores in new strategic locations, improving profitability by decreasing the cost through origin sourcing, 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 December 31, 2010, we operated 29 supermarkets, 11 hypermarkets, 3 department stores, and 2 distribution centers, one in Daqing and one in Harbin. Under our expansion plan, we opened nine new stores in 2010 that have, in the aggregate, approximately 74,189 square meters of space. In 2011, we plan to open additional hypermarkets, supermarkets and department stores having, in the aggregate, approximately 70,000 square meters of retail space. Most of the stores will be opened by us and others will be acquired by us. We are also making improvements to our logistics and information systems to support our supermarkets. We expect to finance our expansion plan from funds generated from operations and bank loans. Based on our previous experience, we believe it takes six to nine months for a new store to achieve profitability.

Private Label Merchandise

Some of the merchandise we sell is made to our specifications by manufacturers using the QKL brand name. We refer to such merchandise as “private label” merchandise. With private label merchandise, we entrust the manufacturer to make the product and to select the name and design. Under our agreements with the private label manufacturer, the private label manufacturers can not sell the private label merchandise to any other party. Sales of private label merchandise accounted for approximately 5.8% and 5.5% of our total revenues in 2010 and 2009, respectively. In June 2008, we established a specialized department for designing and purchasing private label merchandise, in which 7 full-time employees currently work. Our goal is to increase private label sales to 20% of our total revenues.

Principal Factors Affecting Our Results

The following factors have had, and we expect they will continue to have, a significant effect on our business, financial condition and results of operations.

Seasonality – Our business is subject to seasonality, with increased sales in the first quarter and fourth quarter, due to increases in shopping and consumer activity as a result of the holidays such as New Year (January 1), Chinese Lunar New Year (January or February), the Dragon Festival (February 2), Women’s Day (March 8), the Back to School Day (March 1), National Day (October 1), Mid-Autumn Festival (September or October) and Christmas (December 25).

Timing of New Store Openings – Growth through new store openings is a fundamental part of our strategy. Our new stores typically operate at a loss for approximately three months due to start-up inventory and other costs, promotional discounts and other marketing costs and strategies associated with new store openings, rental expenses and costs related to hiring and training new employees. Our operating results, and in particular our gross margin, have and will continue to vary based in part on the pace of our new store openings.

Locations for New Stores – Good commercial space that meets our standards, in locations that meet our needs, may be scarce in some of the cities we wish to enter. One option for entering certain target markets within our intended timeframe may be to begin operations in a location that is not optimal and wait for an opportunity to move to a better location. Alternatively, we may seek to enter into a target market through acquisitions. As such, the timing and costs associated with entry into new markets can be difficult to predict. Identifying and pursuing opportunities will be a resource-intensive challenge, and if we do not perform or if actual costs of entering new markets exceed our expectations, our total revenues, cash flows, and liquidity could suffer.

Logistics of Geographic Expansion – Opening additional stores in cities further from our distribution centers in Daqing and Harbin will mean that the transportation of our supplies and personnel among our stores will become more difficult and subject to disruption. To alleviate this, we expanded our distribution capabilities by opening a new distribution center in Harbin in the 2 nd quarter of 2010. We have been using our regional purchasing systems since 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.

Hiring – 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 hiring. Where competitors operate supermarkets nearby, their trained staff is a potential source for our own hiring 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 Policies and Estimates

Our critical accounting estimates are included in our significant accounting policies as described in Note 2 of the consolidated financial statements included in Item 8, Financial Statements, of this Annual Report on Form 10-K. Those consolidated financial statements were prepared in accordance with GAAP. Critical accounting estimates are those that we believe are most important to the portrayal of our financial condition and results of operations. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense. Our estimates are evaluated on an ongoing basis and drawn from historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. Actual results may differ from our estimates. Management believes that the following accounting estimates reflect the more significant judgments and estimates we use in preparing our consolidated financial statements.

Revenue Recognition

We earn revenue by selling merchandise primarily through our 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 card (aka “gift card”) 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. We determine 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. We recognized approximately nil in cash card breakage revenue for fiscal 2010 and 2009, respectively.

We record sales tax collected from our 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.

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, we have 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 counts of its stores once per quarter and cycle counts inventories at its distribution center once per quarter. 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.

Long-lived Assets

We review long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows, usually at the store level. The carrying amount of a long-lived asset is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. If the asset is determined not to be recoverable, it is considered to be impaired and the impairment to be recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset, determined using discounted cash flow valuation techniques, as defined in ASC 360, Property, Plant, and Equipment.

We determined the sum of the undiscounted cash flows expected to result from the use of the asset by projecting future revenue and operating expense for each store under consideration for impairment. The estimates of future cash flows involve management judgment and are based upon assumptions about expected future operating performance. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions.

Our evaluation resulted in no long-lived asset impairment charges during fiscal 2010 and 2009.

Goodwill

We perform an annual goodwill impairment test as of December 31 each year in accordance with ASC subtopic 350-20, Goodwill (formerly SFAS No. 142), and update the test between annual tests if events or circumstances occur that indicate an impairment might exist. We perform the annual review for goodwill impairments.

Reporting units are determined based on the organizational structure at the date of the impairment test. A separate goodwill impairment test is performed for each reporting unit on the goodwill that has been allocated to it.

Reporting units are the component business units from our operating segment where discrete financial information exists for them. Management regularly reviews their operating results. Also, for each reporting unit, their economic characteristics are dissimilar from each other. Currently, we have 12 reporting units under goodwill impairment testing.

The annual test of the potential impairment of goodwill requires a two-step process. Step one of the impairment test involves comparing the estimated fair values of reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, step two must be performed to determine the amount, if any, of the goodwill impairment loss. If the carrying amount is less than fair value, further testing of goodwill impairment is not performed.

Step two of the goodwill impairment test involves comparing the implied fair value of the reporting unit’s goodwill against the carrying value of the goodwill. Under step two, determining the implied fair value of goodwill requires the valuation of a reporting unit’s identifiable tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination on the testing date. The difference between the fair value of the entire reporting unit as determined in step one and the net fair value of all identifiable assets and liabilities represents the implied fair value of goodwill. The goodwill impairment charge, if any, would be the difference between the carrying amount of goodwill and the implied fair value of goodwill upon the completion of step two.

For purposes of the step one analyses, determination of reporting units’ fair value is based on the income approach, which estimates the fair value of our reporting units based on discounted future cash flows.

We recorded $43,863,929 in goodwill in connection with our acquisitions (see Note 6) of businesses in the years of 2010 and 2008. As of December 31, 2010, we performed step one of the impairment test. The result is that the fair values of our reporting units are substantially in excess of their carry values and step two is not required. Therefore, we believed no goodwill was subject to the risk of impairment.

We believe the difference between the market capitalization and the carrying value of our net assets is to due (a) a control premium that should be applied to the market capitalization in determining the fair value of the entire Company and (b) a temporary decline in the stock price suffered by Chinese companies that are public in the U.S. as a result of negative press surrounding accounting practices and reverse mergers of certain Chinese companies.

Recently Issued Accounting Guidance

See Note 2 to consolidated financial statements included in Item 8, Financial Statements, of this Annual Report on Form 10-K.

Results of Operations

The following table sets forth selected items from our consolidated statements of operations by dollar and as a percentage of our net sales for the periods indicated:

	Year Ended December 31, 2010						Year Ended December 31, 2009
	Amount			% of Net Sales			Amount			% of Net Sales
Net sales	$	298,399,394			100.0	%	$	247,594,272			100.0	%
Cost of sales		245,548,576			82.3			203,994,809			82.4
Gross profit		52,850,818			17.7			43,599,463			17.6
Selling expenses		32,348,721			10.8			24,324,848			9.8
General and administrative expenses		8,151,742			2.7			4,802,262			1.9
Operating income		12,350,355			4.2			14,472,353			5.8
Other income(expenses)		-			-			(14,253	)		-
Decrease(Increase) in fair value of warrants		7,801,649			2.6			(35,492,017	)		(14.3	)
Interest income		670,245			0.2			222,007			0.1
Interest expenses		(10,469	)		-			(23,734	)		-

Income (loss) before income taxes		20,811,780			7.0			(20,835,644	)		8.5
Income taxes		3,381,216			1.1			3,807,794			1.5

Net income (loss)	$	17,430,564			5.9	%	$	(24,643,438	)		(10.0	)%

Net Sales – Net sales increased by $50.8 million, or 20.5%, to $298.4 million for fiscal 2010 from $247.6 million for fiscal 2009. The change in net sales was primarily attributable to the following:

Comparable stores are stores that were opened for at least one year before the beginning of the comparison period, or by January 1, 2009. Those 27 stores generated approximately $227.5 million sales in fiscal 2010, an increase of $20.1 million, or 9.7% compared with $207.4 million sales in fiscal 2009.

New store sales increased, reflecting the opening of 16 new stores since January 1, 2009. Nine stores opened in fiscal 2010 generated approximately $14.7 million for fiscal 2010, and seven stores opened in 2009 generated $51.3 million for fiscal 2010 and $23.7 million for fiscal 2009, respectively.

Cost of Sales – Our cost of sales for fiscal 2010 was approximately $245.5 million, representing an increase of $41.5 million, or 20.4%, from approximately $204.0 million for fiscal 2009. The increase was due to increase volume of sales. Our cost of sales primarily of the cost for our merchandises, it also includes related costs of packaging and shipping costs and the distribution center cost.

We anticipate that our cost of sales will continue to increase along with our expansion in the coming quarters.

Gross Profit – Gross profit, or total revenue minus cost of sales, was increased by $9.3 million, or 21.2%, to $52.9 million, or 17.7% of net sales, in fiscal 2010 from $43.6 million, or 17.6% of net sales, in fiscal 2009. The change in gross profit was primarily attributable to the following:

Net sales increased by $50.8 million in 2010 compared to 2009.

We reclassified $2.6 million of vendor rebates received from vendors from selling expenses to offset cost of sales. We believe that such reclassification represents better presentation to its retail industry standard.

All of the reasons above attributed to the gross margin changes. We believe that our gross margin is likely to be between 17.5% and 18.5%, over the next few business quarters. New stores tend to be less profitable during their early months of operation. In addition, China’s retail industry in general, and its supermarket industry in particular, are becoming more competitive every year. In this competitive marketplace, it is likely that we will focus on providing our customers with low prices in order to increase our market share and long-term sales volume.

Selling Expenses – Selling expenses increased by $8.0 million, or 33.0%, to $32.3 million, or 10.8% of net sales, in fiscal 2010 from $24.3 million, or 9.8% of net sales, in fiscal 2009. The change in selling expense was mainly due to increase in labor costs, depreciation, rent expense, and utilities and other operating costs for fiscal 2010 compared with fiscal 2009 primarily due to support of an increase in store count. In particular, labor costs increased by $2.8 million or 35.5%, to $10.8 million in fiscal 2010 from $8.0 million in fiscal 2009. Depreciation increased by $0.9 million, or 35.8% in fiscal 2010, to $3.4 million from $2.5 million in fiscal 2009. Rent expenses increased by $2.9 million, or 255.3%, to $4.0 million in fiscal 2010 from $1.1 million in fiscal 2009. Utilities increased by $1.0 million, or 30.3%, to $4.4 million in fiscal 2010 from $3.4 million in fiscal 2009.

General and Administrative Expense – General and administrative expenses increased by $3.4 million to $8.2 million, or 2.7% of net sales, in fiscal 2010 from $4.8 million, or 1.9% of net sales, in fiscal 2009. The increase was mainly due to the fact that we continued to strengthen our work force by hiring new employees, training and providing higher compensation to managerial staff. Moreover, after we upgraded to Nasdaq in October 2009, professional fee expenses increased due to additional compliance standards. In specific, staff costs increased by $0.6 million or 21.6%, to $3.0 million in fiscal 2010 from $2.4 million in fiscal 2009. Depreciation increased by $1.1 million to $1.2 million in fiscal 2010 from $0.1 million in fiscal 2009. Professional fee expenses increased by $0.4 million, or 41.9%, to $1.2 million in fiscal 2010 from $0.8 in fiscal 2009. Besides that, in fiscal 2010, we recognized a non-cash expense of $1,014,755 relating to (i) the warrant agreement we entered into on January 22, 2010, (ii) the option agreements we entered into with our independent directors on September 14, 2009, and our Chief Operating Officer, Alan Stewart and 20 employees on June 26, 2010, and (iii) the option agreement we entered into with our Chief Financial Officer, Tsz-Kit Chan on December 2, 2010.

