10-Q/A 1 v162699_10qa.htm Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q/A
(Amendment No.1)
 
(Mark One)
 
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended March 31, 2009
 
or
 
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ____________ to ___________.
 
Commission File Number 000-51200
 
Yongye International, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)

Nevada
20-8051010
(State or other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
 
6th Floor, Suite 608, Xue Yuan International Tower,
No. 1 Zhichun Road, Haidian District Beijing, PRC
(Address of Principal Executive Office)
 
(Former address of Principal Executive Office, if changed since last report)
+86 10 8232 8866
(Issuer’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
 
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 ¨
Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ý
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes _ No _ *The registrant has not yet been phased into the interactive data requirements.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x As of May 7, 2009, 28,058,960 shares of common stock, par value $.001 per share, were issued and outstanding.
 
 


 
 
 
 
EXPLANATORY NOTE
 
We are filing this Quarterly Report on Form 10-Q/A (the “Amendment”) to amend Part I, Item 1, Financial Statements and Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the original Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission (“SEC”). This Amendment has been filed to correct an error in the manner in which we calculated the number of shares outstanding in determining earnings per share, and another error in which we should have reclassified warrants issued as a derivative liability, and the financial statements contained herein are being restated accordingly. In addition, certain revisions are being made to the disclosures included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 initially filed with the Securities and Exchange Commission (the “Commission”) on May 7, 2009 in response to the Commission’s comment letter dated September 1, 2009.
 
 
Page
   
Part I: Financial Information:
 
   
Item 1 -Financial Statements
 
   
Consolidated Balance Sheets
1
   
Consolidated Statements of Income and Comprehensive Income
2
   
Consolidated Statements of Cash Flows
3
   
Notes to Consolidated Financial Statements
4
   
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
   
Signatures
26

 

 
 
Item 1- Financial Statements
 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS

   
March 31, 2009
   
December 31, 2008
 
   
(Unaudited)
(Restated - Note 1(C))
   
(Restated - Note 1(C))
 
CURRENT ASSETS
           
Cash and cash equivalents
  $ 1,424,268     $ 4,477,477  
Accounts receivable, net
    6,128,346       2,748,042  
Inventories
    22,201,250       20,708,193  
Advance payments
    62,937       44,051  
Due from related party
    274,758       192,741  
Prepaid expenses
    91,968       189,478  
Other receivables
    256,554       680,752  
Total Current Assets
    30,440,081       29,040,734  
                 
PROPERTY AND EQUIPMENT, NET
    6,717,213       5,368,074  
                 
INTANGIBLE ASSETS, NET
    92,918       95,453  
                 
TOTAL ASSETS
  $ 37,250,212     $ 34,504,261  
                 
CURRENT LIABILITIES
               
Long-term loans- current portion
    166,448       167,652  
Accounts payable- related party
  $ 90,169     $ 46,739  
Taxes payable
    508,262       366,981  
Advance from customers
    82,037       1,869,400  
Accrued expenses
    1,636,175       583,880  
Other payables
    697,806       626,910  
Derivative liabilities – fair value of warrants
    1,899,920       2,107,931  
Total Current Liabilities
    5,080,817       5,769,493  
                 
LONG-TERM LOANS
    291,498       230,121  
                 
STOCKHOLDERS' EQUITY
               
Capital stock: par value $.001; 75,000,000 shares authorized; 26,760,258 shares issued and outstanding at March 31, 2009 and December 31, 2008
    26,760       26,760  
Additional paid-in capital- Common stock
    13,633,604       13,633,604  
Retained earnings
    15,128,297       12,102,882  
Statutory reserve
    1,489,281       1,207,912  
Accumulated other comprehensive income
    379,045       329,445  
Total Stockholders' Equity
    30,656,987       27,300,603  
Noncontrolling interest
    1,220,910       1,204,044  
Total Equity
    31,877,897       28,504,647  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 37,250,212     $ 34,504,261  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
1

 

YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
   
Yongye International, Inc.
   
Yongye
 
   
and Subsidiaries
   
Nongfeng
 
   
(f/k/a Yongye Biotechnology
International, Inc.)
       
