QHY GROUP - Quarter Report: 2012 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2012
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OR
o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________.
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COMMISSION FILE NUMBER: 001-34210
YAKUN INTERNATIONAL INVESTMENT & HOLDING GROUP
(Exact Name of Registrant as Specified in its Charter)
NEVADA
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42-1743094
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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No.40-1, Dama Road, Nanguan District, Changchun city,
Jilin Province 130000 , China
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100020
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(Address of principal executive offices)
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(Zip code)
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043188738636
Issuer's telephone number
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark 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.
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the number of shares outstanding of each of the issuer's classes of common equity, for the period covered by this report and as at the latest practicable date:
At November 1, 2012, we had outstanding 13,259,600 shares of common stock
YAKUN INTERNATIONAL INVESTMENT & HOLDING GROUP
FORM 10-Q
CONTENTS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
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PART I. FINANCIAL IINFORMATION
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Item 1. FINANCIAL STATEMENTS
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Consolidated Balance Sheets
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1
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Consolidated Statements of Operations and Comprehensive Income
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2
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Consolidated Statements of Cash Flows
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3
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Notes to Consolidated Financial Statements
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4-11
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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12
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Item 4. CONTROLS AND PROCEDURES
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16
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PART II. OTHER INFORMATION
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ITEM 1A. RISK FACTORS
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16
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ITEM 6. EXHIBITS
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17
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SIGNATURES
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18
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to statements regarding projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to those set forth herein and in our Report on Form 8-K/A (Amendment No. 2) filed on April 20, 2012. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by the federal securities laws, the Company undertakes no obligation to update forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this report.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Yakun International Investment & Holding Group
CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
CONTENTS
Pages
Consolidated balance sheets (unaudited)
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1
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Consolidated statements of operations and comprehensive income (unaudited)
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2
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Consolidated statements of cash flows (unaudited)
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3
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Notes to consolidated financial statements (unaudited)
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4
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Yakun International Investment & Holding Group
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
September 30,
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December 31,
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|||||||
2012
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2011
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|||||||
(Unaudited)
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||||||||
ASSETS
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||||||||
Current assets
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||||||||
Cash and cash equivalents
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$ | 8,874,652 | $ | 1,586,158 | ||||
Accounts receivable, net of allowance
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2,845,044 | 999,488 | ||||||
Inventories, net
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232,825 | 264,237 | ||||||
Other receivables
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27,411 | 21,138 | ||||||
Advance to suppliers
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365,300 | 189,149 | ||||||
Deferred tax assets
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117,334 | 69,268 | ||||||
Deposits & prepayment
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11,125 | 11,090 | ||||||
Total current assets
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12,473,691 | 3,140,528 | ||||||
Property and equipment, net
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2,132,233 | 1,539,785 | ||||||
Prepaid lease
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3,175,853 | 1,548,259 | ||||||
Prepaid lease - related party
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5,154,557 | 5,994,681 | ||||||
Loans to related party
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1,019,581 | 1,016,365 | ||||||
Total assets
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$ | 23,955,915 | $ | 13,239,618 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
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||||||||
CURRENT LIABILITIES
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||||||||
Customer deposits
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$ | 16,221 | $ | 10,912 | ||||
Accounts payable and accrued liabilities
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620,667 | 264,453 | ||||||
Taxes payable
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3,312,401 | 305,570 | ||||||
Related party payable
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260,018 | 234,860 | ||||||
Total current liabilities
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4,209,307 | 815,795 | ||||||
STOCKHOLDERS' EQUITY
Preferred stock, 5,000,000 shares authorized, 0 shares outstanding
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||||||||
Common stock, $0.001 par value; 70,000,000 shares authorized, 13,259,600 shares issued and outstanding at September 30, 2012 and 12,059,600 shares issued and outstanding at December 31, 2011
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13,260 | 12,060 | ||||||
Additional paid in capital
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322,519 | 143,719 | ||||||
Retained earnings
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18,599,200 | 11,567,692 | ||||||
Accumulated other comprehensive income
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811,629 | 700,352 | ||||||
Total stockholders' equity
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19,746,608 | 12,423,823 | ||||||
Total liabilities and stockholders' equity
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$ | 23,955,915 | $ | 13,239,618 |
See accompanying notes to consolidated financial statements
1
Yakun International Investment & Holding Group
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited - Expressed in U.S. dollars)
For the Three Months Ended
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For the Nine Months Ended
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|||||||||||||||
September 30,
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September 30,
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|||||||||||||||
2012
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2011
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2012
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2011
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|||||||||||||
Sales
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$ | 12,736,088 | $ | 9,678,303 | $ | 21,042,548 | $ | 15,308,878 | ||||||||
Cost of sales
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4,357,773 | 3,719,246 | 8,136,256 | 6,532,665 | ||||||||||||
Cost of sales - related party
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206,410 | 59,929 | 622,062 | 140,163 | ||||||||||||
Gross profit