Changes in fair value of warrants – We recognized a non-cash income of $7.8 million and a non-cash charge of $35.5 million unrelated to the company’s operations in fiscal 2010 and 2009 respectively, which resulted from the change in fair value of warrants issued to investors in conjunction with the Company’s issuance of warrants in March 2008 pursuant to provisions of FAB ASC Topic 815, “Derivative and Hedging” (“ASC 815”). The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders. The warrant holders have permanently waived the “down-round” protection from the warrants as of March 30, 2010. Therefore, we believe that the non-cash incomes or charges affecting net income will not be applied after December 31, 2010.

Income Taxes – The provision for income taxes was $3.4 million in fiscal 2010 compared with $3.8 million in fiscal 2009. Excluding the effect of changes in fair value of warrants, our effective tax rate was 26.0% for fiscal 2010 and 2009. There was no significant change in our effective tax rate.

Net Income

We had a net income of $17.4 million in fiscal 2010 compared to a net loss of $24.6 million in fiscal 2009. Excluding changes in the fair value of warrants, adjusted net income for fiscal 2010 decreased 11.3% to $9.6 million, or $0.24 per diluted share, from $10.8 million, or $0.34 per diluted share for fiscal 2009. The number of shares used in the computation of diluted EPS (excluding changes in the fair value of the warrants) increased 23.5% to 40.2 million shares from 31.9 million shares for the year of 2009.

About Non-GAAP Financial Measures

The Company uses “adjusted net income” to provide information about its operating trends. Investors are cautioned that adjusted net income and the decrease in adjusted net income are not a measure of liquidity or of financial performance under Generally Accepted Accounting Principles (“GAAP”).

The Company defines adjusted net income as net income excluding non-recurring items as well as special non-cash charges. The adjusted net income numbers presented may not be comparable to similarly titled measures reported by other companies. Adjusted net income, while providing useful information, should not be considered in isolation or as an alternative to net income or cash flows as determined under GAAP. The non-GAAP measures in this annual report have been reconciled to the nearest GAAP measure, and this reconciliation is located under the heading “Non-GAAP Net Income Calculation” below. Non-GAAP Net Income Calculation

Reconciliation of Net Income (Loss) to Adjusted Net Income

(Unaudited)

Years Ended December 31	2010			2009

Net income (loss)	$	17,430,564		$	(24,643,438	)
Add back (deduct):
Change in fair value of warrants		(7,801,649	)		35,492,017

Adjusted net income	$	9,628,915		$	10,848,579

Liquidity and Capital Resources

We are a holding company and conduct our operations through our PRC subsidiary (Speedy Brilliant (Daqing)) and variable interest entity (QKL-China) in China. We may transfer funds to Speedy Brilliant (Daqing) by means of shareholder's loans or capital contributions. We may also transfer funds to QKL-China by means of Loan Agreement among Speedy Brilliant (Daqing) and all of the shareholders of QKL-China. Earnings of QKL-China may be transferred to Speedy Brilliant (Daqing) in the form of payments under the consigned management and technology service agreements, which in turn gives Speedy Brilliant (Daqing) the ability to pay dividends to our offshore company (Speedy Brilliant (BVI)).

Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. 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.

Our ability to pay dividends is primarily dependent on our receiving distributions of funds from Speedy Brilliant (Daqing), our operating subsidiary, which is restricted by certain regulatory requirements. Relevant PRC statutory laws and regulations permit payments of dividends by QKL-China and Speedy Brilliant (Daqing) only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, QKL-China and its subsidiary are required to set aside at least 10% of their after-tax profit, after deducting any accumulated deficit, each year to its general reserves until the cumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. As investment holding companies, our off-shore subsidiaries, including QKL Stores Inc. and Speedy Brilliant (BVI), do not have material cash obligations to third parties. Therefore, the dividend restriction does not impact the liquidity of these companies. As of December 31, 2010 and December 31, 2009, restricted retained earnings were $ 6.0 million and $4.9 million, respectively. Unrestricted retained earnings as of December 31, 2010 and December 31, 2009 were $39.4 million and $29.4 million, respectively, which were the amounts ultimately available for distribution if we were to pay dividends.

In accordance with relevant PRC laws and regulations, Speedy Brilliant (Daqing), QKL-China and its subsidiary are restricted from transferring funds to our off-shore companies in the form of cash dividends, loans or advances, except for the unrestricted retained earnings described above. Therefore, as of December 31, 2010 and December 31, 2009, restricted net assets comprising statutory reserve funds of our PRC operating subsidiary and variable interest entity were $6.0 million and $4.9 million, respectively.

As of December 31, 2010 and 2009, our PRC subsidiary, variable interests entity and its subsidiary had cash and cash equivalents of approximately $10.2 million and $38.4 million, respectively and did not have any restricted cash. Dividend distribution from our PRC subsidiaries and variable interest entity to our non-PRC entities would be subject to a 10% PRC withholding taxes under current PRC tax laws. Currently, we do not have the intention to transfer funds from our PRC entities to our non-PRC entities.

At December 31, 2010, we had $17.5 million of cash on hand compared to $45.9 million at December 31, 2009. The following table sets forth a summary of our cash flows for the periods indicated:

Years Ended December 31	2010			2009

Net cash provided by operating activities	$	(9,073,830	)	$	10,866,330
Net cash used in investing activities		(21,143,179	)		(19,455,014	)
Net cash provided by financing activities		-			35,210,517
Effect of foreign currency translation		1,764,245			5,944

Net change in cash	$	(28,452,764	)	$	26,627,777

The seasonality of our business historically provides greater cash flow from operations during the holiday and winter selling season, with the fourth fiscal quarter net sales traditionally generating the strongest profits of our fiscal 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 our fiscal year.

Cash Flows from Operating Activities

Net cash used in operating activities was $9.1 million for fiscal 2010 and net cash provided by operating activities was $10.9 million for fiscal 2009, respectively. The decrease in cash provided by operating activities for fiscal 2010 compared to fiscal 2009 primarily reflects the increase of other receivables and inventories, the decrease of customer deposits received and the increase in prepaid expenses. The increase in other receivables resulted from increasing loans to vendors to insure adequate levels of merchandise during the peak Chinese New Year season. The increase in inventory was due to the fact that we have more stores and we reserved inventories for our new store openings in January 2011.

Cash Flows from Investing Activities

Net cash used in investing activities for fiscal 2010 and 2009 was $21.1 million and $19.5 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, store-related remodeling and corporate headquarters. Capital expenditures were higher for fiscal 2010 mostly due to the acquisitions of business operations for seven new stores. Moreover, we terminated a property buying/selling agreement for our headquarters, and approximately $11.3 million was refunded to us. The building, which we have determined to lease instead, is intended to accommodate future growth of the Company’s administrative and operations personnel as we implement our supermarket expansion plan.

The following table sets forth net cash used in investing activities

Years Ended December 31	2010			2009

New stores	$	6,394,870		$	8,553,096
Renovation of old stores		1,532,590			-
New distribution center		690,828			11,647
Acquisition of businesses		23,984,428			-
New headquarters		(11,343,373	)		11,001,584
Sale proceeds from disposal of fixed assets		(11,533	)		-
Pledged deposits		(104,631	)		(111,313	)

Total	$	21,143,179		$	19,455,014

Cash flows From Financing Activities

Net cash used for financing activities for fiscal 2010 and 2009 was nil and $35.2 million, respectively. Cash provided by financing activities was used to acquire and open new stores, and a distribution center, store renovations and relocations.

Financing Agreement

On June 18, 2009, we entered into a financing agreement with Longjiang Commercial Bank. Under this agreement, the Company had a credit line up to approximately $4.2 million (RMB27.6 million) expiring June 18, 2011. The loan under this financing agreement is secured by buildings with net worth book value of approximately $7.4 million (RMB 48.7 million). As of December 31, 2010, we did not have any outstanding revolving line of credit.

Future Capital Requirements – We had cash on hand of $17.5 million at December 31, 2010. We expect capital expenditures for fiscal 2011 primarily to fund the opening of new stores, store-related remodeling and relocation. We anticipate an opening of 70,000 square meters of new stores in fiscal 2011 compared to 74,189 square meters of new stores in fiscal 2010.

We believe we will be able to fund our cash requirements, for at least the next twelve 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 revolving credit facility.

If we are unable to generate sufficient cash flow from operations to meet our obligations and commitments, or if we are unable to maintain our ability to borrow sufficient amounts under our existing revolving credit facility, or successfully negotiate and enter into a new revolving credit facility to replace our current facility, which has an initial termination date of June 18, 2011, 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”). Information regarding our operating leases is available in Item 2, Properties and Note 14, Operating Leases , of the notes to consolidated financial statements included in Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K.

Operating lease commitments consist principally of leases for our retail store facilities and distribution center. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term. With respect to most of those leases, we intend to renegotiate those leases as they expire.

In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise in advance of expected delivery. Because most of these purchase orders do not contain any termination payments or other penalties if cancelled, they are not included as outstanding contractual obligations.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Management 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 Rules 13a15 (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. Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our CEO and CFO have determined that as of December 31, 2010, our disclosure controls and procedures were not effective. This conclusion was based on the fact that Company has not timely filed certain current reports on Form 8-K.

In connection with the preparation of this Amendment No. 1, our Chief Executive Officer and our Chief Financial Officer re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. In making this evaluation, they considered the material weakness related to the misstatement related to accounting for basic and dilutive earnings per share discussed in Item 7. (Management's Discussion and Analysis of Financial Condition and Results of Operations). As a result of this material weakness and the late filing of current reports on form 8-K discussed above, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2010.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the company.

Management has used the framework set forth in the report entitled Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on such evaluation, our CEO and CFO have concluded that, as of the end of such period, our internal controls over financial reporting were not effective due to the material weaknesses described below.

Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

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 and the conclusion regarding our disclosure controls and procedures above. Management believes that it had inadequate accounting personnel, and that it did not supply adequate training to new staff in a timely manner, which led to the delay of processing some transactions or events.

In connection with this Amendment No. 1, management, including our Chief Executive Officer and Chief Financial Officer, reassessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, our management used the criteria set forth by the COSO in Internal Control-Integrated Framework. This evaluation identified a material weakness in our internal control regarding our process and procedures related to the accounting for basic and dilutive earnings per share. This material weakness in our internal controls resulted in the restatement of our 2010 financial statements.

Remediation Measures for Material Weaknesses

Management intends to continue to implement procedures to remedy such material weaknesses. 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 provide additional training to the Company’s internal auditor on appropriate controls and procedures necessary to document and evaluate our internal control procedures. In the fourth quarter of 2010, we appointed PricewaterhouseCoopers as our accounting advisor to ensure that our staff has adequate professional knowledge and to monitor the need for additional or better qualified staff. The advisor also provided training programs on develop our corporate culture toward emphasizing the importance of internal controls so as 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.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only our management’s report in this annual report.

QKL STORES INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS		PAGES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-1

CONSOLIDATED BALANCE SHEETS		F-2

CONSOLIDATED STATEMENTS OF OPERATIONS		F-3

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY		F-4

CONSOLIDATED STATEMENTS OF CASH FLOWS		F-5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		F6 – F40

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:		SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS		II

ALBERT WONG & CO. LLP
CERTIFIED PUBLIC ACCOUNTANTS
139 Fulton Street, Suite 818B
New York, NY 10038-2532
Tel : 1-212-226-9088
Fax: 1-212-437-2193

Report of Independent Registered Public Accounting Firm

To:

The Board of Directors and Shareholders of

QKL Stores Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of QKL Stores Inc. and Subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

	/s/ Albert Wong & Co. LLP
New York, United States of America	Albert Wong & Co. LLP
April 9, 2012	Certified Public Accountants

F-1

QKL STORES INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	December 31, 2010		December 31, 2009

ASSETS
Cash	$	17,460,034	$	45,912,798
Restricted cash		77,205		181,836
Accounts receivable		167,509		283,929
Inventories		44,467,265		24,691,156
Other receivables		28,236,397		13,980,572
Prepaid expenses		5,088,825		2,993,191
Advances to suppliers		3,740,327		2,965,139
Deferred income tax assets		508,617		417,788

Total current assets		99,746,179		91,426,409
Property, plant equipment, net		24,792,149		29,402,630
Land use rights, net		748,533		753,226
Goodwill		43,863,929		19,280,509
Other assets		467,927		408,391

Total assets	$	169,618,717	$	141,271,165

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		38,944,917		29,244,923
Cash card and coupon liabilities		10,814,546		7,721,630
Customer deposits received		1,495,059		3,862,890
Accrued expenses and other payables		9,883,282		6,656,089
Income taxes payable		2,365,931		1,154,229

Total current liabilities		63,503,735		48,639,761
Warrant liabilities		-		44,304,034

Total liabilities		63,503,735		92,943,795

Commitments and contingencies		-		-

Shareholders’ equity
Common stock, $.001 par value per share, authorized 100,000,000, shares, issued and outstanding 29,743,811 and 29,475,983 at December 31, 2010 and December 31, 2009, respectively		29,744		29,476
Series A convertible preferred stock, par value $0.01, 10,000,000 shares authorized, 7,295,328 and 7,548,346 shares outstanding at December 31, 2010 and December 31, 2009, respectively		72,953		75,483
Additional paid-in capital		90,710,619		53,191,217
Retained earnings – appropriated		6,012,675		4,913,072
Retained earnings (accumulated deficit)		2,094,850		(14,236,111	)
Accumulated other comprehensive income		7,194,141		4,354,233

Total shareholders’ equity		106,114,982		48,327,370

Total liabilities and shareholders’ equity	$	169,618,717	$	141,271,165

See notes to audited consolidated financial statements.

