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QHY GROUP - Quarter Report: 2012 March (Form 10-Q)

Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 (Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED March 31, 2012
  
OR
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM _______ TO ________.
 
COMMISSION FILE NUMBER: 001-34210
 
YAKUN INTERNATIONAL INVESTMENT & HOLDING GROUP
(Exact Name of Registrant as Specified in its Charter)
 
 NEVADA
42-1743094
(State or other jurisdiction of  
(I.R.S. Employer
 incorporation or organization) 
Identification No.)
   
No.40-1, Dama Road, Nanguan District, Changchun city,
Jilin Province 130000 , China
100020
(Address of principal executive offices)  
(Zip code)
 
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
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company x
 
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 May 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
 
   
PART I.   FINANCIAL IINFORMATION
 
   
Item 1.  FINANCIAL STATEMENTS
 
   
1
   
2
   
3
   
4-11
   
12
   
16
   
PART II.    OTHER INFORMATION
 
   
16
   
17
   
18
 
 
 

 
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 ENDED MARCH 31, 2012 AND 2011
 
CONTENTS

 
Pages
 
Consolidated balance sheets (unaudited)
1
   
Consolidated statements of operations and comprehensive income (unaudited)
2
   
Consolidated statements of cash flows (unaudited)
3
   
Notes to consolidated financial statements (unaudited)
4
 
 
 

 
Yakun International Investment & Holding Group
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)

   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 840,723     $ 1,586,158  
Accounts receivable, net of allowance
    893,038       999,488  
Inventories, net
    432,297       264,237  
Other receivables
    3,684       21,138  
Advance to suppliers
    277,586       189,149  
Prepaid income taxes
    78,307       69,268  
Deposits & prepayment
    11,107       11,090  
Total current assets
    2,536,742       3,140,528  
                 
Property and equipment, net
    1,840,253       1,539,785  
Prepaid lease
    3,342,649       1,548,259  
Prepaid lease - related party
    5,717,943       5,994,681  
Loans to related party
    1,017,918       1,016,365  
Total assets
  $ 14,455,505     $ 13,239,618  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES
               
Customer deposits
  $ 302     $ 10,912  
Accounts payable and accrued liabilities
    334,393       264,453  
Taxes payable
    443,151       305,570  
Related party payable
    234,899       234,860  
Total current liabilities
    1,012,745       815,795  
                 
STOCKHOLDERS' EQUITY                 
Preferred stock, 5,000,000 shares authorized, 0 shares outstanding
               
Common stock, $0.001 par value; 70,000,000 shares authorized, 13,259,600 and 12,059,600 shares issued and outstanding at March 31, 2012 and December 31, 2011; respectively
    13,260       12,060  
Additional paid in capital
    322,519       143,719  
Retained earnings
    12,385,475       11,567,692  
Accumulated other comprehensive income
    721,506       700,352  
Total stockholders' equity
    13,442,760       12,423,823  
                 
Total liabilities and stockholders' equity
  $ 14,455,505     $ 13,239,618  
 
See accompanying notes to consolidated financial statements
 
 
1

 
Yakun International Investment & Holding Group
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPEREHENSIVE INCOME
(Unaudited – Expressed in U.S. dollars)
 
     
For the Three Months Ended
March 31,
   
2012
   
2011
 
             
Sales
 
$
4,081,428
   
$
2,698,911
 
Cost of sales
   
1,877,776
     
1,297,191
 
Cost of sales - related party
   
208,079
     
39,849
 
Gross profit
   
1,995,573
     
1,361,871
 
Operating expenses
               
Selling, general and administrative
   
757,323
     
281,703
 
Lease expenses - related party
   
77,287
     
74,006
 
Total operating expenses
   
834,610
     
355,709
 
                 
Income from operations
   
1,160,963
     
1,006,162
 
                 
Other income
               
Interest income
   
598
     
36,825
 
Total other income
   
598
     
36,825
 
                 
Income before income tax expense
   
1,161,561
     
1,042,987
 
Income tax expense
   
(343,778
)
   