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8,171,905 | 5,899,128 | 12,284,230 | 8,636,050 | ||||||||||||
Operating expenses
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||||||||||||||||
Selling, general and administrative
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966,646 | 442,530 | 2,580,853 | 1,007,873 | ||||||||||||
Lease expenses - related party
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76,667 | 111,297 | 231,053 | 260,303 | ||||||||||||
Total operating expenses
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1,043,313 | 553,827 | 2,811,906 | 1,268,176 | ||||||||||||
Income from operations
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7,128,592 | 5,345,301 | 9,472,324 | 7,367,874 | ||||||||||||
Other income
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||||||||||||||||
Subsidy income
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- | - | - | 109,231 | ||||||||||||
Interest income
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- | 38,064 | 878 | 112,835 | ||||||||||||
Total other income
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- | 38,064 | 878 | 222,066 | ||||||||||||
Income before income tax expense
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7,128,592 | 5,383,365 | 9,473,202 | 7,589,940 | ||||||||||||
Income tax expense
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(1,802,545 | ) | (1,354,072 | ) | (2,441,694 | ) | (1,869,700 | ) | ||||||||
Net income
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5,326,047 | 4,029,293 | 7,031,508 | 5,720,240 | ||||||||||||
Other comprehensive income
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||||||||||||||||
Foreign currency translation gain (loss)
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90,123 | 151,992 | 111,277 | 315,896 | ||||||||||||
Total comprehensive income
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$ | 5,416,170 | $ | 4,181,285 | $ | 7,142,785 | $ | 6,036,136 | ||||||||
Earnings per share – basic and diluted
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$ | 0.40 | $ | 0.45 | $ | 0.54 | $ | 0.68 | ||||||||
Weighted average number of shares outstanding – basic and diluted
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13,259,600 | 8,884,933 | 13,027,483 | 8,461,644 |
See accompanying notes to consolidated financial statements
2
Yakun International Investment & Holding Group
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Expressed in U.S. dollars)
For the Nine Months Ended September 30,
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||||||||
2012
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2011
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Cash flows from operating activities
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||||||||
Net income
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$ | 7,031,508 | $ | 5,720,240 | ||||
Depreciation and amortization
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340,783 | 184,612 | ||||||
Prepaid lease amortization- related party
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852,632 | 399,841 | ||||||
Stock based compensation
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180,000 | - | ||||||
Accounts receivable
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(1,828,537 | ) | (1,548,912 | ) | ||||
Inventories
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32,007 | (122,861 | ) | |||||
Other receivables
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(6,160 | ) | (55,529 | ) | ||||
Advance to suppliers
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(174,232 | ) | (174,198 | ) | ||||
Deferred tax assets
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(47,487 | ) | - | |||||
Accounts payable & accrued expense
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353,401 | 107,445 | ||||||
Customer deposits
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5,235 | (6,141 | ) | |||||
Taxes payable
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2,983,257 | (465,987 | ) | |||||
Prepaid income taxes
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- | (37,590 | ) | |||||
Prepaid lease
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(1,610,490 | ) | (415,219 | ) | ||||
Prepaid lease – related party
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- | (3,229,482 | ) | |||||
Net cash provided by operating activities
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8,111,917 | 356,219 | ||||||
Cash flows from investing activities
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||||||||
Purchase of property and equipment
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(923,941 | ) | (108,391 | ) | ||||
Net cash used in investing activities
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(923,941 | ) | (108,391 | ) | ||||
Cash flows from financing activities
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||||||||
Increase of shareholder loan
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25,000 | 1,141 | ||||||
Net cash provided by financing activities
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25,000 | 1,141 | ||||||
Effect of exchange rate changes on cash
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75,518 | 25,718 | ||||||
Net increase (decrease) in cash and cash equivalents
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7,288,494 | 274,687 | ||||||
Cash and cash equivalents at beginning of period
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1,586,158 | 870,041 | ||||||
Cash and cash equivalents at end of period
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$ | 8,874,652 | $ | 1,144,728 | ||||
Supplementary cash flow information:
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||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income tax
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$ | 868,975 | $ | 2,252,535 |
See accompanying notes to consolidated financial statements
3
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in U.S. dollars)
1.
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Basis of presentation
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The financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of our subsidiaries in the People’s Republic of China (“PRC”), which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP.
The interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2011. The Company follows the same accounting policies in the preparation of interim reports.
2.
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Organization and principal activities
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Yakun International Investment & Holding Group (the “Company”, “Yakun International”, or ”we”) formerly named Rhino Productions, Inc. (“Rhino Productions”) was incorporated under the laws of the State of Nevada on October 16, 2007. Prior to the acquisition (“the Acquisition”)of Vast Glory Holdings Limited (“Vast Glory”), we were a development stage company that had not generated any revenue from operations and maintained no essential assets since inception.
On September 13, 2011, we consummated a Share Exchange Agreement with the shareholders of Vast Glory Holdings Limited (“Vast Glory”), pursuant to which we completed the Acquisition and acquired 100% of the outstanding capital stock of Vast Glory in exchange for 8,250,000 shares of our common stock, which constituted approximately 68% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the Acquisition pursuant to the Exchange Agreement.
The Acquisition was accounted for as a reorganization of equity interests under common control. In accordance with the applicable accounting guidance for accounting for a business combination as a pooling of interests, Vast Glory’s assets and liabilities were recorded at their historical carrying amounts, with no goodwill or other intangible assets recorded as a result of the accounting merger of Vast Glory with the Company.
Vast Glory was incorporated on February 26, 2009 in British Virgin Islands (“BVI”) in anticipation of a business combination. Vast Glory was inactive until April 29, 2011, when the shareholders of HK Food Logistics, Limited (“HK Food”) transferred 100% of the outstanding common shares of HK Food to Vast Glory. As a result of this transaction, HK Food became a wholly-owned subsidiary of Vast Glory.
Prior to the April 29, 2011 share transfer, the shareholders of Vast Glory and HK Food were substantially the same. According to ASC 805-30, the pooling-of-interest method was used to account for the transactions between entities under common control whereby Vast Glory recognized the HK Food assets and liabilities transferred at their carrying amounts. Accordingly, the financial statements for Vast Glory and HK Food have been combined for all periods presented per ASC 805-45. The reorganization of entities under common control was retrospectively applied to the financial statements of all prior periods as though the assets and liabilities had been transferred at that date.