F-2

QKL STORES INC. AND SUBSIDIARIES

Consolidated Statements of Operations

	Years Ended December 31,
	2010			2009
	(Restated)
Net sales	$	298,399,394		$	247,594,272
Cost of sales		245,548,576			203,994,809
Gross profit		52,850,818			43,599,463

Operating expenses:
Selling expenses		32,348,721			24,324,848
General and administrative expenses		8,151,742			4,802,262
Total operating expenses		40,500,463			29,127,110

Income from operations		12,350,355			14,472,353

Non-operating income(expense):
Other income (expenses)		-			(14,253	)
(Increase) decrease in fair value of warrants		7,801,649			(35,492,017	)
Interest income		670,245			222,007
Interest expense		(10,469	)		(23,734	)
Total non-operating income (loss)		8,461,425			(35,307,997	)

Income (loss) before income tax		20,811,780			(20,835,644	)

Income taxes		3,381,216			3,807,794

Net income (loss)	$	17,430,564		$	(24,643,438	)

Basic earnings (loss) per share of common stock	$	0.47		$	(1.13	)
Diluted earnings per share	$	0.24		$	(1.13	)

Weighted average shares used in calculating net income per ordinary share – basic		29,670,468			21,885,423
Weighted average shares used in calculating net income per ordinary share – diluted		40,170,511			21,885,423

See notes to audited consolidated financial statements.

F-3

QKL STORES INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

	Common stock				Series A convertible preferred stock						Additional paid-in			Retained Earnings -		Retained earnings (accumulated			Accumulated other comprehensive
	Share		Amount		Share			Amount			capital			appropriated		deficit)			income		Total
January 1, 2009		20,882,353	$	20,882		9,117,647		$	91,176		$	21,783,477		$	3,908,247	$	14,204,169		$	3,859,136	$	43,867,087
Net income		-		-		-			-			-			-		(24,643,438	)		-		(24,643,438	)
Reclassification of warrants from equity to derivative liabilities												(6,020,000	)				(2,792,017	)				(8,812,017	)
Compensation expense for stock option granted		-		-		-			-			14,252			-		-			-		14,252
Warrants exercised (cashless)		124,329		124								(124	)				-					-
Preferred stock convert to common stock		1,569,301		1,570		(1,569,301	)		(15,693	)		14,123
common shares offering		6,900,000		6,900								37,399,489										37,406,389
Appropriation to statutory reserves		-		-		-			-			-			1,004,825		(1,004,825	)		-		-
Foreign currency translation adjustment		-		-		-			-			-			-		-			495,097		495,097
December 31, 2009		29,475,983	$	29,476		7,548,346		$	75,483		$	53,191,217		$	4,913,072	$	(14,236,111	)	$	4,354,233	$	48,327,370
Net income		-		-		-			-			-			-		17,430,564					17,430,564
Reclassification of warrants from derivative liabilities to equity												36,502,385										36,502,385
Compensation expense for stock option granted		-		-		-			-			1,014,755			-		-			-		1,014,755
Warrants exercised (cashless)		14,810		15								(15	)				-					-
Preferred stock convert to common stock		253,018		253		(253,018	)		(2,530	)		2,277			-		-			-		-
common shares offering																						-
Appropriation to statutory reserves		-		-		-			-			-			1,099,603		(1,099,603	)				-
Foreign currency translation adjustment		-		-		-			-			-			-		-			2,839,908		2,839,908
December 31, 2010		29,743,811	$	29,744		7,295,328		$	72,953		$	90,710,619		$	6,012,675	$	2,094,850		$	7,194,141	$	106,114,982

See notes to audited consolidated financial statements .

F-4

QKL STORES INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	17,430,564		$	(24,643,438	)
Depreciation-property, plant and equipment		4,858,011			2,721,636
Amortization		28,294			27,967
Deferred income tax		(77,850	)		(416,944	)
Loss on disposal of property, plant and equipment		180,304			36,938
Share-based compensation		1,014,755			-
Change in fair value of warrants		(7,801,649	)		35,492,017
Adjustments to reconcile net income to net cash provided by operating activities:
Accounts receivable		125,240			512,692
Inventories		(19,009,023	)		(10,047,537	)
Other receivables		(13,821,470	)		(9,749,527	)
Prepaid expenses		(2,038,694	)		(327,811	)
Advances to suppliers		(2,043,610	)		1,686,988
Accounts payable		8,791,436			7,829,738
Cash card and coupon liabilities		2,853,026			3,834,412
Customer deposits received		(2,487,840	)		944,028
Accrued expenses and other payables		1,748,832			3,069,863
Income taxes payable		1,175,844			(104,692	)
Net cash (used in) provided by operating activities		(9,073,830	)		10,866,330

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(8,618,288	)		(19,566,327	)
Acquisition of business, net		(23,984,428	)		-
Refund of office building purchase		11,343,373			-
Sales proceeds of fixed assets disposal		11,533			-
Decrease of restricted cash		104,631			111,313
Net cash used in investing activities		(21,143,179	)		(19,455,014	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common stock		-			37,406,389
Repayment of bank loan		-			(2,195,872	)
Net cash provided by financing activities		-			35,210,517

Net increase in cash		(30,217,009	)		26,621,833

Effect of foreign currency translation		1,764,245			5,944

Cash at beginning of period		45,912,798			19,285,021
Cash at end of period	$	17,460,034		$	45,912,798

Supplemental disclosures of cash flow information:
Interest paid		10,469			23,734
Income taxes paid	$	2,260,343		$	4,120,045

See notes to audited consolidated financial statements .

F-5

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

QKL Stores, Inc. (“QKL”) (formerly known as Forme Capital, Inc.) was incorporated under the laws of the State of Delaware on December 2, 1986. From 1989 to 2000, Store created and spun off to its stockholders nine blind pool companies for two years, then operated as a real estate company for eight years, then sold substantially all of its assets and ceased operations. From 2000 until March 28, 2008, QKL was a shell company with no substantial operations or assets. QKL currently operates through (1) itself, (2) one directly wholly-owned subsidiary in the British Virgin Islands: Speedy Brilliant Group Ltd. (“Speedy Brilliant (BVI)”), (3) one directly wholly-owned subsidiary of Speedy Brilliant (BVI) located in Mainland China: Speedy Brilliant (Daqing) Ltd. (“Speedy Brilliant (Daqing)” or “WFOE”), (4) one operating company located in Mainland China: Daqing Qingkelong Chain Commerce & Trade Co., Ltd. (“QKL-China”), which QKL controls, through contractual arrangements between WFOE and QKL-China, as if QKL-China were a wholly-owned subsidiary of QKL, and (5) one wholly-owned operating subsidiary of QKL-China located in Mainland China: Daqing Qinglongxin Commerce & Trade Co., Ltd (“Qinglongxin Commerce”).

Speedy Brilliant (BVI) was established in the British Virgin Islands as a BVI business company on February 23, 2007. Speedy Brilliant (Daqing) was established in the Heilongjiang Province of the People’s Republic of China (the PRC) as a limited company on August 1, 2007. QKL-China was established in the Heilongjiang Province of the PRC as a limited company on November 2, 1998. Qinglongxin Commerce was established in the Heilongjiang Province of the PRC as a limited company on July 10, 2006.

QKL and its subsidiaries (hereinafter, collectively referred to as “the Company”) are engaged in the operation of retail chain stores in the PRC.

The Company is a regional supermarket chain that currently operates 29 supermarkets, 11 hypermarkets and 3 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.

The Company completed the initial steps in the execution of its expansion plan in March 2008, when the Company raised financing through the combination of a reverse merger and private placement, and also raised additional financing in our public offering in the fourth quarter of 2009. Under that plan, the Company opened nine new stores in 2010 that have, in the aggregate, approximately 74,189 square meters of space, seven new stores in 2009 that have, in the aggregate, approximately 32,000 square meters of space and ten new stores in 2008 that have, in the aggregate, approximately 42,000 square meters of space. Five stores opened in 2010 were opened by the Company and four of the new stores were opened through the acquisition of existing businesses by the Company.

F-6

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

PRC Restructuring Agreements

The PRC restructuring transaction was effected by the execution of five agreements between Speedy Brilliant (Daqing), on the one hand, and QKL-China (and in some cases the shareholders of QKL-China), on the other hand. Those five agreements and their consequences are described below.

Consigned Management Agreement

The Consigned Management Agreement among Speedy Brilliant (Daqing), QKL-China and all of the shareholders of QKL-China, provides that Speedy Brilliant (Daqing) will provide financial, business management and human resources management services to QKL-China that will enable Speedy Brilliant (Daqing) to control QKL-China’s operations, assets and cash flow, and in exchange, QKL-China will pay a management fee to Speedy Brilliant (Daqing) equal to 4.5% of QKL-China’s annual revenue. The management fee for each year is due by January 31 of the following year. The agreement will remain effective until Speedy Brilliant (Daqing) or its designees have acquired 100% of the equity interests of QKL-China or substantially all of the assets of QKL-China.

Technology Service Agreement

The Technology Service Agreement among Speedy Brilliant (Daqing), QKL-China and all of the shareholders of QKL-China, provides that Speedy Brilliant (Daqing) will provide technology services, including the selection and maintenance of QKL-China’s computer hardware and software systems and training of QKL-China employees in the use of those systems, and in exchange QKL-China will pay a technology service fee to Speedy Brilliant (Daqing) equal to 1.5% of QKL-China’s annual revenue. The technology service fee for each year is due by January 31 of the following year. The agreement will remain effective until Speedy Brilliant (Daqing) or its designees have acquired 100% of the equity interests of QKL-China or substantially all of the assets of QKL-China.

Loan Agreement

The Loan Agreement among Speedy Brilliant (Daqing) and all of the shareholders of QKL-China, provides that Speedy Brilliant (Daqing) will make a loan in the aggregate principal amount of RMB 77 million (approximately $11.2 million) to the shareholders of QKL-China, each shareholder receiving a share of the loan proceeds proportional to its shareholding in QKL-China, and in exchange each shareholder agreed (i) to contribute all of its proceeds from the loan to the registered capital of QKL-China in order to increase the registered capital of QKL-China, (ii) to cause QKL-China to complete the process of registering the increase in its registered capital with PRC regulatory authorities within 30 days after receiving the loan, and (iii) to pledge their equity to Speedy Brilliant (Daqing) under the Equity Pledge Agreement described below.

F-7

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The loan is repayable by the shareholders at the option of Speedy Brilliant (Daqing) either by the transfer of QKL-China’s equity to Speedy Brilliant (Daqing) or through proceeds indirectly from the transfer of QKL-China assets to Speedy Brilliant (Daqing). The loan does not bear interest, except that if (x) Speedy Brilliant (Daqing) is able to purchase the equity or assets of QKL-China, and (y) the lowest allowable purchase price for that equity or those assets under PRC law is greater than the principal amount of the loan, then, insofar as it is allowable under PRC law, interest will be deemed to have accrued on the loan in an amount equal to the difference between the lowest allowable purchase price for QKL-China and the principal amount of the loan. The effect of this interest provision is that, if and when permitted under PRC law, Speedy Brilliant (Daqing) may acquire all of the equity or assets of QKL-China by forgiving the loan, without making any further payment. If the principal amount of the loan is greater than the lowest allowable purchase price for the equity or assets of QKL-China under PRC law, then Speedy Brilliant (Daqing) would exempt the shareholders from paying the difference between the two amounts. The effect of this provision is that (insofar as allowable under PRC law) the shareholders of QKL-China may satisfy their repayment obligations under the loan by transferring all of QKL-China’s equity or assets to Speedy Brilliant (Daqing), without making any further payment.