(263,179
)
Net income
   
817,783
     
779,808
 
Other comprehensive income
               
Foreign currency translation gain
   
21,154
     
149,634
 
Total comprehensive income
 
$
838,937
   
$
929,442
 
                 
Earnings per share – basic and diluted
 
$
0.07
   
$
0.06
 
Weighted average number of shares outstanding – basic and diluted
   
12,560,699
     
12,059,600
 
 
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 Three Months Ended March 31,
 
   
2012
   
2011
 
             
Cash flows from operating activities
           
Net income
  $ 817,783     $ 779,808  
Depreciation and amortization
    251,336       60,236  
Stock based compensation     180,000       -  
Prepaid lease amortization- related party
    285,366       113,855  
Accounts receivable
    107,777       (188,576 )
Inventories
    (167,344 )     (350,179 )
Other receivables
    17,453       (20,725 )
Advance to suppliers
    (87,983 )     (4,665 )
Deferred tax assets
    (8,916 )     5,460  
Accounts payable & accrued expense
    69,490       (64,951 )
Customer deposits
    (10,607 )     (8,594 )
Taxes payable
    136,859       (155,652 )
Prepaid lease
    (1,948,415 )     -  
Net cash provided by (used in) operating activities
    (357,201 )     166,017  
                 
Cash flows from investing activities
               
Purchase of property and equipment
    (389,176 )     (35,733 )
Net cash used in investing activities
    (389,176 )     (35,733 )
                 
Cash flows from financing activities
               
Repayment of shareholder loan
    -       (4,489 )
Net cash used in financing activities
    -       (4,489 )
                 
Effect of exchange rate changes on cash
    942       1,739  
                 
Net increase (decrease) in cash and cash equivalents
    (745,435 )     127,534  
  Cash and cash equivalents at beginning of period
    1,586,158       787,310  
  Cash and cash equivalents at end of period
  $ 840,723     $ 914,844  
                 
Supplementary cash flow information:
               
Cash paid for interest   $ -     $ -  
Cash paid for income tax
  $ 195,269     $ 353,697  
 
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.
Basis of presentation
 
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 US GAAP 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.
Organization and principal activities

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 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 pursuant to which we acquired 100% of the outstanding capital stock of Vast Glory in exchange for 8,250,000 shares of our common stock (the “Acquisition”), 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.

The Acquisition was accounted for as a reorganization of entities 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 business combination of Vast Glory with the Company.

Vast Glory was incorporated on February 26, 2009 in the 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 pooling of interests 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.
 
 
4

 
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited – Expressed in U.S. dollars)
 
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, HK Food had no operations other than those related to its incorporation.

Pursuant to variable interest entity contractual agreements, HK Food indirectly controls Changchun Decens Foods Co., Ltd. (“Decens Foods”).  Decens  Foods is located in Changchun City, Jilin Province, the People’s Republic of China (“PRC”).  It was established in September 2003 under the laws of the 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 a series of variable interest entity contractual agreements (the “VIE Agreements”) with Decens Foods and its shareholders (the “Decens Shareholders”). The incorporation of HK Food, WFOE and entering into the VIE Agreements did not result in any change in the basis of the assets and liabilities of Decens Foods, which continue to be carried at their historical amounts. WFOE effectively assumed management of the business activities of Decens Foods and has the right to appoint all executive and senior management and the members of the board of the directors of Decens Foods.

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 a variable interest entity or VIE, the PRC legal entity established by the individuals authorized by the Company. The Company has entered into certain exclusive agreements with Decens Foods through WFOE, which entitles WFOE to receive all of its 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 Decens Foods when permitted by the PRC laws, and share pledge agreements for the equity interests in Decens Foods held by the authorized individuals.

Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between the Company and Decens Foods. 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 Decens Foods. Decens Foods is  subject to operating risks, which determine the variability of the Company’s interest in the entity. Based on these contractual arrangements, the Company consolidates Decens Foods as required by Accounting Standards Codification (“ASC”) subtopic 810-10 (“ASC 810-10”), Consolidation: Overall, because the Company holds all the variable interests of Decens Foods through WFOE, which is the primary beneficiary of Decens Foods.