HK Food was incorporated under the laws of the Hong Kong Special Administrative Region of the People's Republic of China (“Hong Kong”, or “HK”) on June 28, 2010. HK Food established Changchun Yaqiao Business Consulting Co., Ltd. (“WFOE”), a wholly foreign-owned enterprise in China on October 28, 2010. Until December 29, 2010, when HK Food through its WFOE entered into a series of variable interest entity contractual agreements (the “VIE Agreements”) with Cangchun Decens Foods Co., Ltd. (“Decens”) and its shareholders (the “Decens Shareholders”), HK Food had no operations other than those related to its incorporation.
4
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in U.S. dollars)
Pursuant to the VIE Agreements, HK Food indirectly controls Decens. Decens is located in Changchun City, Jilin Province, the People’s Republic of China (“PRC”). It was established in September 2003 under the law of PRC and is principally engaged in the production of cakes and Chinese traditional foods which it distributes through its outlets and distribution network throughout Jilin Province.
In December 2010, WFOE entered into the VIE Agreements with Decens and the Decens Shareholders. The incorporation of HK Food, WFOE and entering into of VIE Agreements did not result in any change in the basis of the assets and liabilities of Decens, which continue to be carried at their historical amounts. WFOE effectively assumed management of the business activities of Decens and has the right to appoint all executive and senior management and the members of the board of the directors of Decens.
PRC laws and regulations prohibit or restrict foreign ownership of certain bakery content businesses. To comply with these foreign ownership restrictions, the Company operates its name brand bakery sales in the PRC through VIEs, the PRC legal entities that were established by the individuals authorized by the Company. The Company has entered into certain exclusive agreements with the VIEs through WFOE, which entitles WFOE to receive all of their residual returns. In addition, the Company has entered into certain agreements with the authorized individuals through WFOE, including option agreements to acquire the equity interests in the VIEs when permitted by the PRC laws, and share pledge agreements for the equity interests in the VIEs held by the authorized individuals.
Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between the Company and VIEs. The Company demonstrates its ability and intention to continue to exercise the ability to absorb substantially all of the profits and all of the expected losses of VIEs. The VIEs are subject to operating risks, which determine the variability of the Company’s interest in those entities. Based on these contractual arrangements, the Company consolidates the VIEs as required by Accounting Standards Codification (“ASC”) subtopic 810-10 (“ASC 810-10”), Consolidation: Overall, because the Company holds all the variable interests of VIEs through WFOE, which is the primary beneficiary of the VIEs.
Yakun International, Vast Glory, HK Food, WFOE and Decens are referred to herein collectively as the “Company” or “we”, “us”, “our” or “Group”.
3.
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Cash and cash equivalents
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Cash and cash equivalents represent cash on hand and deposits held at call with PRC banks which is not insured with the FDIC. The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
September 30,
2012
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December 31,
2011
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|||||||
Cash on hand
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$ | 255,577 | $ | 730,399 | ||||
Cash in bank
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8,619,075 | 855,759 | ||||||
Total
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$ | 8,874,652 | $ | 1,586,158 |
5
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in U.S. dollars)
4.
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Accounts receivable
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Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. As of September 30, 2012 and December 31, 2011, no allowance for doubtful accounts was provided for.
September 30,
2012
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December 31,
2011
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|||||||
Due from third parties
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$ | 2,845,044 | $ | 999,488 | ||||
Total
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$ | 2,845,044 | $ | 999,488 |
5.
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Related party transactions
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a)
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Loans to (from) related parties are as follows:
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September 30,
2012
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December 31,
2011
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|||||||
Jilin Fuyuanguan Foods Co., Ltd
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$ | 1,019,581 | $ | 1,016,365 | ||||
Total
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$ | 1,019,581 | $ | 1,016,365 |
These loans bear no interest and are due on demand.
b)
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Prepaid leases - related party
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September 30,
2012
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December 31,
2011
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|||||||
Prepaid leases - outlets and office building (Note 5.b).1).)
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$ | 119,319 | $ | 475,768 | ||||
Prepaid leases - outlets and office building (Note 5.b).2).)
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2,418,187 | 2,410,560 | ||||||
Prepaid leases - workshop and office building (Note 5.b).3).)
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2,617,051 | 3,108,353 | ||||||
$ | 5,154,557 | $ | 5,994,681 |
1)
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The Company leases its office building and operating outlets from one of its stockholders. The lease contract is for 5 years starting from January 2008 to December 2012. The total rental of RMB15,000,000 was prepaid in advance. The prepaid leases are amortized equally over the five years using straight line method. The monthly rental is RMB 250,000 (approximately US$38,400).
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2)
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In December 2011, the Company extended the lease contract of the same office building from January 2013 to December 2017. The total rent is RMB30,000,000 (about US$4.76 million), of which RMB15,200,000 (about US$2.4 million) was paid in advance. The remaining rent is due in 2012 and 2013. The prepaid leases will be amortized equally over the five years using straight line method starting January 1, 2013. The monthly rental is RMB 500,000 (approximately US$76,800).
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3)
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On June 25, 2011, the Company entered into a new lease agreement with one of the Company’s shareholders. According to the new lease agreement, the Company will lease an office building and use it as a new administration, sales and manufacturing facility. The lease contract is for 5 years starting from September 1, 2011 to September 1, 2016 and a total rental of RMB21,000,000 (approximately US$3.1 million) was prepaid in advance. The prepaid leases are amortized equally over the five years using the straight line method. The monthly rental is RMB 350,000 (approximately US$53,800).
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For the three months ended September 30, 2012 and 2011, related party lease expense included in cost of goods sold was $206,410 and $95,342, respectively; related party lease expense included in operating expenses was $77,667 and $75,884, respectively.