The Loan Agreement also contains promises from the shareholders of QKL-China that during the term of the agreement they will elect as directors of QKL-China only candidates nominated by Speedy Brilliant (Daqing), and they will use their best efforts to ensure that QKL-China does not take certain actions without the prior written consent of Speedy Brilliant (Daqing), including (i) supplementing or amending the articles of association or rules of QKL-China, or of any subsidiary controlled or wholly owned by it, (ii) increasing or decreasing its registered capital or shareholding structure, (iii) transferring, mortgaging or disposing of any interests in its assets or income, or encumbering its assets or income in a way that would affect Speedy Brilliant (Daqing)’s security interest unless required for QKL-China’s normal business operations, (iv) incurring or succeeding to any debts and liabilities, (v) entering into any material contract (exceeding RMB 5.0 million, or approximately $0.7 million, in value); (vi) providing any loan or guarantee to any third party; (vii) acquiring or consolidating with any third party, or investing in any third party; and (viii) distributing any dividends to the shareholders in any manner. In addition, the Loan Agreement provides that at Speedy Brilliant (Daqing)’s request, QKL-China will promptly distribute all distributable dividends to its shareholders.

The funds that Speedy Brilliant (Daqing) used to make the loan came from the proceeds received by us, its indirect parent company, in the private placement transaction completed in March 2008.

Exclusive Purchase Option Agreement

The Exclusive Purchase Option Agreement, among Speedy Brilliant (Daqing), QKL-China, and all of the shareholders of QKL-China, provides that QKL-China will grant Speedy Brilliant (Daqing) or its designated third party an irrevocable and exclusive right to purchase all or part of QKL-China’s assets, and the shareholders of QKL-China will grant Speedy Brilliant (Daqing) or its designated third party an irrevocable and exclusive right to purchase all or part of their equity interests in QKL-China. Either right may be exercised by Speedy Brilliant (Daqing) in its sole discretion at any time that the exercise would be permissible under PRC law, and the purchase price for Speedy Brilliant (Daqing)’s acquisition of equity or assets will be the lowest price permissible under PRC law. QKL-China and its shareholders are required to execute purchase agreements and related documentation within 30 days of receiving notice from Speedy Brilliant (Daqing) that it intends to exercise its right to purchase.

The Exclusive Purchase Option Agreement contains promises from QKL-China and its shareholders that they will refrain from taking actions, such as voting to dissolve or declaring dividends, that could impair Speedy Brilliant (Daqing)’s security interest in the equity of QKL-China or reduce its value. These promises are substantially the same as those contained in the Loan Agreement described above.

The agreement will remain effective until Speedy Brilliant (Daqing) or its designees have acquired 100% of the equity interests of QKL-China or substantially all of the assets of QKL-China. The exclusive purchase options were granted under the agreement on the closing date.

F-8

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Equity Pledge Agreement

The Equity Pledge Agreement, among Speedy Brilliant (Daqing), QKL-China, and all of the shareholders of QKL-China, provides that the shareholders of QKL-China will pledge all of their equity interests in QKL-China to Speedy Brilliant (Daqing) as a guarantee of the performance of the shareholders’ obligations and QKL-China’s obligations under each of the other PRC Restructuring Agreements. Under the Equity Pledge Agreement, the shareholders of QKL-China have also agreed (i) to cause QKL-China to have the pledge recorded at the appropriate office of the PRC Bureau of Industry and Commerce, (ii) to deliver any dividends received from QKL-China during the term of the agreement into an escrow account under the supervision of Speedy Brilliant (Daqing), and (iii) to deliver QKL-China’s official shareholder registry and certificate of equity contribution to Speedy Brilliant (Daqing).

The Equity Pledge Agreement contains promises from QKL-China and its shareholders that they will refrain from taking actions, such as voting to dissolve or declaring dividends, that could impair Speedy Brilliant (Daqing)’s security interest in the equity of QKL-China or reduce its value. These promises are substantially the same as those contained in the Loan Agreement described above.

Under the advice of our PRC legal counsel, we believe each of the significant control and economic benefits agreements is enforceable under PRC and local law. ASC 810-10-50-2AA through 50-2AC collectively require the reporting entity to disclose the significant judgments and assumptions used in determining whether to consolidate a variable interest entity. One of the most significant assumptions the Company applied in consolidating its VIE is the interpretation of the provisions of applicable PRC laws and regulations. However, any changes in PRC laws and regulations that affect our ability to control QKL-China might preclude us from consolidating QKL-China in the future.

Mr. Zhuangyi Wang, our Chairman of the board and Chief Executive Officer owns 96% of QKL China. Through contractual arrangements between Speedy Brilliant (Daqing) and QKL-China and its respective registered shareholders, we bear the economic risks and receive the economic benefits of QKL-China as their primary beneficiary. The financial results of QKL-China are consolidated into our financial statements despite the lack of our equity interest in them. We believe the consolidation is necessary to fairly present the financial position and results of operations of our company, because of the existence of a parent-subsidiary relationship through contractual arrangements. Speedy Brilliant (Daqing) has entered into contractual arrangements with QKL-China and its respective registered shareholders. Consigned Management Agreement and Technology Service Agreement enable us to receive substantially all of the economic benefits from QKL-China. Loan Agreement and Equity Pledge Agreement enable us to exercise effective control over QKL-China. And Exclusive Purchase Option Agreement enables us to have an exclusive option to purchase all of the equity interests in QKL-China when and to the extent permitted by PRC law.

QKL-China is financed by means of capital contributions from its shareholders. Subsequent to the payment of funds under the Loan Agreement, we have provided additional financial support by means of loan of approximately $1.2 million to QKL-China in November 2010 for the provision of working capital to our principal business in PRC. There are no specific terms or arrangements that require the Company to provide financial support to QKL-China. The creditors of QKL-China do not have recourse to the general credit of the QKL Stores Inc., Speedy Brilliant (BVI) or Speedy Brilliant (Daqing).

Under PRC law, QKL-China must set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Although the statutory reserves can be used, among other things, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, companies may not distribute the reserve funds as cash dividends except upon a liquidation of these subsidiaries.

Noncontrolling interest

Effective January 1, 2009, the Company adopted an authoritative pronouncement issued by the Financial Accounting Standards Board (the "FASB") regarding noncontrolling interests in consolidated financial statements. The pronouncement requires noncontrolling interests to be separately presented as a component of equity in the consolidated financial statements. The presentation regarding noncontrolling interest was retroactively applied for all the presented periods. As at December 31, 2010 and 2009, the Company did not have any noncontrolling interests.

The following consolidated financial statement balances and amounts of the Company's VIE and its subsidiary were included in the accompanying consolidated balance sheets as of and for the years ended:

	December 31,
	2010		2009
Total current assets	$	91,859,564	$	81,983,801
Total noncurrent assets		69,872,538		49,844,756
Total assets		161,732,102		131,828,557
Total current liabilities		63,302,609		48,593,761
Total noncurrent liabilities		-		-
Total liabilities	$	63,302,609	$	48,593,761

	December 31,
	2010		2009
Net sales	$	298,399,394	$	247,594,272
Gross profit		52,850,818		43,599,463
Income from operations		13,946,829		14,960,253
Net income	$	11,225,020	$	11,330,643

As a result of the contractual arrangements above, Speedy Brilliant (Daqing) bears the majority of economic risks and receives the economic benefits of the VIE, QKL-China, and is the primary beneficiary of the VIE. Therefore, the Company has consolidated the financial results of the VIE and their subsidiary in its consolidated financial statements.

The Company believes that Speedy Brilliant (Daqing)'s contractual arrangements with the VIE are in compliance with PRC law and are legally enforceable. The majority shareholder of the VIE, our Chairman and CEO, Mr. Wang, is also the majority shareholder of the Company and therefore has no current interest in seeking to act contrary to the contractual arrangements. However, uncertainties in the PRC legal system could limit the Company's ability to enforce these contractual arrangements, which in turns, may lead to the potential of deconsolidation.

Completion of the PRC Restructuring

The PRC restructuring transaction closed on March 28, 2008 and after the closing date, Speedy Brilliant (Daqing) completed all required post-closing steps, including the payment and verification of all the installments of Speedy Brilliant (Daqing)’s registered capital.

The remaining portion of Speedy Brilliant (Daqing)’s registered capital was contributed and verified by August 1, 2009, two years after the issuance of its business license.

Share Exchange Transaction

In the share exchange transaction, Forme acquired control of Speedy Brilliant (BVI), a British Virgin Islands holding company and the parent company of Speedy Brilliant (Daqing), by issuing to the stockholders of Speedy Brilliant (BVI) shares of common stock in exchange for all of the outstanding capital stock of Speedy Brilliant (BVI). The stockholders of Speedy Brilliant (BVI) with whom we completed the share exchange were (i) the majority holder, Winning State International Limited, a British Virgin Islands holding company (“Winning State (BVI)”) all of whose stock was acquired by our Chief Executive Officer, Mr. Zhuangyi Wang, pursuant to a call option held by Mr. Wang and (ii) three minority stockholders, Ms. Fang Chen, Mr. Yang Miao, and Ms. Ying Zhang, Mr. Wang has exercised his call option and all of the shares of Winning State (BVI) were transferred from Mr. Yap to Mr. Wang on February 2, 2010.

F-9

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Share Exchange Agreement

On March 28, 2008, Forme entered into a share exchange agreement with (i) Speedy Brilliant (BVI); (ii) Speedy Brilliant (Daqing); (iii) the owners of all of the outstanding voting stock of Speedy Brilliant (BVI), namely (a) Winning State (BVI) (a company that is wholly owned and controlled by Mr. Chin Yoke Yap (all of whose stock was acquired by our CEO, Mr. Zhuangyi Wang, pursuant to a call option held by Mr. Wang that he exercised on February 2, 2010)), which owned approximately 98.5% of the Speedy Brilliant (BVI) stock, and (b) three individuals, Ms. Fang Chen, Ms. Yang Miao and Ms. Ying Zhang, who collectively owned approximately 1.5% of the Speedy Brilliant (BVI) stock; and (iv) Forme’s then controlling stockholders, Vision Opportunity China LP, Stallion Ventures, LLC, and Castle Bison, Inc. Under the terms of the share exchange agreement, the Speedy Brilliant (BVI) stockholders exchanged all of the outstanding shares of Speedy Brilliant (BVI) for a total of 19,382,298 newly issued shares of Forme common stock. As a result of the share exchange, Forme acquired Speedy Brilliant (BVI) as a wholly owned subsidiary, and the Speedy Brilliant (BVI) stockholders became holders of 92.8% of our common stock on a non-diluted basis (64.6% of our common stock assuming conversion of our newly-issued Series A Preferred Stock and 46.3% of our common stock assuming conversion of our newly-issued Series A Preferred Stock and exercise of all of the Series A Warrants and Series B Warrants).

In the PRC restructuring transaction described above, Speedy Brilliant (BVI) gained control of our operating company, QKL-China. Therefore, when we acquired control of Speedy Brilliant (BVI) in the share exchange, we acquired indirect control of QKL-China. As a result, at the time of the share exchange, (i) we ceased to be a shell company as that term is defined in Rule 12b-2 under the Exchange Act, (ii) Speedy Brilliant (BVI) became our wholly owned subsidiary, and (iii) through our newly-acquired indirect subsidiary Speedy Brilliant (Daqing) we now control, through the contractual arrangements described above.

F-10

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company’s current structure, after completion of the reverse merger transaction, is set forth in the diagram below:

Private Placement Transaction

The other transaction we completed on March 28, 2008 was a private placement in which we raised funds through a private sale of securities that was exempt from the registration requirements under Section 4(2) of the Securities Act as a result of our compliance with Rule 506 of Regulation D promulgated under the Securities Act. In the private placement we sold to certain accredited investors, for gross proceeds to us of $15.5 million, 9,117,647 units at a purchase price of $1.70 per unit, each unit consisting of one share of Series A Preferred Stock (each of which is convertible (subject to adjustment) into one share of our common stock), a 0.625 interest in a Series A Warrant and a 0.625 interest in a Series B Warrant.

The agreements through which the private placement were carried out are described in detail below, all of which were entered into on March 28, 2008 unless otherwise indicated.

Securities Purchase Agreement

The securities purchase agreement among Vision Opportunity Master Fund Ltd. (“Vision Master”), Vision Opportunity China Fund Limited (together with Vision Master, “Vision”) and certain other investors listed in Exhibit A thereto involved the sale of an aggregate of 9,117,647 units, each unit consisting of one share of Series A Preferred Stock, a 0.625 interest in a Series A Warrant and a 0.625 interest in a Series B Warrant. The closing of the private placement transaction and the securities purchase agreement was contingent upon and dependent on the closing of the reverse merger transaction. Each share of Series A Preferred Stock is convertible into one share of common stock subject to adjustment as described below. Each warrant is exercisable for one of common stock or an aggregate of up to 11,397,058 shares of common stock. The Series A Warrants are exercisable for up to 5,698,529 shares of common stock and have an exercise price of $3.40 per share, subject to adjustment. The Series B Warrants are exercisable for up to 5,698,529 shares of common stock and have an exercise price of $4.25 per share, subject to adjustment. The warrants expire on March 28, 2013, which is five years from the date of issuance.