Yakun International, Vast Glory, HK Food, WFOE and Decens Foods are referred to herein collectively as the “Company” or “we”, “us”, “our” or “Group”.
 
3.
Cash and cash equivalents
 
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.
 
 
5

 
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited – Expressed in U.S. dollars)
 
   
March 31,
2012
   
December 31,
2011
 
             
Cash on hand
  $ 206,075     $ 730,399  
Cash in bank
    634,648       855,759  
Total
  $ 840,723     $ 1,586,158  
 
4.
Accounts receivable
 
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. As of March 31, 2012 and December 31, 2011, no allowance for doubtful accounts was provided for.
 
   
March 31,
2012
   
December 31,
2011
 
             
Due from third parties
  $ 893,038     $ 999,488  
Total
  $ 893,038     $ 999,488  
 
5.
Related party transactions
 
 
a.
Loans to (from) related parties are as follows:
 
   
March 31,
2012
   
December 31,
2011
 
Jilin Fuyuanguan Foods Co., Ltd
  $ 1,017,918     $ 1,016,365  
Total
  $ 1,017,918     $ 1,016,365  
 
This loan bears no interest and is due on demand.
 
 
b.
Prepaid leases - related party
 
   
March 31,
2012
   
December 31,
2011
 
Prepaid leases - outlets and office building (Note 5.b.1)
  $ 357,371     $ 475,768  
Prepaid leases - outlets and office building (Note 5.b.2)
    2,414,243       2,410,560  
Prepaid leases - workshop and office building (Note 5.b.3)
    2,946,329       3,108,353  
Prepaid leases - outlets and office building
  $ 5,717,943     $ 5,994,681  
 
6

 
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited – Expressed in U.S. dollars)
 
 
1.
The Company leases its office building and operating outlets from one of its stockholders. The lease contract is for 5 years from January 2008 to December 2012. The total rental of RMB15,000,000 was prepaid in advance. The lease prepayment is being amortized equally over the five years using straight line method. The monthly rental is RMB 250,000 (approximately US$38,400).

 
2.
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 lease prepayment 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).

 
3.
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 lease prepayment is being  amortized equally over the five years using the straight line method. The monthly rental is RMB 350,000 (approximately US$53,800).
 
For the three months ended March 31, 2012 and 2011, related party lease expense included in cost of goods sold was $208,079 and $113,855, respectively; related party lease expense included in operating expenses was $77,287 and $74,006, respectively
 
c.
Related party payable
   
March 31,
2012
   
December 31,
2011
 
Due to shareholders
  $ 234,899     $ 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.
Inventory
 
   
March 31,
2012
   
December 31,
2011
 
Raw materials
  $ 371.593     $ 254,161  
Finished goods
    60,704       10,076  
Total
  $ 432,297     $ 264,237  
 
7.
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
10 years
Vehicles
6 years
Office equipment
Leasehold improvements
4 years
Lease term
 
 
7

 
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited – Expressed in U.S. dollars)
 
Property and equipment consist of the following:
 
   
March 31,
2012
   
December 31,
2011
 
Machinery
  $ 1,524,838     $ 1,383,935  
Vehicles
    356,994       342,097  
Office equipment and electronic devices
    46,577       44,841  
Leasehold improvements
    463,354       254,144  
Total
    2,391,763       2,025,017  
Less: accumulated depreciation
    (551,510 )     (485,232 )
Total fixed assets, net
  $ 1,840,253       1,539,785  
 