For the nine months ended September, 2012 and 2011, related party lease expense included in cost of goods sold was $621,711 and $174,930, respectively; related party lease expense included in operating expenses was $230,921 and $224,911, respectively
6
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in U.S. dollars)
c)
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Related party payable
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September 30,
2012
|
December 31,
2011
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|||||||
Due to shareholders
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$ | 260,018 | $ | 234,860 |
Related party payable arises from Company’s expenses paid by Ms. Yakun Song, one of the shareholders of the Company. This payable is non-interest bearing and due on demand.
6.
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Inventory
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September 30,
2012
|
December 31,
2011
|
|||||||
Raw materials
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$ | 221,013 | $ | 254,161 | ||||
Finished goods
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11,812 | 10,076 | ||||||
Total
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$ | 232,825 | $ | 264,237 |
7.
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Property and equipment
|
Property and equipment are recorded at cost. Depreciation is calculated on the straight-line method after taking into account their respective estimated residual values over the following estimated useful lives:
Machinery
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10 years
|
Vehicles
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6 years
|
Office equipment
|
4 years
|
Leasehold improvements
|
Lease term |
Property and equipment consist of the following:
September 30,
2012
|
December 31,
2011
|
|||||||
Machinery
|
$ | 1,775,514 | $ | 1,383,935 | ||||
Vehicles
|
368,314 | 342,097 | ||||||
Office equipment and electronic devices
|
57,680 | 44,841 | ||||||
Leasehold improvements
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614,374 | 254,144 | ||||||
Total
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2,816,882 | 2,025,017 | ||||||
Less: accumulated depreciation
|
(684,649 | ) | (485,232 | ) | ||||
Total fixed assets, net
|
$ | 2,132,233 | $ | 1,539,785 |
For the three months ended September 30, 2012 and 2011, the Company recorded depreciation expense in cost of goods sold of $45,277 and $38,839, respectively, and depreciation expense in operating expenses of $20,862 and $23,841, respectively.
For the nine months ended September 30, 2011 and 2010, the Company recorded depreciation expense in cost of goods sold of $154,129 and $112,336, respectively, and depreciation expense in operating expenses of $186,665 and $72,276, respectively.
7
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in U.S. dollars)
8.
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Prepaid lease
|
September 30,
2012
|
December 31,
2011
|
|||||||
Prepaid leases - outlet (Note 8.a).)
|
$ | 238,637 | $ | 380,615 | ||||
Prepaid leases - outlet (Note 8.b).)
|
472,501 | 628,013 | ||||||
Prepaid leases – workshop (Note 8.c).)
|
386,592 | 513,830 | ||||||
Prepaid leases - outlet (Note 8.d).)
|
5,598 | 25,801 | ||||||
Prepaid leases - outlet (Note 8.e).)
|
327,464 | - | ||||||
Prepaid leases - outlet (Note 8.f).)
|
310,272 | - | ||||||
Prepaid leases - outlet (Note 8.g).)
|
357,673 | - | ||||||
Prepaid leases - outlet (Note 8.h).)
|
271,374 | - | ||||||
Prepaid leases - outlet (Note 8.i).)
|
358,181 | - | ||||||
Prepaid leases - outlet (Note 8.j).)
|
136,613 | - | ||||||
Prepaid leases - outlet (Note 8.k).)
|
168,040 | - | ||||||
Prepaid leases - outlet (Note 8.l).)
|
88,552 | |||||||
Prepaid leases - outlet (Note 8.m).)
|
39,773 | |||||||
Prepaid leases - outlet (Note 8.n).)
|
14,583 | - | ||||||
$ | 3,175,853 | $ | 1,548,259 |
a)
|
On June 30, 2011, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 5 years starting from July 1, 2011 to June 30, 2016. The total rental is RMB6,000,000 ($951,536), of which RMB3,000,000 ($475,768) was paid by the Company in 2011. The remaining rental of RMB3,000,000 will be due before May 31, 2014. The prepaid leases are amortized equally over the five years using the straight line method. The monthly rental is RMB 100,000 (approximately $15,800).
|
b)
|
On June 30, 2011, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 3 years starting from January 1, 2012 to December 31, 2014. The total rental is RMB3,960,000 ($628,013) was paid by the Company in 2011. The prepaid leases are amortized equally over the five years using the straight line method. The monthly rental is RMB 110,000 (approximately $16,900).
|
c)
|
On November 15, 2011, the Company entered into a new lease agreement with a third party. According to the new lease agreement, the Company will lease a building and use it as a new manufacturing and sales facility. The lease contract is for 3 years starting from January 1, 2012 to December 31, 2014 and a total rental of RMB3,240,000 ($513,830) was prepaid in 2011. The prepaid leases are amortized equally over the three years using the straight line method. The monthly rental is RMB 90,000 (approximately $14,300).
|
d)
|
On November 23, 2011, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 1 year starting from December 15, 2011 to December 14, 2012. The total rental is RMB170,000 ($26,960) was paid by the Company in 2011. The prepaid leases are amortized equally over the 1 year using the straight line method. The monthly rental is RMB14,166 (approximately $2,300).
|
e)
|
On February 21, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 3 years starting from April 2, 2012 to April 1, 2015. The total rental is RMB2,470,000 ($392,314) was paid by the Company in March 2012. The prepaid leases are amortized equally over the 3 years using the straight line method. The monthly rental is RMB68,611 (approximately $10,900).
|
f)
|
On January 16, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 3 years starting from March 15, 2012 to March 14, 2015. The total rental of RMB2,380,000 ($378,020) was paid by the Company in January and March 2012. The prepaid leases are amortized equally over the 3 years using the straight line method. The monthly rental is RMB66,111 (approximately $10,500).