F-11

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The terms of our Series A Preferred Stock are set forth in a Certificate of Designations, which we filed with the Secretary of State of the State of Delaware on March 13, 2008. For more information regarding the material terms of Series A Preferred Stock, see the section of this report entitled “Description of our Securities” under the subheadings “Preferred Stock” and “Terms of Series A Preferred Stock.”

Securities Escrow Agreement

The securities escrow agreement among Vision, as representative of the purchasers under the securities purchase agreement, Winning State (BVI), and Loeb & Loeb LLP, as escrow agent, was entered into as an inducement to the purchasers to enter into the securities purchase agreement. Winning State (BVI) agreed to deliver 18,235,294 shares of our common stock owned by Winning State (BVI) as escrow shares (the “Escrow Shares”) to the escrow agent for the benefit of the purchasers, and to deliver some or all of those shares to the purchasers in the event the Company fails to achieve certain financial performance thresholds for the 12-month periods ending December 31, 2008 and December 31, 2009.

The financial performance thresholds for 2008 required that the Company achieve (i) both net income and cash from operations greater than $9.4 million and (ii) fully diluted earnings per share equal to or greater than $0.23. Under the terms of the agreement these thresholds were met if the Company achieved at least 95% thereof. The Company reported net income of $9.0 million, cash from operations of $18.7 million and diluted earnings per share of $0.29 for 2008, and therefore the thresholds for 2008 were met by the Company. Accordingly, all of the Escrow Shares remain in escrow, pending the performance of the 2009 performance thresholds described below.

The financial performance thresholds for 2009 will be satisfied if the Company achieves (i) both net income and cash from operations of greater than $11.15 million and (ii) fully diluted earnings per share of $0.27. On April 1, 2010 the securities escrow agreement was amended to exclude amounts recorded as liabilities under ASC815. At December 31, 2009, excluding amounts recorded as liabilities under ASC815, the Company had net income of $10.8 million, cash from operations of $10.8 million and fully diluted earnings per share of $0.34.

Because we achieved at least 95% of each of the 2009 performance thresholds, all of the 2009 escrow shares have been returned to Winning State (BVI).

For purposes of determining the performance thresholds described above, fully diluted earnings per share was calculated by (x) dividing the lesser of net income and cash from operations, as reported in our 2009 financial statements plus any amounts that may have been recorded as charges or liabilities on the 2009 financial statements due to the application of Emerging Issues Task Force Issue No. 00-19 that are associated with (1) any outstanding warrants issued in connection with the Securities Purchase Agreement or (2) any liabilities created as a result of the escrow shares being released to any of our officers or directors by (y) the aggregate number of shares of our then outstanding common stock on a fully-diluted basis which number includes, without limitation, the number of shares of common stock issuable upon conversion of the then outstanding shares of Series A Preferred Stock and the number of shares of common stock issuable upon the exercise of any then outstanding preferred stock, warrants or options of the Company.

F-12

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Investor and Public Relations Escrow Agreement

We also entered into an investor and public relations agreement with Vision Opportunity China LP, as representative of the purchasers under the securities purchase agreement, and Loeb & Loeb LLP, as escrow agent. Under the agreement, $300,000 of the proceeds of the private placement was deposited into an escrow account with Loeb & Loeb LLP for use in investor and public relations.

Settlement Agreement

On January 22, 2008, QKL terminated its engagement agreement with Kuhns Brothers to provide QKL with investment banking services, on an exclusive basis, with respect to the private placement transaction and the share exchange transaction, and the parties executed a settlement agreement. Under the terms of the settlement agreement, we were required to pay Khuns Brothers (i) a cash fee equal to 8.5% of the gross proceeds invested in the financing by investors introduced to the Company by Kuhns Brothers, Inc. (“Introduced Investors”), and (ii) warrants to purchase up to a number of shares of common stock of the Company equal to 8.5% of the dollar amount of the shares purchased by the Introduced Investors divided by the per-share purchase price of the common stock or preferred stock in the financing. The warrants have the same terms as warrants received by the Introduced Investors. Accordingly, Kuhns Brothers received from us a cash fee of $1,300,500, Series A Warrants to purchase 191,250 shares of our common stock and Series B Warrants to purchase 153,000 shares of our common stock.

Lock-Up Agreement

In connection with the private placement we also entered into an agreement with Winning State (BVI) under which, in order to induce Forme to enter into the share exchange agreement, certain stockholders including Mr. Zhuangyi Wang, our CEO and Mr. Xudong Wang, our former CFO, agreed that (i) they would not sell or transfer any shares of our common stock until at least 12 months after the effective date of a registration statement filed with the SEC registering for resale the shares of common stock underlying the Series A Preferred Stock issued in the private placement transaction and (ii) for an additional 24 months after the end of that 12 month period, would not sell or transfer more than one-twelfth of its total shares of that common stock during any one month.

Agreements Executed in Connection with Our Public Offering

Waiver to Registration Rights Agreement

On October 16, 2009, Vision Opportunity China LP, as representative of the purchasers listed on Schedule I to the Registration Rights Agreement dated as of March 28, 2008, agreed to waive the notice and piggyback registration rights provided by the Registration Rights Agreement solely with respect to our public offering in the fourth quarter of 2009 of 6,900,000 shares of our common stock at a price of $5.75 per share that raised aggregate net proceeds of $39.7 million.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Waiver to Securities Purchase Agreement

On October 16, 2009, Vision Opportunity China LP, as representative of the purchasers listed on Schedule A to the Securities Purchase Agreement dated as of March 28, 2008, agreed to waive the notice and preemption rights provided by the Securities Purchase Agreement, solely with respect to our public offering in the fourth quarter of 2009 of 6,900,000 shares of our common stock at a price of $5.75 per share that raised aggregate net proceeds of $39.7 million.

Amendment to Securities Escrow Agreement

On October 15, 2009, we entered into an Amendment to Securities Escrow Agreement, amending the Securities Escrow Agreement dated March 28, 2008, by and among the Company, Vision Opportunity China LP as representative of the Purchasers, Winning State Investment Limited and Loeb & Loeb LLP, as escrow agent, to revise the definition of “Net income” and “Cash from Operations” for the fiscal year ended December 31, 2009 to exclude the one time non-recurring cash expenses incurred by us in connection with our public offering in the fourth quarter of 2009 and the transactions contemplated by our public offering that were not contemplated by the Securities Escrow Agreement.

Lock-Up Letters

On October 15, 2009, in connection with our public offering and in order to induce Roth Capital Partners, LLC to act as our underwriter, each of our directors and executive officers, and Winning State (BVI) agreed that, without the prior written consent of Roth Capital Partners, LLC, they would not, during the period commencing on October 15, 2009 and ending 180 days after the date of the final prospectus relating to our public offering (i) either directly or indirectly sell, pledge, lend or transfer any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock, subject to certain exclusions, or (ii) make any demand for or exercise any right with respect to the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for shares of common stock.

Anti-dilution Agreements

On March 24, 2010, we entered into a Warrant Amendment (“Series A Warrant Amendment”) to the Series A Warrant to Purchase Shares of Common Stock of the Company (“Series A Warrant”) with Vision Opportunity China LP, pursuant to which certain anti-dilution provisions of the Series A Warrants were removed on behalf of the Series A Warrant holders. Pursuant to the Series A Warrant Amendment, we agreed not to issue any additional shares of common stock or common stock equivalents, except as otherwise contemplated by the Series A Warrant, at a per share price less than the exercise price then in effect, without the prior written consent of holders of a majority of the Series A Warrants at such time.

On March 24, 2010, we entered into a Warrant Amendment (“Series B Warrant Amendment”) to the Series B Warrant to Purchase Shares of Common Stock of the Company (“Series B Warrant”) with Vision Opportunity China LP, pursuant to which certain anti-dilution provisions of the Series A Warrants were removed on behalf of the Series A Warrant holders. Pursuant to the Series B Warrant Amendment, we agreed not to issue any additional shares of common stock or common stock equivalents, except as otherwise contemplated by the Series B Warrant, at a per share price less than the exercise price then in effect, without the prior written consent of holders of a majority of the Series B Warrants at such time.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On March 25, 2010, we entered into a Waiver (“Waiver”) to the Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (“Certificate”) with the holders of our Series A Convertible Preferred Stock, pursuant to which certain anti-dilution protections of the Certificate were waived. We plan to amend the Certificate to state that we will not issue any additional shares of common stock or common stock equivalents, except as otherwise contemplated by the Certificate, at a conversion price less than the conversion price then in effect for the Series A Preferred Stock, without the prior written consent of holders of a majority of the Series A Warrants at such time.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Presentation

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements include the financial statements of QKL Stores Inc, and its wholly-owned subsidiaries (collectively referred to herein as the “Company”). All intercompany accounts, transactions, and profits have been eliminated upon consolidation.

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.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Reclassification

The presentation of certain line items presented on the consolidated financial statements and the relevant notes for the prior years have been changed in conformity with the current year presentation of the condensed consolidated financial statements and the corresponding notes. For comparative purposes, in the financial statements for the year ended December 31, 2009, the Company reclassified the following:

$2,644 ,752 of vendor rebates received from vendors was reclassified from selling expenses to offset cost of sales,

The Company believes that such reclassification represents better presentation to its retail industry standard. The reclassification had no effect on the Company’s previously reported condensed consolidated statements of income, condensed consolidated statements of stockholders’ equity or condensed consolidated statements of cash flows, and is not considered material to any previously reported condensed consolidated financial statements.

Foreign Currency Translation

The Company’s financial statements are presented in the U.S. dollar ($), which is the Company’s reporting currency, while its functional currency is Chinese Renminbi (RMB). Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of income. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange ruling at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the statements of income.

In accordance with ASC 830, Foreign Currency Matters, the Company translated the assets and liabilities into US $ using the rate of exchange prevailing at the applicable balance sheet date and the statements of income and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation are recorded in shareholders’ equity as part of accumulated other comprehensive income.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Foreign Currency Translation (continued)

Below is a table with foreign exchange rates used for translation:

	(Average Rate) Years Ended December 31,
	2010		2009

Chinese Renminbi (RMB)	RMB	6.7788	RMB	6.8310
United States dollar ($)	$	1.0000	$	1.0000

As of December 31,	2010		2009
Chinese Renminbi (RMB)	RMB	6.6118	RMB	6.8172
United States dollar ($)	$	1.0000	$	1.0000

Segment Reporting

The Company operates in one industry segment, operating retail chain stores. ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Given the economic characteristics of the similar nature of the products sold, the type of customer and the method of distribution, the Company operates as one reportable segment as defined by ASC 280, Segment Reporting.

Revenue Recognition

The Company earns revenue by selling merchandise primarily through its retail stores. Revenue is recognized when merchandise is purchased by and delivered to the customer and is shown net of estimated returns during the relevant period. The allowance for sales returns is estimated based upon historical experience.

Cash received from the sale of cash card (aka “gift card”) 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 fiscal 2010 and 2009, respectively.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

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, 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 $150,980 and $188,995 for fiscal 2010 and 2009, respectively. Advertising expense is included in selling expense in the accompanying consolidated statements of income. The Company receives co-operative advertising allowances from product 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 expense when the Company incurs the advertising cost eligible for the credit. Co-operative advertising allowances recognized as a reduction to selling and administrative expense amounted to nil for fiscal 2010 and 2009 respectively.

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.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Leases

The Company accounts for its leases under the provisions of ASC 840, Leases. Certain of the Company’s operating leases provide for minimum annual payments that change over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis over the minimum lease term. The Company recognizes a deferred rent liability for minimum step rents when the amount of rent expense exceeds the actual lease payments and it reduces the deferred rent liability when the actual lease payments exceeds the amount of straight-line rent expense. Rent holidays and tenant improvement allowances for store remodels are amortized on the straight-line basis over the initial term of the lease and any option period that is reasonably assured of being exercised.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Restricted Cash

Restricted cash are cash deposited in a trust account maintained in the United States for the purpose of investor and public relation affairs.

Accounts Receivable

Accounts receivable consist primarily of third party purchasing card receivables, amounts due from inventory vendors for returned products or co-operative advertising and amounts due from lessors for tenant improvement allowances. Accounts receivable have not historically resulted in any material credit losses. An allowance for doubtful accounts is provided when accounts are determined to be uncollectible.