   
For the Three Months Ended
   
For the Three Months Ended
 
   
March 31, 2009
   
March 31, 2008
 
   
(Unaudited)
   
(Unaudited)
 
   
(Restated - Note 1(C))
       
             
SALES
  $ 12,435,775     $ 9,528,055  
                 
COST OF SALES
    5,902,607       4,484,261  
                 
GROSS PROFIT
    6,533,168       5,043,794  
                 
SELLING EXPENSES
    2,620,298       3,192,797  
                 
RESEARCH & DEVELOPMENT EXPENSES
    288,572        
                 
GENERAL AND ADMINISTRATIVE EXPENSES
    345,157       357,192  
                 
INCOME FROM OPERATIONS
    3,279,141       1,493,805  
                 
OTHER EXPENSES (INCOME)
               
Interest expenses
    5,958        
Other expenses
    441       97  
Change in fair value of derivative liabilities
    (208,011 )      
TOTAL OTHER EXPENSES
    (201,612 )     97  
                 
INCOME BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST
    3,480,753       1,493,708  
                 
PROVISION FOR INCOME TAXES
    155,447       373,427  
                 
NET INCOME
    3,325,306       1,120,281  
                 
LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTERST
    18,522        
                 
NET INCOME ATTRIBUTABLE TO YONGYE BIOTECHNOLOGY INTERNATIONAL, INC.
    3,306,784       1,120,281  
                 
OTHER COMPREHENSIVE INCOME
               
Foreign Currency Translation Adjustment
    47,945       30,531  
                 
COMPREHENSIVE INCOME
  $ 3,354,729     $ 1,150,812  
                 
Net income per share:
               
Basic
  $ 0.12     $ 0.10  
Diluted
  $ 0.12     $ 0.10  
Weighted average shares used in computation:
               
Basic
    26,760,258       11,444,755  
Diluted
    26,760,258       11,444,755  

The accompanying notes are an integral part of these consolidated financial statements.

 
2

 
 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Yongye International, Inc.
   
Yongye
 
   
and Subsidiaries
   
Nongfeng
 
   
(f/k/a Yongye Biotechnology
International, Inc.)
       
   
For the Three Months Ended
   
For the Three Months Ended
 
   
March 31, 2009
   
March 31, 2008
 
   
(Unaudited)
   
(Unaudited)
 
   
(Restated - Note 1(C))
       
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 3,306,784     $ 1,120,281  
Adjustments to reconcile net income to net cash (used in)/provided by operating activities
               
Depreciation and amortization
    107,236       42,784  
Reversal of bad debt provision
    (73,701 )      
Net income attributable to the noncontrolling interest
    18,522        
Change in fair value of derivative liabilities
    (208,011 )      
Changes in assets and liabilities:
               
Accounts receivable
    (3,302,662 )     (7,200,057 )
Inventories
    (1,466,830 )     (4,556,216 )
Advances payments
    (18,828 )      
Due from related party
    (72,763 )     138,693  
Prepaid expense
    97,734        
Other receivables
    424,992       (86,738 )
Accounts payable- related party
    43,366       6,967,770  
Taxes payable
    140,799       381,255  
Advance from customers
    (1,789,453 )     80  
Accrued expenses
    1,051,410       3,371,935  
Other payables
    70,298       14,853  
Net Cash (Used in)/Provided by Operating Activities
    (1,671,107 )     194,640  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Acquisition of property and equipment
    (1,446,782 )     (213,919 )
Net Cash Used in Investing Activities
    (1,446,782 )     (213,919 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from bank loans
    89,534        
Repayment of bank loans
    (29,870 )      
Proceeds from share capital
          150,000  
Net Cash Provided by Financing Activities
    59,664       150,000  
                 
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH
    5,016       26,858  
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (3,053,209 )     157,579  
CASH AND CASH EQUIVALENTS – BEGINNING
    4,477,477        
CASH AND CASH EQUIVALENTS - ENDING
  $ 1,424,268     $ 157,579  
                 
Supplemental cash flow information:
               
Cash paid for income taxes
    22,464        
Cash paid for interest expense payment
    9,833        
Noncash investing and financing activities:
               
 
During the three months ended March 31, 2008, the minority shareholder of Yongye Nongfeng contributed a patent valued at $100,000 to that company.
 
The accompanying notes are an integral part of these consolidated financial statements.