8.
Prepaid lease
 
   
March 31,
2012
   
December 31,
2011
 
Prepaid leases - outlet (Note 8.a).)
  $ 333,547     $ 380,615  
Prepaid leases - outlet (Note 8.b).)
    576,559       628,013  
Prepaid leases – workshop (Note 8.c).)
    471,730       513,830  
Prepaid leases - outlet (Note 8.d).)
    19,090       25,801  
Prepaid leases - outlet (Note 8.e).)
    392,315       -  
Prepaid leases - outlet (Note 8.f).)
    372,769       -  
Prepaid leases - outlet (Note 8.g).)
    425,669       -  
Prepaid leases - outlet (Note 8.h).)
    320,840       -  
Prepaid leases - outlet (Note 8.i).)
    430,130       -  
    $ 3,342,649     $ 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 from July 1, 2011 to June 1, 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 is due May 31, 2014. The lease prepayment is being 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 from January 1, 2012 to December 31, 2014. The total rental,  RMB3,960,000 ($628,013), was paid by the Company in 2011. The lease prepayment is being 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 from January 1, 2012 to December 31, 2014 and a total rental of RMB3,240,000 ($513,830) was prepaid in 2011. The lease prepayment is being amortized equally over the three years using the straight line method. The monthly rental is RMB 90,000 (approximately $14,300).
 
8

 
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited – Expressed in U.S. dollars)
 
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 from December 15, 2011 to December 14, 2012. The total rental,  RMB170,000 ($26,960), was paid by the Company in 2011. The lease prepayment is being 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 from April 2, 2012 to April 1, 2015. The total rental, RMB2,470,000 ($392,314), was paid by the Company in March 2012. The lease prepayment is being 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 from March 15, 2012 to March 14, 2015. The total rental,  RMB2,380,000 ($378,020), was paid by the Company in January and March 2012. The lease prepayment is being amortized equally over the 3 years using the straight line method. The monthly rental is RMB66,111 (approximately $10,500).

 
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 from April 7, 2012 to April 6, 2015. The total rental, RMB2,680,000 ($425,670), was paid by the Company in March 2012. The lease prepayment is being 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 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 lease prepayment is being 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 years will be negotiated by the Company and the lessor based on the market price in the years 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 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 lease prepayment is being 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 the year 2016.
 
For the three months ended March 31, 2012 and 2011, the Company recorded lease expense in operating expenses of $159,721 (RMB1,007,474) and nil, respectively.
 
 
9

 
Yakun International Investment & Holding Group
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited – Expressed in U.S. dollars)
 
9.
Taxes payable
 
   
March 31,
2012
   
December 31,
2011
 
Value-added tax payable
  $ 81,848     $ 100,427  
Enterprise Income tax payable
    353,351       195,334  
Others
    7,952       9,809  
Total
  $ 443,151     $ 305,570  
 

 
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 shares issued was measured at estimated $0.15 per share.
 
The Company accounts for stock-based compensation under provisions of ASC 505-50: 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 ASC505-50, 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 March 31, 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 March 31, 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 is 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 March 31, 2012 and December 31, 2011.
 
PRC
 
WFOE and Decens Foods, 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 three months ended
   
For the three months ended
 
   
March 31, 2012
   
March 31, 2011
 
Income (loss) before income taxes
           
United States, BVI, HK
  $ (211,340 )   $ (11,918 )
China (WFOE and Decens Foods)
    1,372,901       1,054,905  
    $ 1,161,561     $ 1,042,987  
Provision for Income Taxes
               
Current income tax
  $ 343,225     $ 257,719  
Deferred income tax
    553       5,460  
    $ 343,778     $ 263,179  
                 
Net income
  $ 817,783     $ 779,808  
                 
Worldwide effective rate
    29.59 %     25.23 %
 
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 through May 14, 2012 and no subsequent events occurred that required disclosure in the accompanying consolidated financial statements.
 