Inventories

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.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Significant additions or improvements extending useful lives of assets are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives as follows:

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Buildings		30 to 40 years
Shop equipment		5 years
Office equipment		3 years
Motor vehicles		5 years
Car park		43 years
Leasehold improvements		Shorter of estimated useful life or term of lease

Land Use Rights

According to the laws of the PRC, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through the land use rights granted by the government. The land use rights represent cost of the rights to use the land in respect of properties located in the PRC. Land use rights are carried at cost and amortized on a straight-line basis over the period of rights of 30 to 40 years.

Goodwill

Goodwill represents the excess of purchase price over fair value of net assets acquired. Under ASC 350, Intangibles — Goodwill and Other, goodwill is not amortized but evaluated for impairment annually or whenever events or changes in circumstances indicate that the value may not be recoverable.

The Company performed an annual impairment test as of the end of fiscal 2010 and 2009, and determined that goodwill was not impaired.

Long-lived Assets

The Company reviews long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows, usually at the store level. The carrying amount of a long-lived asset is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. If the asset is determined not to be recoverable, then it is considered to be impaired and the impairment to be recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset, determined using discounted cash flow valuation techniques, as defined in ASC 360, Property, Plant, and Equipment.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company determined the sum of the undiscounted cash flows expected to result from the use of the asset by projecting future revenue and operating expense for each store under consideration for impairment. The estimates of future cash flows involve management judgment and are based upon assumptions about expected future operating performance. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions.

The Company’s evaluation resulted in no long-lived asset impairment charges during fiscal 2010 and 2009.

Concentration of Credit Risk

The Company maintains cash in bank deposit accounts in PRC, except one restricted cash deposit account in the U.S. for the sole purpose of disbursements of investor relations expenses. The account in the U.S. is uninsured by the Federal Deposit Insurance Corporation (“FDIC”) up to nil. The Company performs ongoing evaluations of this institution to limit its concentration risk exposure.

The Company operates retail stores located principally in the Northeast of China. Because of this, the Company is subject to regional risks, such as the economy, regional financial conditions and unemployment, weather conditions, power outages, and other natural disasters specific to the region in which the Company operates.

The Company relies on two distribution centers located in Daqing and Harbin, China, which service its stores. Any natural disaster or other serious disruption to the distribution center due to fire, earthquake or any other cause could damage a significant portion of inventory and could materially impair the Company’s ability to adequately stock its stores.

Accrual and Disclosure of Loss Contingencies

We determine whether to disclose or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable, and whether it can be reasonably estimated. We analyze, if any, our litigation and regulatory matters based on available information to assess the potential liabilities. Our assessment is developed based on an analysis of possible outcomes under various strategies. We accrue for loss contingencies when such amounts are probable and reasonably estimable. If a contingent liability is only reasonably possible, we will disclose the potential range of the loss, if estimable. We record losses related to contingencies in cost of operations or selling, general and administrative expenses, depending on the nature of the underlying transaction leading to the loss contingency.

Retirement Benefit Plans

Full time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Company to make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Company accounts the mandated defined contribution plan under the vested benefit obligations approach based on the guidance of ASC 715, Compensation—Retirement Benefits.

The total amounts for such employee benefits which were expensed were $2,487,299 and $2,087,718 for the years ended December 31, 2010 and 2009, respectively.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Retained Earnings - Appropriated

The income of the Company’s PRC subsidiaries is distributable to their shareholder after transfer to reserves as required by relevant PRC laws and regulations and the subsidiary’s Articles of Association. As stipulated by the relevant laws and regulations in the PRC, these PRC subsidiaries are required to maintain reserves which are non-distributable to shareholders. Appropriations to the reserves are approved by the respective boards of directors.

Reserves include statutory surplus reserves and discretionary reserves. Statutory surplus reserves can be used to make good previous years’ losses, if any, and may be converted into capital in proportion to the existing equity interests of shareholders, provided that the balance after such conversion is not less than 25% of the registered capital. The appropriation to the statutory surplus reserves must not be less than 10% of net profit after taxation. Such appropriation may cease to apply if the balance of the fund is equal to 50% of the entity’s registered capital. The annual appropriations of reserves of QKL-China and Qinglongxin Commerce are 10% and 10% for the years ended December 31, 2010 and 2009, respectively.

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.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 nonfinancial 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 10 regarding the fair value of the Company’s warrants, which are classified as Level 3 liabilities in the fair value hierarchy.

The fair value of warrants was calculated using the Black-Scholes option pricing model. The assumptions that were used to calculate fair value as of December 31, 2009 were as follows:

Investor Warrants:	12/31/2009
Expected volatility		54	%
Risk free rate		1.82	%
Expected terms		3.24
Expected dividend yield		-

Expected volatility is based on average peer group volatility with comparable size and operations. The Company did not have enough historical share trade period and was thinly traded. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the warrants.

Recently Issued Accounting Guidance

In June 2009, the FASB issued ASC 810-10-30, Variable Interest Entities (formerly FASB 167), regarding when and how to determine, or re-determine, whether an entity is a variable interest entity. In addition, FASB No. 167 replaces FIN 46R’s quantitative approach for determining who has a controlling financial interest in a variable interest entity with a qualitative approach. Furthermore, ASC 810-10-30 requires ongoing assessments of whether an entity is the primary beneficiary of a variable interest entity. ASC 810-10-30 is effective beginning January 1, 2010 and the adoption had no impact on the Company’s consolidated financial statements.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued its final Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162. SFAS No. 168 established the FASB Accounting Standards Codification (“ASC”) as the single source of authoritative generally accepted accounting principles in the United States of America (“GAAP”) to be applied by nongovernmental entities in the preparation of financial statements. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance in the ASC carries an equal level of authority. The ASC supersedes all previously existing non-SEC accounting and reporting standards. The ASC simplifies user access to all authoritative GAAP by reorganizing previously issued GAAP pronouncements into approximately 90 accounting topics within a consistent structure, without creating new accounting and reporting guidance. The ASC became effective for financial statements issued for interim and annual periods ending after September 15, 2009; accordingly, the Company adopted the ASC in the third quarter of fiscal 2009. Following SFAS No. 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the ASC, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the ASC. In the discussion that follows, the Company will refer to ASC citations that relate to ASC Topics and their descriptive titles, as appropriate, and will no longer refer to citations that relate to accounting pronouncements superseded by the ASC. The adoption of the ASC had no impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140,” (not yet reflected in FASB ASC 860-10-65). SFAS No. 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” along with the exception from applying FIN 46(R), “Consolidation of Variable Interest Entities.” The standard is effective for the first annual reporting period that begins after November 15, 2009 (i.e. the Company’s fiscal year beginning January 1, 2010), for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this Statement had no impact on the Company’s consolidated financial statements.

In September 2009, the accounting standard regarding multiple deliverable arrangements was updated to require the use of the relative selling price method when allocating revenue in these types of arrangements. This method allows a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update is effective January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented. The Company is currently evaluating the impact that this standard update will have on its consolidated financial statements.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In January 2010, the FASB issued the following ASC Updates:

ASU No. 2010-01—Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This Update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009 with retrospective application. The adoption had no impact on the Company’s consolidated financial statements.

ASU No. 2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends Subtopic 810-10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity, but does not apply to: (i) sales of in substance real estate; and (ii) conveyances of oil and gas mineral rights. The amendments in this Update are effective beginning in the period that an entity adopts FAS 160 (now included in Subtopic 810-10). The adoption had no impact on the Company’s consolidated financial statements.

ASU No. 2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This Update amends Subtopic 820-10 that require new disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. This Update also amends Subtopic 820-10 to clarify certain existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. It is expected the adoption of this Statement will have no impact on the Company’s consolidated financial statements.

ASU 2010-20 provides greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables by providing additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. The updated guidance is effective for public entities with interim and annual reporting periods beginning on or after December 15, 2010 for activities that occur during the reporting period. The Company does not expect the adoption of this guidance will have impact on its consolidated financial statements.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In April 2010, the FASB issued an Accounting Standard Update (“ASU”) No.2010-13,”Compensation-Stock Compensation” (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” which address the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. ASU 2010-13 is effective for interim and annual periods beginning on or after December 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial position or results of the operations.

The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.

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QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 3 – OTHER RECEIVABLES

Other receivables consisted of the following:

December 31,	2010		2009

Deposits (1)	$	2,202,590	$	1,486,336
Purchase deposits (2)		1,276,255		701,225
Input value added tax recoverable (3)		1,973,079		1,164,315
Loans to suppliers (4)		18,119,405		8,531,986
Rebates receivables (5)		1,725,963		1,109,903
Rent deposits		1,994,467		499,032
Others		944,638		487,775

Total	$	28,236,397	$	13,980,572

(1)

Deposits are cash held by cashiers of retail stores for day to day operations

(2)

Purchase deposits are cash held by employees in retail stores for the equipment purchase.

(3)

Input VAT arises when the group purchases products from suppliers and input VAT can be deducted from output VAT on sales.

(4)

Loans to unrelated vendors are used to secure the merchandise needed during the peak season at the end of the year. The loans were unsecured bearing an interest rate of 6.237% per annum. These loans are due on March 7, 2011 and September 30, 2011, respectively.

(5)

Rebates receivables represent promotional allowances provided by vendors for promotions incurred by the company.

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consisted of the following:

December 31,	2010			2009

Buildings	$	6,397,575		$	6,275,438
Shop equipment		13,309,062			11,515,649
Office equipment		3,250,626			1,199,554
Motor vehicles		1,045,720			751,430
Car park		19,480			18,893
Leasehold improvements		11,424,560			7,611,421
Construction in progress		2,498,542			11,001,584

Total property, plant and equipment		37,945,565			38,373,969
Less: accumulated depreciation and amortization		(13,153,416	)		(8,971,339	)

Total property, plant and equipment, net	$	24,792,149		$	29,402,630

F-28

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The depreciation expenses for the years ended December 31, 2010 and 2009 were $4,858,011 and $ 2,721,636, respectively

NOTE 5 – LAND USE RIGHTS

Land use rights consisted of the following:

December 31,	2010			2009

Land use rights	$	888,521		$	862,527
Less – accumulated amortization		(139,988	)		(109,301	)

Total intangible assets, net	$	748,533		$	753,226

The amortization expenses of land use right for the years ended December 31, 2010 and 2009 were $28,294 and $27,967 respectively.

Future amortization of land use rights is as follows:

Years ending December 31,	Amount
2011	$	28,093
2012		28,093
2013		28,093
2014		28,093
2015		28,093
Thereafter		608,068

Total	$	748,533

NOTE 6 – GOODWILL

Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination at the date of acquisition.

Goodwill for impairment has been tested annually, or whenever events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying amount. The test to evaluate for impairment is a two-step process. In the first step, we compare the fair value of each of our reporting units to its carrying value. If the fair value of any reporting unit is less than its carrying value, we perform a second step to determine the implied fair value of goodwill associated with that reporting unit. If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment. Based upon the results of our 2010 and 2009 analyses, no impairment of goodwill was indicated in 2010 or 2009.

F-29

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

A summary of changes in the Company’s goodwill is as follows:

	2010					2009
	(RMB)		(USD)			(RMB)		(USD)
Balance – beginning of year:
Goodwill		131,439,086	$	19,280,509			131,439,086	$	18,878,823
Accumulated impairment charges		-		-			-		-
		131,439,086		19,280,509			131,439,086		18,878,823
Activity during the year:
Additions		158,580,000		23,984,428			-		-
Impairment charge		-		-			-		-
Other adjustments*		-		598,992	*		-		401,686
		158,580,000		24,583,420			-		401,686
Balance – end of year:
Goodwill		290,019,086		43,863,929			131,439,086		19,280,509
Accumulated impairment charges		-		-			-		-
		290,019,086	$	43,863,929			131,439,086	$	19,280,509

* Other adjustments are the exchange differences arising during the year.

The goodwill was generated from the acquisition of a number of businesses in Northeast China through the purchases of assets and the business operations from unrelated parties. According to ASC 805 “business combinations”, the acquisition of these businesses should be treated as acquisition of a business.