|
8
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in U.S. dollars)
g)
|
On March 21, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 3 years starting from April 7, 2012 to April 6, 2015. The total rental of RMB2,680,000 ($425,670) was paid by the Company in March 2012. The prepaid leases are amortized equally over the 3 years using the straight line method. The monthly rental is RMB74,444 (approximately $11,820).
|
h)
|
On March 12, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 5 years starting from April 12, 2012 to April 12, 2017. The rental of RMB2,020,000 ($320,840) for the first 3 years was paid by the Company in March 2012. The prepaid leases are amortized equally over the 3 years using the straight line method. The monthly rental is RMB56,111 (approximately $8,910). The rental for the 4th and 5th year will be negotiated by the Company and the lessor based on the market price in year 2016 and 2017.
|
i)
|
On March 19, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 4 years starting from March 19, 2012 to March 20, 2016. The rental of RMB2,740,000 ($435,200) for the first 3 years was paid by the Company in March 2012. The prepaid leases are amortized equally over the 3 years using the straight line method. The monthly rental is RMB76,111 (approximately $12,080). The rental for the 4th year will be negotiated by the Company and the lessor based on the market price in year 2016.
|
j)
|
On May 25, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for about 5 years starting from May 8, 2012 to July 23, 2017. The rental of RMB2,740,000 ($435,200) for the first 3 years was paid by the Company in May 2012. The prepaid leases are amortized equally over the 3 years using the straight line method. The monthly rental is RMB27,500 (approximately $4,350). The rental for the 4th and 5th year will be negotiated by the Company and the lessor based on the market price in year 2016.
|
k)
|
On June 15, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 5 years starting from June 15, 2012 to June 15, 2017. The rental of RMB1,170,000 ($186,000) for the first 3 years was paid by the Company in June 2012. The prepaid leases are amortized equally over the 3 years using the straight line method. The monthly rental is RMB32,500 (approximately $5,160). The rental for the 4th year will be negotiated by the Company and the lessor based on the market price in year 2016.
|
l)
|
On June 15, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 3 years starting from May 26, 2012 to May 26, 2015. The total rental of RMB630,000 ($100,000) was paid by the Company in June 2012. The prepaid leases are amortized equally over the 3 years using the straight line method. The monthly rental is RMB17,500 (approximately $2,800).
|
m)
|
On July 25, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 1 year starting from September 1, 2012 to August 31, 2013. The total rental of RMB300,000 ($47,600) was paid by the Company in September 2012. The prepaid leases are amortized equally over the 1 year using the straight line method. The monthly rental is RMB25,000 (approximately $4,000).
|
n)
|
On August 25, 2012, the Company entered into a new lease agreement with a third party to rent a store as the Company’s retail outlet. The lease contract is for 1 year starting from September 1, 2012 to August 31, 2013. The total rental of RMB100,000 ($15,900) was paid by the Company in September 2012. The prepaid leases are amortized equally over the 1 year using the straight line method. The monthly rental is RMB8,333 (approximately $1,300).
|
For the three months ended September 30, 2012 and 2011, the Company recorded lease expense in operating expenses of $312,564 and $46,698, respectively; the Company recorded lease expenses in cost of sales of $42,462 and nil, respectively.
For the nine months ended September 30, 2012 and 2011, the Company recorded lease expense in operating expenses of $703,374 and $46,698, respectively; the Company recorded lease expenses in cost of sales of $127,191 and nil, respectively.
9.
|
Taxes payable
|
September 30,
2012
|
December 31,
2011
|
|||||||
Value-added tax payable
|
$ | 1,344,359 | $ | 100,427 | ||||
Enterprise Income tax payable
|
1,833,826 | 195,334 | ||||||
Others
|
134,216 | 9,809 | ||||||
Total
|
$ | 3,312,401 | $ | 305,570 |
9
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in U.S. dollars)
10.
|
Shareholder’s Equity and Stock Based Compensation
|
2011 Stock Incentive Plan
In December 2011, the Board of Directors adopted the 2011 Stock Incentive Plan (“2011 Plan”) under which it may grant incentive and nonstatutory stock options, and restricted stocks to eligible employees, non-employee directors, or consultants. Under the 2011 Plan, a total of 1,200,000 unissued shares of the Company’s stock will be reserved for issuance. On February 22, 2012, the Company granted 1,200,000 shares of restricted stocks to 10 outside consultants under 2011 Plan. Those shares were vested immediately and non-forfeitable. At the grant date, the fair value of these restricted shares issued was measured at estimated $0.15 per share.
The Company accounts for stock-based compensation under provisions of EITF 96-18: Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Under the provisions of EITF 96-18, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the period that the services are provided.
For the three months ended September 30, 2012, the Company recorded stock based compensation expenses of nil in Operating Expenses.
For the nine months ended September 30, 2012, the Company recorded stock based compensation expenses of $180,000 in Operating Expenses (1,200,000 shares at the fair value of $0.15 per share).
11.
|
Income Tax
|
USA
The Company and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate. As the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of September 30, 2012 and December 31, 2011.
BVI
Vast Glory is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly, is exempted from payment of British Virgin Island’s income taxes.
Hong Kong
HK Food was incorporated in Hong Kong and subject to Hong Kong income taxes. As HK Food had no income generated in Hong Kong, there was no tax expense or tax liability at September 30, 2012 and December 31, 2011.
PRC
WFOE and Decens, which were incorporated in the PRC, are governed by the income tax law of the PRC and are subject to PRC enterprise income tax (“EIT”). The prevailing statutory rate of enterprise income tax is 25%.