11

 
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 Ended March 31, 2012 and 2011
All amounts, other than percentages, are in U.S. dollars

   
For the Three Months Ended March 31,
 
Dollar Increase
   
% increase
 
   
2012
         
2011
         
(decrease)
   
(decrease)
 
Sales
  $ 4,081,428       100 %   $ 2,698,911       100 %     1,382,517       51 %
Cost of sales
    1,877,776       46 %     1,297,191       48 %     580,585       45 %
Cost of sales - related party
    208,079       5 %     39,849       1 %     168,230       422 %
Gross profit
    1,995,573       49 %     1,361,871       50 %     633,702       47 %
Selling, general and administrative
    757,323       19 %     281,703       10 %     475,620       169 %
Lease expenses - related party
    77,287       2 %     74,006       3 %     3,281       4 %
Income from operations
    1,160,963       28 %     1,006,162       37 %     154,801       15 %
Other income
    598       0 %     36,825       1 %     (36,227 )     (98 %)
Income before income tax expense
    1,161,561       28 %     1,042,987       39 %     118,574       11 %
Income tax expense
    343,778       8 %     263,179       10 %     80,599       31 %
Net income
  $ 817,783       20 %   $ 779,808       29 %     37,975       5 %
Sales
For the three months ended March 31, 2012, our sales were $4,081,428, an increase of $1,382,517 or approximately 51% over $2,698,911 for the three months ended March 31, 2010. This growth was primarily the result of increased sale volume of our products and appreciation of Renminbi (our operating currency) against the US dollar (our reporting currency). The appreciation of Renminbi contributed approximately 6% to the increase  in sales. Since April 2011, the Company opened 5 new retail outlets, of which 2 were opened  in 2011 and 3 were opened in 2012. The 5 new retail stores generated sales of approximately $300,000, or an increase of approximately 1.2% compared to three months ended March 31, 2011. The number of units we sold increased by approximately 44% during the three months ended March 31, 2012 from the number of units for the three months ended March 31, 2011. Favorable volume was driven primarily by a new series of western flavored bakery products we introduced during 2011, and higher demand for our festival bakery products, especially rice glue balls in the first quarter. Sales of rice glue balls on a unit basis increased approximately 20%.

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 March 31, 2012 was $1,877,776, an increase of $580,585, or 45%, over $1,297,191 for the three months ended March 31, 2011.  
 
Raw material cost decreased to 33% of net sales for the three month period ended March 31, 2012, compared to 35% of net sales for the three months ended March 31, 2011.
 
Overhead expenses were 13% of net sales for the three month period ended March 31, 2012, compared to 11% of net sales for the three months ended March 31, 2011. The increase was primarily due to higher facility expenses associated with the newly leased workshop from a third party starting January 1, 2012, and higher packaging expenses.

Cost of Sales- Related Party
Cost of sales – related party represents the workshop lease expense paid to one of the shareholders of the Company. The cost of sales – related party was $208,079 for the three months ended March 31, 2012, an increase of $168,230, or 422% over $39,849 for the three months ended March 31, 2011, reflecting the increase in rent expenses associated with a new office building leased from the same shareholder since June 2011.
 
 
12

 
On June 25, 2011 the Company leased an office building from one of the Company’s shareholders to use as an administration, sales and manufacturing facility. The lease is for 5 years terminating September 1, 2016. The total rent was paid in advance and will be amortized equally over five years using the straight line method. 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 decreased to 48.9% for the three months ended March 31, 2012, compared to 50.5% for the three months ended March 31, 2011. The decrease in profit margin was due to the higher facility expenses from two new workshops leased since September 2011. Although the higher facility expenses had a negative impact on the gross margin for the three months ended March 31, 2012, management believes that the expansion of our production facilities is necessary in order to meet the increased demand for our products and to improve our working efficiency by installing new equipment in these facilities.
 
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March 31, 2012 were $757,323, an increase of $475,620 or 169% as compared to $281,703 for the three months ended March 31, 2011. There are three main reasons for the increase: (1) an increase in salary expenses of $106,384; and  (2) an increase in rent expense of $135,942 because of the 5 new retail outlets the Company has leased since July 2011 and (3) a one-time stock based compensation expense of $180,000 for stock issued to ten consultants pursuant to the Company's 2011 Stock Incentive Plan.
 
To date, Ms. Song, our Chief Executive Officer and principal shareholder has not been paid for services rendered to Decens Foods or the Company.  Regardless of whether Ms. Song begins to receive a salary, commencing January 1, 2012, a reasonable amount of compensation for her services, as determined by Ms. Song, has been accrued as an expense of the Company.  For the three months ended March 31, 2012, the Company estimated that a reasonable salary for Ms. Song’s services would be $5,000 per month and a total of $15,000 has been accrued and included among selling, general and administrative expenses.
 