During 2008, the Company purchased the business operations and certain assets of stores that sell grocery, food and non-food products in the local region from five independent third parties: (1) Heilongjiang Longmei Commerce Co., Ltd (the “Anda Store”); (2) Nehe Wanlong Commercial Building Co., Ltd. (the “Nehe Store”); (3) Fuyu Xinshuguang Real Estate Development Co., Ltd (the “Fuyu Store”); (4) Daqing Xinguangtiandi Shopping Center Co., Ltd (the “Xinguang tiandi Store”); and (5) Hulunbeier Huahui Department Store Co., Ltd. (the “Hailaer Store”). The consideration for the acquisitions was settled in cash and was accounted for as follows (presented in RMB):

No.	Store Name	Acquisition Date		Consideration		The fair value of net assets		Goodwill
				(RMB)		(RMB)		(RMB)		(USD)*
1	Anda Store		08/31/2008		22,740,000		970,404		21,769,596	$	3,180,272
2	Nehe Store		09/30/2008		16,800,000		828,500		15,971,500		2,329,871
3	Fuyu Store		10/31/2008		17,400,000		1,042,010		16,357,990		2,387,324
4	Xinguangtiandi Store		09/30/2008		13,800,000		880,000		12,920,000		1,884,728
5	Hailaer Store		10/31/2008		66,000,000		1,580,000		64,420,000		9,401,607
	Total				136,740,000		5,300,914		131,439,086

* converted into U.S. dollars using the date of acquisition exchange rate

F-30

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

During 2010, the Company acquired the business operations and certain assets of stores that sell grocery, food and non-food products in the local region from seven independent third parties:(1) Jian County Great Wall Operating Management Co., Ltd (the “Jian Store”); (2) Inner Mongolia Fada Property Development Group Co., Ltd (the “Manzhouli Store”); (3) Taian County Jiahemei Commercial Co., Ltd (the “Taian Store”); (4) ARongQi Naji Town Shopping Center (the “Arongqi Store”); (5) Tianlong Shopping Mall (the “Mulan Store”); (6) Liaoyang LeWanJia Shopping Center (the “Liaoyang Store”); and (7) Siping Wanxi Commercial Co., Ltd (the “Siping Store”). After the closing of the acquisition, these businesses ceased their operations as retail stores and the Company was licensed to operate in these locations. In 2010, the Company opened six supermarket/ hypermarket stores and one department store with its trade name QKL that sell grocery, food and non-food products and will open the remaining one store soon. The operating results of these businesses have been included in the consolidated financial statements since the acquisition dates. The consideration for the acquisitions was settled in cash and was accounted for as follows (presented in RMB):

No.	Store Name	Acquisition Date		Consideration		The fair value of the net assets		Goodwill
				(RMB)		(RMB)		(RMB)		(USD)*
1	Jian Store		08/01/10		31,500,000		-		31,500,000	$	4,647,080
2	Manzhouli Store		07/01/10		18,380,000		-		18,380,000		2,705,611
3	Taian Store		07/01/10		28,000,000		-		28,000,000		4,121,714
4	Arongqi Store		11/01/10		16,100,000		-		16,100,000		2,409,927
5	Mulan Store		12/01/10		14,000,000		-		14,000,000		2,096,923
6	Liaoyang Store		10/01/10		27,600,000		-		27,600,000		4,117,866
7	Siping Store		11/01/10		23,000,000		-		23,000,000		3,442,753
	Total				158,580,000		-		158,580,000

* converted into U.S. dollars using the date of acquisition exchange rate

No supplemental pro forma information is presented for the acquisitions due to the immaterial effect of each acquisition on the Company’s results of operations.

Acquisition-related expenses in connection with the 2010 acquisitions are classified within the general and administrative expenses and amounted to $117,747, which included the expenses for investigating and researching, evaluating, coordinating and directing the acquisition transactions.

NOTE 7 – ACCRUED EXPENSES AND OTHER PAYABLES

Other payables consisted of the following:

December 31,	2010		2009

Accrued expenses	$	3,652,235	$	1,688,890
VAT and other PRC tax payable		946,704		202,873
Repair, maintenance, and purchase of equipment payable		3,227,292		3,471,555
Employee promoters bond deposit		2,057,051		1,292,771

Total other payables	$	9,883,282	$	6,656,089

F-31

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 8 – EARNINGS PER SHARE

The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Potentially dilutive common shares consist of convertible preferred stock (using the if-converted method) and exercisable warrants and stock options outstanding (using the treasury method). Holder of Class A convertible preferred stock participate in dividends of the Company on the same basis as holders of the Company’s common stock and is therefore included in the calculation of basic earnings per share using the two class method. The following table sets forth the computation of basic and diluted net income per common share:

The following table sets forth the computation of basic and diluted net income per common share:

Years Ended December 31,	2010			2009
	(Restated)
Net income (loss) to QKL Stores, Inc. for computing basic net income per share	$	17,430,564		$	(24,643,438	)
Increase (decrease) in fair value of warrants		(7,801,649	)		35,492,017
Anti-dilutive effect of changes in fair value of warrants		-			(35,492,017	)
Adjusted net income to QKL Stores, Inc. for computing diluted net income per share		9,628,915			(24,643,438	)
Undistributed earnings allocated to Series A Convertible Preferred Stock		3,433,171			-
Net income (loss) attributable to ordinary shareholders for computing basic net income (loss) per ordinary share		13,997,393			(24,643,438	)
Weighted-average shares of common stock outstanding in computing net income per common stock
Basic		29,670,468			21,885,423
Dilutive shares:
Conversion of Series A Convertible Preferred Stock		7,362,139			8,816,289
Dilutive effect of stock warrants and options		3,137,904			1,651,112
Anti-dilutive effect of stock warrants		-			(10,467,401	)
Diluted		40,170,511			21,885,423
Basic earnings (loss) per share of common stock	$	0.47		$	(1.13	)
Diluted earnings per share	$	0.24		$	(1.13	)

NOTE 9 – PREFERRED STOCK AND STOCK WARRANTS

Series A Preferred Stock

The terms of the Company’s Series A Preferred Stock are set forth in a Certificate of Designations, which we filed with the Secretary of State of the State of Delaware on March 13, 2008. Set forth below are the material terms of our Series A Preferred Stock:

Conversion and Anti-Dilution: Each share of Series A Preferred Stock is convertible at any time into one share of the Company’s common stock. A holder of Series A Preferred Stock may not convert those shares if as a result of the conversion, that holder would beneficially own more than 4.99% of the Company’s common stock outstanding at that time. A holder may, however, waive this provision by providing the Company with 61 days’ notice that such holder wishes to waive this restriction with regard to any or all shares of common stock issuable upon conversion of such holder’s Series A Preferred Stock.

Voting: Holders of the Series A Preferred Stock vote on an “as converted” basis together with the common stock, as a single class, in connection with any proposal submitted to stockholders to: (i) increase the number of authorized shares, (ii) approve the sale of any capital stock of the Company, (iii) adopt an employee stock option plan, and (iv) effect any merger, consolidation, sale of all or substantially all of the assets of the Company, or related consolidation or combination transaction. Holders of the Series A Preferred Stock have a separate class vote on all matters that impact the rights, value, or ranking of the Series A Preferred Stock.

Liquidation Preference: In the event of a liquidation, dissolution or winding up, voluntary or involuntary, of the Company, the holders of Series A Preferred Stock then outstanding will be entitled to receive, out of the Company’s assets available for distribution to the Company’s stockholders, an amount equal to $1.70 per share before any payment is made or any assets distributed to the holders of the common stock or any other stock that ranks junior to the Series A Preferred Stock. The holders rank (a) senior to the common stock and to any other class or series of stock issued by the Company not designated as ranking senior to or pari passu with the Series A Preferred Stock in respect of the right to participate in distributions or payments on a liquidation event and (b) pari passu with any other class or series of stock of the Company, the terms of which specifically provide that such class or series will rank pari passu with the Series A Preferred Stock in respect of the right to participate in distributions or payments on a liquidation event.

Dividends : The shares of Series A Preferred Stock are not entitled to dividends unless the Company pays dividends, in cash or other property, to holders of outstanding shares of common stock. If the Company does pay dividends, each outstanding share of Series A Preferred Stock will entitle its holder to receive dividends out of available funds equal to the dividends to which the common stock into which such share was convertible on the record date would have been entitled, had such common stock been issued.

F-32

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 5,822,655 and Series B stock warrants of 5,800,911 which can be converted on a one-for-one basis into shares of the Company’s common stock. The stock warrants have a five year life and the Series A warrants are exercisable at an equivalent price of $3.40 per share and the Series B are exercisable at an equivalent price of $4.25 per share. These stock warrants will expire on March 28, 2013 pursuant to the warrant agreements.

The Company used the Black-Scholes option pricing model to determine the fair value of the Series A and B stock warrants on March 28, 2008 (assumptions used – expected life of 5 years, volatility of 89%, risk free interest rate of 2.51%, and expected dividend yield of 0%).

Effective January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) (previously EITF 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”). As a result of adopting ASC 815, warrants to purchase 11,623,566 of the Company’s common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants were not considered indexed to the Company’s own stock, and as such, all future changes in the fair value of these warrants were recognized in earnings until such time as the warrants are exercised or expire. The Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability. On January 1, 2009, the Company recorded as a cumulative effect adjustment of decreasing additional paid-in capital of $6,020,000 and beginning retained earnings of $2,792,017 and $8,812,017 to warrant liabilities to recognize the fair value of such warrants. The fair value of the warrants was $44,304,034 on December 31, 2009. The Company recognized $35,492,017 loss from the change in fair value of warrants for the year ended December 31, 2009.

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.

Warrant C

On January 22, 2010, the Company issued a warrant (“Warrant C”) to a non-related individual in exchange for consulting services relating to operational and managerial experience. Warrant C can be converted into 200,000 shares of the Company’s common stock at an exercise price of $5.00 per share. Warrants C has a five year term and became exercisable 180 days from the date of issuance of Warrant C.

The Company recognized share-based compensation cost based on the grant-date fair value estimated in accordance with ASC 505-50 “equity based payments to non-employees”. The fair value of these stock warrants on the date of grant was estimated using the Black-Scholes method (assumption used – expected life of 2.75 years, volatility of 54%, and risk free interest rate of 1.25%, and expected dividend yield of 0%). The Company recognized $558,180 of compensation expense related to this transaction.

F-33

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, 2009		11,623,566		$	3.82	$	2.24
Granted – Warrant C		200,000			5.00		4.06
Exercised-Warrants A		(30,392	)		3.40		2.24
Exercised-Warrants B		(24,314	)		4.25		2.24
Cancelled		-			-		-
Balance – December 31, 2010		11,768,860		$	3.84	$	2.27

F-34

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 10 – SHARED BASED COMPENSATION

Under the 2009 Omnibus Securities and Incentive Plan, on September 14, 2009, the Company entered into stock option agreements with its three independent directors, granting each director options to purchase 20,000 shares of the Company’s common stock at an exercise price of $8.00 per share. The options vest in approximately equal amounts on the three subsequent anniversary dates of the grant and expire on the fifth anniversary of the date of agreement of or the date the option is fully exercised. On January 30, 2010, the Company entered into amendment agreements with its three directors to correct the exercise price to $7.50, which was the fair market value on the date of the grant. The correction of this error was considered immaterial.

Under the 2009 Omnibus Securities and Incentive Plan, on June 26, 2010, the Company granted the its Chief Operating Officer, Alan Stewart and 20 employees options to acquire 2,070,000 shares of the Company's common stock at an exercise price of $4.40 per share. The options vest in approximately equal amounts on the four subsequent anniversary dates of the grant and expire on the eighth anniversary of the date of agreement of or the date the option is fully exercised.

Under the 2009 Omnibus Securities and Incentive Plan, on December 2, 2010, the Company granted its Chief Financial Officer, Tsz-Kit Chan options to acquire 100,000 shares of the Company's common stock at an exercise price of $3.42 per share. The options vest in approximately equal amounts on the four subsequent anniversary dates of the grant and expire on the eighth anniversary of the date of agreement of or the date the option is fully exercised.

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.

F-35

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Stock-based compensation expenses recognized was $456,575 for the year ended December 31, 2010. 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, 2009		60,000		$	7.50		1.70	$	-
Granted
-Alan Stewart and 20 employees		2,070,000		$	4.40		3.48		-
-Tsz-Kit Chan		100,000		$	3.42		3.92		-
Exercised		-			-		-		-
Forfeited		(197,000	)	$	4.40		3.48		-

Outstanding– December 31, 2010		2,033,000		$	4.44		3.45	$	13,000

Exercisable - December 31, 2010		414,601		$	4.50		3.42	$	2,600

The weighted average grant date fair value of options granted during year of 2010 and 2009 were $3,265,767 and $144,498, respectively.

As of December 31, 2010, there was $ 2,939,438 of total unrecognized compensation cost related to non-vested share option awards granted. Such cost is expected to be recognized over a weighted-average period of 3-4 years.