10
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in U.S. dollars)
The reconciliation of tax computed by applying respective statutory income tax rate to pre-tax income is as follows:
For the nine months ended
|
For the nine months ended
|
|||||||
September 30, 2012
|
September 30, 2011
|
|||||||
Income (loss) before income taxes
|
||||||||
United States, BVI, HK
|
$ | (291,589 | ) | $ | (34,148 | ) | ||
China (Decens)
|
9,764,791 | 7,624,088 | ||||||
9,473,202 | 7,589,940 | |||||||
Provision for Income Taxes
|
||||||||
Current income tax
|
2,742,443 | 1,869,700 | ||||||
Deferred income tax
|
(300,749 | ) | - | |||||
2,441,694 | 1,869,700 | |||||||
Net income
|
$ | 7,031,508 | $ | 5,720,240 | ||||
Worldwide effective rate
|
25.77 | % | 24.63 | % |
12.
|
Subsequent events
|
In May 2009, the FASB issued a new accounting standard which established general accounting standards and disclosure for subsequent events. In accordance with this standard, we evaluated subsequent events up to the date the financial statements were issued and no subsequent events occurred that required disclosure in the accompanying consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Comparison of the Results of Operations for the Three Months and Nine Months Ended September 30, 2012 and 2011
All amounts, other than percentages, are in U.S. dollars
For the Three Months Ended September 30,
|
% increase
|
For the Nine Months Ended March 31,
|
% increase
|
|||||||||||||||||||||
2012
|
2011
|
(decrease)
|
2012
|
2011
|
(decrease)
|
|||||||||||||||||||
Sales
|
$ | 12,736,088 | $ | 9,678,303 | 32 | % | $ | 21,042,548 | $ | 15,308,878 | 37 | % | ||||||||||||
Cost of sales
|
4,357,773 | 3,719,246 | 17 | % | 8,136,256 | 6,532,665 | 25 | % | ||||||||||||||||
Cost of sales - related party
|
206,410 | 59,929 | 244 | % | 622,062 | 140,163 | 344 | % | ||||||||||||||||
Gross profit
|
8,171,905 | 5,899,128 | 39 | % | 12,284,230 | 8,636,050 | 42 | % | ||||||||||||||||
Selling, general and administrative
|
966,646 | 442,530 | 118 | % | 2,580,853 | 1,007,873 | 156 | % | ||||||||||||||||
Lease expenses - related party
|
76,667 | 111,297 | -31 | % | 231,053 | 260,303 | -11 | % | ||||||||||||||||
Income from operations
|
7,128,592 | 5,345,301 | 33 | % | 9,472,324 | 7,367,874 | 29 | % | ||||||||||||||||
Other income
|
- | 38,064 | -100 | % | 878 | 222,066 | -100 | % | ||||||||||||||||
Income before income tax expense
|
7,128,592 | 5,383,365 | 32 | % | 9,473,202 | 7,589,940 | 25 | % | ||||||||||||||||
Income tax expense
|
(1,802,545 | ) | (1,354,072 | ) | 33 | % | (2,441,694 | ) | (1,869,700 | ) | 31 | % | ||||||||||||
Net income
|
$ | 5,326,047 | $ | 4,029,293 | 32 | % | $ | 7,031,508 | $ | 5,720,240 | 23 | % |
Three Months Ended September 30, 2012 Compared With Three Months Ended September 30, 2011
Sales
For the three months ended September 30, 2012, our sales were $12,736,088, an increase of $3,057,785 or approximately 32% from $9,678,303 for the same period in 2011. A significant contributor to the growth in sales was our new retail shops. By the end of the 3rd quarter of 2012 we had opened 12 new stores-- 3 in the 1st quarter, 7 in the 2nd quarter and 2 in the 3rd quarter, a period in which we closed no stores. As a group, these 12 new stores contributed approximately $1 million to our sales in the three months ended September 30, 2012 which was slightly offset by the 2 stores closed in the fourth quarter of 2011. Both the Mid-autumn Festival (September 30th) and National Day (October 1st, 2012) were contributors to our sales in the 3rd quarter. As more companies and governmental organizations are purchasing products like moon cakes and bakery packages as holiday gifts for their employees, revenue generated from this type of group-buying increased about $1.7 million during the three months ended September 30, 2012. Our sales benefitted from increased demand for moon cakes, as many employers chose to give their employees a single gift appropriate for the Mid-Autumn Festival and National Day rather than gifts for each day. Sales of moon cakes increased about $2.4 million in the 3rd quarter of 2012 as compared to the comparable quarter iin 2011.
Cost of Sales
Cost of sales primarily consists of the cost of raw materials and manufacturing overhead expenses. The cost of sales for the three months ended September 30, 2012 was $4,357,773, an increase of $638,527, or 17%, from $3,719,246 for the same period in 2011.
11
Raw material costs decreased to 29% of net sales for the three months ended September 30, 2012, compared to 32% of net sales for the same period in 2011. The decrease was mainly the result of increased sales of moon cakes, which have a higher margin than most of our other products, and our decision to raise the selling price of some popular moon cake products. Also contributing to the decrease in the percentage of sales represented by raw material costs was a decrease in the market price of sugar which decreased from the price of the comparable period last year.
Overhead expenses were 5% of net sales for the three months ended September 30, 2012 compared to 6% of net sales for the same period in 2011. The decrease was mainly due to the increase in our sales and the improved working capacity in our newly leased workshop.
Cost of Sales- Related Party
Cost of sales – related party consisted of the rent payable to one of the shareholders of the Company for the building housing our administration, sales and manufacturing facilities. The cost of sales – related party was $206,410 for the three months ended September 30, 2012, an increase of $146,481, or 244% from $59,929 for the same period in 2011. The increase in rent expenses reflects the fact that we leased a new more modern building from this same shareholder in September 2011.