Lease expenses – related party
In addition to the building leased from a shareholder and used as an administrative and manufacturing facility, the Company leases certain retail sales outlets from one of its stockholders. The lease is for 5 years starting from 2008 and the total rent was prepaid in advance. The rent will be amortized equally over the five year term of the lease using the straight line method. The monthly rental allocated to selling, general and administrative expenses in respect of this lease is RMB 162,500 (approximately $24,500).
 
For the three months ended March 31, 2012 and 2011, the Company recorded related party lease expense in operating expenses of $77,287 and $74,006, respectively. The increase was due to the appreciation of Renminbi against US dollar.
 
Other Income
Other income for the three months ended March 31, 2012 was $598, a decrease of $36,227 compared to $36,825 for the three months ended March 31, 2011. This was due to the decrease in interest income because two loans the Company entered into in the second half of 2010 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 March 31, 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 March 31, 2012 and 2011.
 
 
13

 
PRC
WFOE and Decens Foods, 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 March 31, 2012 was $343,778, increased by 31%, compared to $263,179 for the three months ended March 31, 2011. The increase in income tax was slightly 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 March 31, 2012, we had cash and cash equivalents of $840,723 and working capital of $1,523,997. 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.
 
 
14

 
Consolidated Statement of Cash Flows
 
   
For the three months ended March 31
 
   
2012
   
2011
 
Net cash provided by (used in) operating activities
 
$
(357,201)
   
$
166,017
 
Net cash used in investing activities
   
(389,176)
     
(35,733
)
Net cash used in financing activities
   
-
     
(4,489
)
Exchange rate effect on cash
   
942
     
1,739
 
Net cash inflow (outflow)
 
$
(745,435)
   
$
127,534
 

Operating Activities

Net cash used in our operating activities for the three months ended March 31, 2012 totaled $357,201, a decrease of $523,218, compared to a positive cash inflow of $166,017 generated from operating activities for the three months ended March 31, 2011.  This use of cash is mainly due to the increase in prepaid leases, inventory and advances to suppliers, offset by an increase in taxes payable and a decrease in accounts receivable.   The prepaid leases reflected the new lease agreements for 5 new retail outlets the Company entered with third parties in the first quarter of 2012. The Company paid RMB12,290,000 ($5,717,943) as prepaid lease expenses in the first quarter of 2012. Although the payment of such long term lease expenses in advance adversely impacted the net cash generated by the Company, 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 three months ended March 31, 2012 was $389,176, an increase of $353,443, compared to $35,733 for the three months ended March 31, 2011, reflecting the payment of leasehold improvements for the new retail outlets the Company leased in the first quarter of 2012.

Financing Activities
 
Net cash used in financing activities for the three months ended March 31, 2012 was nil, compared to $4,489 for the three months ended March 31, 2011, reflecting the repayment of a shareholder loan during the three months ended March 31, 2011.

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 dividends 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.
 
 
15

 
ITEM 4. CONTROLS AND PROCEDURES.
 
(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 March 31, 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.
  
PART II
 
OTHER INFORMATION

 
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.
 
 
16

 
ITEM 6 - EXHIBITS

The following exhibits are filed with this report:
 
31.1
 
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
31.2
 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
32.1
  
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.
 
32.2
 
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.
 
101
  
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Operations and Comprehensive Income for the three month periods ended March 31, 2012 and 2011, (ii) the Consolidated Balance Sheets at March 31, 2012 and December 31, 2011, (iii) the Consolidated Statements of Cash Flows for the three month periods ended March 31, 2012 and 2011 and (iv) the notes to the Consolidated Financial Statements.
 
 
17

 
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.
 
       
Dated: May 20, 2012
By:
/s/ Yakun Song
 
   
Yakun Song
 
   
Chief Executive Officer and President
 
 
 
18