NOTE 11 – INCOME TAXES

The income tax provision consisted of the following:

Years Ended December 31,	2010			2009

Current:
Foreign	$	3,459,066		$	4,224,737
Federal		-			-
State		-			-

Deferred
Foreign		(77,850	)		(416,943	)
Federal		-			-
State		-			-

Provision for income taxes	$	3,381,216		$	3,807,794

F-36

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Deferred tax assets and liabilities reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components that give rise to deferred tax as of December 31, 2010 and 2009 were as follows:

December 31,	2010		2009

Current:
Accrued liabilities	$	428,709	$	240,074

Non-current:
Depreciation on property, plant and equipment		79,908		50,299
Net operating loss carry-forward		-		154,476

Total deferred income taxes		508,617		444,849
Less: valuation allowance		-		(27,061	)

Net deferred income taxes	$	508,617	$	417,788

The difference between the effective income tax rate and the expected federal statutory rate was as follows:

Years Ended December 31,	2010			2009

Statutory rate		34.0	%		34.0	%
Income tax rate reduction		(9.0	)%		(9.0	)%
Permanent differences		-			0.6	%
Valuation allowance		-			0.2	%
Warrant Liability		(9.7	)%		(44.3	)%
Other		1.0	%		0.2	%

Effective income tax rate		16.3	%		(18.3	)%

The permanent differences were related to the non-deductible expenses under China taxation law.

Dividends paid by Speedy Brilliant (Daqing) to Speedy Brilliant BVI are subject to the withholding tax of 10%. Distributions made out of pre January 1, 2008 retained earnings will not be subject to the withholding tax. The Company's PRC entities historically have not declared or paid any dividends.

Aggregate undistributed earnings of the Company's subsidiary, variable interests entity and its subsidiary located in the PRC that are available for distribution to the Company of approximately $39.4 million at December 31, 2010 are considered to be indefinitely reinvested, and accordingly, no provision has been made for the Chinese dividend withholding taxes that would be payable upon the distribution of those amounts to the Company.

F-37

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 12 – SEGMENT INFORMATION

The Company is principally engaged in the operation of retail chain store in the PRC. Nearly all identifiable assets of the Company are located in the PRC. All revenues are derived from customers in the PRC. Accordingly, no analysis of the Company’s sales and assets by geographical market is presented.

For the years ended December 31, 2010 and 2009, the Company’s net revenues from external customers for products and services are as follows:

Years Ended December 31,	2010		2009

Sale of general merchandise	$	294,739,524	$	244,566,173
Department store income		2,394,424		2,348,033
Other income		1,265,446		680,066

Total	$	298,399,394	$	247,594,272

For the years ended December 31, 2010 and 2009, the Company’s net revenues from external customers for sale of general merchandise by categories of product are as follows:

Years Ended December 31,	2010		2009

Grocery	$	105,035,486	$	82,219,402
Fresh food		135,275,120		116,136,695
Non-food		54,428,918		46,210,076

Total	$	294,739,524	$	244,566,173

NOTE 13 –COMPREHENSIVE INCOME

Total comprehensive income includes, in addition to net income, changes in equity that are excluded from the consolidated statements of income and are recorded directly into a separate section of shareholders’ equity on the consolidated balance sheets. Comprehensive income and its components consist of the following:

Years Ended December 31,	2010		2009

Net income	$	17,430,564	$	(24,643,438	)
Other comprehensive income, net of tax
Foreign currency translation adjustment		2,839,908		495,097

Comprehensive income	$	20,270,472	$	(24,148,341	)

F-38

QKL STORES INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 14 - 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:

Years Ended December 31,	2010		2009

Rent expense	$	5,273,472	$	2,150,986
Less: Sublease income		1,326,419		737,370

Total rent expense, net	$	3,947,053	$	1,413,616

Annual minimum payments under operating leases are as follows:

Years Ended December 31,	Minimum Lease Payment		Sublease Income		Net Minimum Lease Payment

2011	$	9,030,619	$	906,114		8,124,505
2012		9,037,499		91,215		8,946,284
2013		8,834,868		20,292		8,814,576
2014		8,755,150		-		8,755,150
2015		8,664,475		-		8,664,475
Thereafter		88,573,278		-		88,573,278

Total	$	132,895,889	$	1,017,621	$	131,878,268

Litigation

The Company is not involved in legal proceedings and claims.

F-39

Note 15 - Restatement of Financial Statements

In order to correct the error in our diluted earnings per share computation we adjusted the numerator to effectively reverse the derivative for the gains (losses) that were recorded in our statement of operations relating to the change in the fair value of the warrants (derivative liability) to the extent such adjustments had a dilutive effect on the computations.

The impact of the affected line items of the Company's financial statements is set forth below:

Consolidated Statements of Operations

For the Year Ended December 31, 2010

	As Previously Reported		As Restated
Basic earnings per share of common stock		0.59		0.47
Diluted earnings per share		0.44		0.42

F-40

QKL STORES INC. AND SUBSIDIARIES

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

	Balance at		Charged to				Balance at
	Beginning of		Costs and				End of
	Period		Expenses		Deductions		Period

December 31, 2009
Allowance for doubtful receivables	$	-	$	-	$	-	$	-
Allowance for sales returns		-		1,142,016		1,132,018		9,998
Inventory reserves		82,228		230,685		250,358		62,555
December 31, 2010
Allowance for doubtful receivables	$	-	$	-	$	-	$	-
Allowance for sales returns		9,998		1,667,354		1,662,275		15,077
Inventory reserves		62,555		428,003		434,778		55,780

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized on April 11, 2012.

	QKL STORES INC.

	/s/ Zhuangyi Wang
	By: Zhuangyi Wang
	Chief Executive Officer and Director (principal executive officer)

In accordance with the requirements of the Securities Exchange Act of 1934, this Amended Report was signed by the following persons in the capacities and on the dates indicated.

Name and Title		Date

/s/ Zhuangyi Wang		April 11, 2012
Zhuangyi Wang
Chief Executive Officer and Director
(principal executive officer)

/s/ Tsz-Kit Chan		April 11, 2012
Tsz-Kit Chan
Chief Financial Officer
(principal financial officer and accounting officer)

/s/ Xishuang Fan		April 11, 2012
Xishuang Fan
COO and Director

/s/ Tsz Fung Philip Lo		April 11, 2012
Tsz Fung Philip Lo
Director

/s/ Zhiguo Jin		April 11, 2012
Zhiguo Jin
Director

/s/ Chaoying Li		April 11, 2011
Chaoying Li
Director

EXHIBIT INDEX

3.1		Certificate of Incorporation (2)
3.2		Bylaws (2)
3.3		Certificate of Amendment of Certificate of Incorporation (7)
4.1		Specimen of Common Stock certificate (1)
4.2		Certificate of Designations authorizing the Series A Preferred Stock (1)
4.3		Form of Series A Warrant (1)
4.4		Form of Series B Warrant (1)
4.5		Warrant Amendment to the Series A Warrant to Purchase Shares of Common Stock of the Company, dated as of March 24, 2010, by and among the Company and Vision Opportunity China LP (9)
4.6		Warrant Amendment to the Series B Warrant to Purchase Shares of Common Stock of the Company, dated as of March 24, 2010, by and among the Company and Vision Opportunity China LP (9)
10.1		Series A Convertible Preferred Stock Purchase Agreement, dated as of March 28, 2008 between the Company and the Purchasers (1)
10.2		Registration Rights Agreement dated March 28, 2008, by and among the Company and the Purchasers (1)
10.3		Lock-Up Agreement, dated as of March 28, 2008, by and among the Company, the sole stockholder of Winning State (BVI) and certain of our stockholders (7)
10.4		Securities Escrow Agreement, dated March 28, 2008, by and between the Company, Vision Opportunity China LP as representative of the Purchasers, Winning State (BVI) and Loeb & Loeb LLP, as escrow agent (1)
10.5		Investor and Public Relations Escrow Agreement dated March 28, 2008 between the Company and Vision Opportunity China LP as representative of the Purchasers and Loeb & Loeb, as escrow agent (1)
10.6		Share Exchange Agreement, dated as of March 28, 2008 between the Company, the controlling stockholder of the Company, Winning State (BVI), Fang Chen, Yang Miao and Ying Zhang (1)
10.7		Consigned Management Agreement, dated as of March 28, 2008 (1)
10.8		Technology Service Agreement dated as of March 28, 2008 (1)
10.9		Loan Agreement, dated as of March 28, 2008 (1)
10.10		Exclusive Purchase Option Agreement, dated as of March 28, 2008 (1)
10.11		The Equity Pledge Agreement, dated as of March 28, 2008 (1)
10.12		Engagement Letter Agreement, dated March 9, 2007, by and between QKL and Kuhns Brothers, Inc. (2)
10.13		Settlement Agreement, dated January 22, 2008, by and between QKL and Kuhns Brothers, Inc. (2)
10.14		Financial Consulting Agreement, dated March 13, 2007 between QKL and Mass Harmony Asset Management Limited (3)
10.15		Amendment dated May 8, 2008 to Registration Rights Agreement dated March 28, 2007, by and among the Company and the Purchasers (3)
10.16		Form of employment agreement (7)
10.17		Waiver and Release dated as of March 9, 2009. (5)
10.18		Agreement dated October 31, 2008 between Daqing Qingkelong Chain Commerce & Trade Co., Ltd. and Fuyu Count Xinshuguang Real Estate Development Co., Ltd (6)
10.19		Agreement dated October 31, 2008 between Daqing Qingkelong Chain Commerce & Trade Co., Ltd. and Hulunbeier Huahui Co., Ltd (6)
10.20		Agreement dated August 31, 2008 between Daqing Qingkelong Chain Commerce & Trade Co., Ltd. and Heilongjiang Longmei Commerce Co., Ltd (6)
10.21		Agreement dated September 30, 2008 between Daqing Qingkelong Chain Commerce & Trade Co., Ltd. and Nehe City Wanlong Co., Ltd. (6)
10.22		Agreement dated September 30, 2008 between Daqing Qingkelong Chain Commerce & Trade Co., Ltd. and Daqing Xinguangtiandi Shopping Center Co., Ltd. Incorporated by reference to our Registration Statement of Form S-1/A (Reg. No. 333-150800) filed with the SEC on March 11, 2009. (6)
10.23		Waiver dated October 15, 2009 to the Registration Rights Agreement dated March 28, 2008, by and between the Company and Vision Opportunity China LP, as representative of the Purchasers (7)
10.24		Waiver dated October 15, 2009 to the Securities Purchase Agreement dated March 28, 2008, by and between the Company and Vision Opportunity China LP, as representative of the Preferred Shareholders (7)
10.25		Amendment to Securities Escrow Agreement dated October 15, 2009 to the Securities Escrow Agreement dated March 28, 2008, by and among the Company Vision Opportunity China LP, as representative of the Purchasers, Winning State Investment Limited, and Loeb & Loeb LLP, as escrow agent (7)
10.26		Lock-up Letter dated October 15, 2009, by and among Roth Capital Partners, LLC, the Company, our directors, executive officers and Winning State International Limited (7)
10.27		2009 Omnibus Securities and Incentive Plan (7)
10.28		Form of Independent Director Agreement (7)

10.29		Form of Waiver to Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, dated as of March 25, 2010, by and among the Company and the holders of Series A Convertible Preferred Stock
10.30		Property Buying/Selling Contract, dated December 30, 2009 (8)
10.31		Amendment No. 2 to Securities Escrow Agreement dated April 1, 2010(9)
10.32		Lease Agreement dated June 28, 2010 between the Company and Xiangdong Zhang. (10)
10.33		Termination Agreement dated June 28, 2010 between the Company and Xiangdong Zhang. (10)
10.34		Employment Agreement of Tsz-Kit Chan, dated October 18, 2010 (11)
16.1		Letter from Albert Wong & Co. to the SEC (7)
21.1		List of Subsidiaries (3)
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*

(1)

Incorporated by reference to our current report on Form 8-K filed with the SEC on April 3, 2008.

(2)

Incorporated by reference to our current report on Form 8-K/A filed with the SEC on April 14, 2008.

(3)

Incorporated by reference to our Registration Statement of Form S-1 (Reg. No. 333-150800) filed with the SEC on May 9, 2008.

(4)

Incorporated by reference to our Registration Statement of Form S-1/A (Reg. No. 333-150800) filed with the SEC on August 7, 2008.

(5)

Incorporated by reference to our Registration Statement of Form S-1/A (Reg. No. 333-150800) filed with the SEC on March 11, 2009.

(6)

Incorporated by reference to our Form 10-K filed with the SEC on April 14, 2009.

(7)

Incorporated by reference to our Registration Statement of Form S-1/A (Reg. No. 333-162150) filed with the SEC on October 19, 2009.

(8)

Incorporated by reference to our current report on Form 8-K filed with the SEC on January 25, 2010.

(9)

Incorporated by reference to our Form 10-K filed with the SEC on April 1, 2010.

(10)

Incorporated by reference to our current report on Form 8-K filed with the SEC on July 1, 2010.

(11)

Incorporated by reference to our current report on Form 8-K filed with the SEC on October 21, 2010.

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