On June 25, 2011 the Company entered an agreement with one of the Company’s shareholders to lease a building housing the Company’s new administration, sales and manufacturing facility. The lease is for 5 years starting from September 1, 2011. The total rent was paid in advance and will be amortized equally over five years using the straight line method from September 1, 2011. The monthly rental allocated to cost of sales in respect of this lease is RMB 350,000 (approximately $53,800).
Profit Margins
Our gross profit margin increased to 64% for the three months ended September 30, 2012, compared to 61% for the same period in 2011. The increase in profit margin was mainly due to the decrease in the price of sugar, a significant component in baked goods, and our decision to raise prices of major moon cake products.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended September 30, 2012 were $966,646, an increase of $488,702 or 102% as compared to $442,530 for the same period in 2011. There are two main reasons for the increase: (1) an increase in salary expenses of $177,627 and (2) the increase in rent expense of $285,055 because of the new retail outlets leased by the Company.
For the three months ended September 30, 2012, among selling, general and administrative expenses the Company accrued and recorded a total salary of $15,000 for Ms. Song, our Chief Executive Officer and principal shareholder.
Lease expenses – related party
For the three months ended September 30, 2012, the Company recorded related party lease expense in operating expenses of $76,667, a decrease of $34,630 or 31% from $111,297 for the same period in 2011. The decrease was principally due to the allocation of a greater portion of the rent expenses associated with our new building to cost of sales relative to selling and administrative expenses than had been the case with the previous building.
12
Other Income
Other income for the three months ended September 30, 2012 was nil, compared to $38,064 for the same period in 2011. The decrease was due to the decrease of $38,064 in interest income from two loans that were outstanding in 2011that were repaid in November 2011.
Income taxes
USA
The Company and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdictions in which they operate. As the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States for the three months ended September 30, 2012 and 2011.
BVI
Vast Glory is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly, is exempted from payment of British Virgin Island’s income taxes.
Hong Kong
HK Food was incorporated in Hong Kong and subject to Hong Kong income taxes. As HK Food had no income generated in Hong Kong, there was no tax expense or tax liability at September 30, 2012 and 2011.
PRC
WFOE and Decens, which were incorporated in the PRC, are governed by the income tax law of the PRC and are subject to PRC enterprise income tax (“EIT”). The prevailing statutory rate of enterprise income tax is 25%. Income tax expense for the three months ended September 30, 2012 was $1,802,545, an increase of 33%, compared to $1,354,072 for the same period in 2011. The increase in income tax was in excess of the percentage increase in our income before taxes due to the increase in our loss in the United States which is not deductible in computing our tax to the PRC and differences in computing taxable income due to differences in the Chinese tax base and US GAAP.
Nine Months Ended September 30, 2012 Compared With Nine Months Ended September 30, 2011
Sales
For the nine months ended September 30, 2012, our sales were $21,042,548, an increase of $5,733,670 or approximately 37% from $15,308,878 for the same period in 2011. The growth is primarily the result of the 12 new retail shops we opened in 2012 which contributed approximately $2.6 million to sales during the nine months ended September 30, 2012, slightly offset by the absence of sales from the 2 stores closed in the fourth quarter of 2011. The higher sales also reflect increased demand for our new series of western flavored bakery products introduced during 2011 and our traditional Chinese festival products, especially moon cakes, rice glue balls and bamboo rice wraps.
Cost of Sales
Cost of sales for the nine months ended September 30, 2012 was $8,136,256, an increase of $1,603,591, or 25%, from $6,532,665 for the same period in 2011.
13
Raw material costs decreased to 31% of net sales for the nine months ended September 30, 2012, compared to 34% of net sales for the same period in 2011. In the nine months ended September 30, 2012, we experienced increased demand for our bamboo rice wraps and moon cakes. And the price of sugar, which is a major ingredient of most bakery products, was lower compared to the same period in 2011. In addition, we raised the price of our major moon cake products in 2012.
Overhead expenses were 7.8% of net sales for the nine month ended September 30, 2012 compared to 8.3% of net sales for the same period in 2011. The decrease was mainly due to the increase in our sales and the improved working capacity in our newly leased workshop.
Cost of Sales- Related Party
Cost of sales – related party consisted of the rent payable to one of the shareholders of the Company for the building housing our administration, sales and manufacturing facilities. The cost of sales – related party was $622,062 for the nine months ended September 30, 2012, an increase of $481,899, or 344% from $140,163 for the same period in 2011. The increase in rent expense reflects the fact that we leased a new more modern building from this shareholder in September 2011.
Profit Margins
Our gross profit margin increased to 58% for the nine months ended September 30, 2012, compared to 56% for the same period in 2011. The increase in profit margin was due to due to the decrease in sugar prices and our decision to raise the prices of major moon cake products in the 3rd quarter.
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months ended September 30, 2012 were $2,580,853, an increase of $1,572,980 or 156% as compared to $1,007,873 of the same period in 2011. There are three main reasons for the increase: (1) the increase in salary expenses of $490,201; (2) the increase in rent expense of $743,429 because of the new retail outlets leased by the Company; and (3) a one-time stock based compensation expense of $180,000 for restricted stock issued to 10 outside consultants.
For the nine months ended September 30, 2012, among selling, general and administrative expenses, the Company accrued and recorded a total salary of $45,000 for Ms. Song’s service.
Lease expenses – related party
For the nine months ended September 30, 2012, the Company recorded related party lease expense in operating expenses of $231,053, a decrease of $29,250 or 11% compared to $260,303 for the same period in 2011. The decrease was principally due to the allocation of a greater portion of the rent expenses associated with our new building to cost of sales relative to selling and administrative expenses than had been the case with the previous building.
Other Income
Other income for the nine months ended September 30, 2012 was $878, a decrease of $221,188 compared to $222,066 for the same period in 2011. The decrease was due to (1) one-time subsidy income of $109,231 received by the Company in June 2011 which was not repeated in 2012; and (2) the decrease of $111,957 in interest income from two loans that were outstanding in 2011 that were repaid in November 2011.
14
Income taxes
USA
The Company and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdictions in which they operate. As the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States for the nine months ended September 30, 2012 and 2011.
BVI
Vast Glory is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly, is exempted from payment of British Virgin Island’s income taxes.
Hong Kong
HK Food was incorporated in Hong Kong and subject to Hong Kong income taxes. As HK Food had no income generated in Hong Kong, there was no tax expense or tax liability at September 30, 2012 and 2011.
PRC
WFOE and Decens, which were incorporated in the PRC, are governed by the income tax law of the PRC and are subject to PRC enterprise income tax (“EIT”). The prevailing statutory rate of enterprise income tax is 25%. Income tax expense for the nine months ended September 30, 2012 was $2,441,694, increased by $571,994 or 31%, compared to $1,869,700 for the same period in 2011. The increase in income tax was in excess of the percentage increase in our income before taxes due to the increase in our loss in the United States which is not deductible in computing our tax to the PRC.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At September 30, 2012, we have cash and cash equivalents of $8,874,652 and working capital of $8,264,384. We believe that our cash and cash equivalents on hand are sufficient to satisfy our cash needs for the immediate future and that there are no commitments or anticipated events that are likely to result in a significant increase or decrease in our liquidity in the immediate future, though we might seek to raise additional cash through the issuance of debt or equity to fund expansion opportunities. In concluding that we have sufficient cash for the immediate future, we note that inflationary pressures remain strong in China. Nevertheless, we believe that we will be able to increase the prices of our products to offset any cost increases due to inflation.
Consolidated Statement of Cash Flows
For the nine months ended September 30
|
||||||||
2012
|
2011
|
|||||||
Net cash provided by operating activities
|
$
|
8,111,917
|
$
|
356,219
|
||||
Net cash used in investing activities
|
(923,941)
|
(108,391)
|
||||||
Net cash provided by financing activities
|
25,000
|
1,141
|
||||||
Exchange rate effect on cash
|
75,518
|
25,718
|
||||||
Net cash inflow (outflow)
|
$
|
7,288,194
|
$
|
274,687
|
15
Operating Activities
Net cash provided by our operating activities for the nine months ended September 30, 2012 totaled $8,111,917, an increase of $7,755,698, compared to $356,219 for the same period in 2011. The increase in cash provided by operating activities reflects the increase in our net income and a significant increase in our taxes payable, partially offset by an increase in accounts receivable and prepaid leases. The prepaid leases reflect the new lease agreements for 12 new retail outlets the Company opened in 2012. The Company prepaid the total rent of RMB15,480,000 ($2,457,000) for these retail outlets in 2012. Although the prepayment of long term leases adversely impacted the net cash generated by the Company for the current period, the net cash generated by the Company over the balance of the terms of these leases will be positively impacted by the absence of ongoing rent payments. Further, management was willing to make the payments because it believes that even after paying these amounts the Company will continue to have the cash necessary to meet its short and long term cash needs.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2012 was $923,941, an increase of $815,550, compared to $108,391 for the same period in 2011, reflecting the cost of leasehold improvements for the new retail outlets the Company opened in 2012 and the purchase of fixed assets.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2012 was $25,000, an increase of $23,859, compared to $1,141 for the same period in 2011, reflecting an increase in the cash paid by a shareholder on behalf of the Company.
All of our revenues are earned by Decens Foods, our PRC affiliate and subsidiary. PRC regulations restrict the ability of our PRC subsidiary to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividend by our PRC subsidiary only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiary is also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of its registered capital. Allocations to this statutory reserve fund can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiary to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that are material to an investor in our shares.
16
(a) Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of September 30, 2012, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer, Yakun Song, and Chief Financial Officer, Fengying Su, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our financial statements are prepared by our financial and accounting staff under the direction of our Chief Financial Officer in accordance with generally accepting accounting principles in effect in the PRC; however we engage an outside consultant to convert our financial statements for presentation in accordance with generally accepted accounting principles in effect in the United States (“US GAAP”). We believe our internal controls over financial reporting in accordance with PRC GAAP are adequate for the proper supervision of the conduct of our business. Nevertheless, the need to convert our financial statements into US GAAP and the lack of familiarity of our accounting staff with US GAAP and US securities laws and regulations is a deficiency in our internal controls over financial reporting and disclosure controls and procedures. This deficiency will not be considered remediated until we hire financial and accounting personnel with the requisite knowledge and experience concerning US GAAP.
(b) Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter which is the subject of this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1A – RISK FACTORS.
The Company is subject to various risks in its operations and as a result of the concentration of its business in the People’s Republic of China. The risks to which the Company is subject have not changed materially from those set forth in its Report on Form 8-K/A (Amendment No. 2) filed April 20, 2012, which are incorporated by reference into this report.
31.1
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
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31.2
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema
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101.CAL
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XBRL Taxonomy Extension Calculation
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101.DEF
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XBRL Taxonomy Extension Definition
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101.LAB
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XBRL Taxonomy Extension Label
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101.PRE
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XBRL Taxonomy Extension Presentation
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__________
* In accordance with Rule 406T of Regulation S-T, the XBRL information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
YAKUN INTERNATIONAL INVESTMENT & HOLDING GROUP.
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Dated: November 14, 2012
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By:
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/s/ Yakun Song
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Yakun Song
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Chief Executive Officer and President
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