 
3

 
 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
MARCH 31, 2009 AND 2008
 
NOTE 1 -ORGANIZATION AND DESCRIPTION OF BUSINESS
 
A. Organization
 
 Yongye International, Inc. (the “Company”, formerly known as “Golden Tan, Inc.” or “Yongye Biotechnology International, Inc.”) was incorporated in the State of Nevada on December 12, 2006. On April 17, 2008, the Company entered into a share exchange agreement (the “Exchange Agreement”) with Fullmax Pacific Limited, a privately held investment holding company organized on May 23, 2007 under the laws of the British Virgin Islands (“Fullmax”) and the shareholders of Fullmax (the “ Fullmax Shareholders”), who collectively owned all the issued and outstanding ordinary shares of Fullmax. Pursuant to the terms of the Exchange Agreement, the Fullmax Shareholders transferred to the Company all of their shares in exchange for 11,444,755 (the “Shares”) shares of the Company’s common shares (the “Share Exchange”). As a result of the Share Exchange, Fullmax became a wholly-owned subsidiary of the Company and the Fullmax Shareholders received approximately 84.7% of the Company’s issued and outstanding common shares. Immediately prior to the date of the Share Exchange, the Company was a publicly listed shell entity with no operations and had a nominal amount of cash and, Fullmax, through its wholly-owned subsidiary, Asia Standard Oil Limited (“ASO”) and indirect subsidiary, Yongye Nongfeng Biotechnology (“Yongye Nongfeng”), was engaged in the sale of fulvic acid based liquid and powder nutrient compounds for plant and animal feed used in the agriculture industry. The Share Exchange was accounted for as a reverse recapitalization, equivalent to the issuance of stock by Fullmax for the net monetary assets of the Company accompanied by a recapitalization.
 
In November 2007, ASO a Hong Kong investment holding company, entered into a Sino-Foreign cooperative joint venture contract (“Contract”) with Inner Mongolia Yongye Biotechnology Co., Ltd. (“Inner Mongolia Yongye”) to form a cooperative joint venture (CJV), Yongye Nongfeng Biotechnology Co. Ltd (“Yongye Nongfeng”), pursuant to which, Inner Mongolia Yongye and ASO are to own 10% and 90% of the equity interests in Yongye Nongfeng, respectively. Inner Mongolia Yongye was formed on September 16, 2003 in the People’s Republic of China (the “PRC”). Mr. Zishen Wu, Chief Executive Officer, President and Chairman of the Company, owns a controlling 91.67% of the equity interest in Inner Mongolia Yongye. Inner Mongolia Yongye’s primary business is the research, manufacturing, and sale of biochemical products for use in plants and animal growth.  Inner Mongolia Yongye is located in the City of Hohhot, Inner Mongolia Autonomous Region PRC.
 
On January 4, 2008, the incorporation and establishment of Yongye Nongfeng was approved by the Inner Mongolia Department of Commerce and the Inner Mongolia Administration for Industry and Commerce. The scope of business of Yongye Nongfeng is the distribution and sale of products of Inner Mongolia Yongye.  The period of the cooperative joint venture is ten years and may be extended by a written application submitted to the relevant government authority for approval no less than six months prior to the expiration of the cooperative joint venture. Prior to the legal establishment of Yongye Nongfeng, both Fullmax and ASO were non substantive holding companies with no assets and operations and were primarily designed and used as legal vehicles to facilitate foreign participation in the business conducted by Inner Mongolia Yongye.
 
In May 2008, upon the agreement among Inner Mongolia Yongye, ASO and Yongye Nongfeng, the ownership of Yongye Nongfeng was revised, pursuant to which Inner Mongolia Yongye and ASO became 0.5% and 99.5% equity interests owner of Yongye Nongfeng, respectively. ASO has not fully injected its share of the capital into Yongye Nongfeng as it isn’t required to do so for 2 years after the CJV is established. Based upon actual capital injection into Yongye Nongfeng, Inner Mongolia Yongye and ASO were 0.6% and 99.4% owners, respectively, of Yongye Nongfeng as of December 31, 2008.
 
B. Nature of Business
 
The Company, through its primary operating subsidiary, Yongye Nongfeng, is engaged in the sale of fulvic acid based liquid and powder nutrient compounds used in the agriculture industry in the PRC. In January 2008, upon receiving governmental approval of the establishment of Yongye Nongfeng, the management of Yongye Nongfeng anticipated that Yongye Nongfeng would not be able to obtain the fertilizer licensee in the near future, and therefore, Yongye Nongfeng entered into an agreement ( the “Agreement”) with Inner Mongolia Yongye, pursuant to which Yongye Nongfeng agreed to purchase finished goods products that are to be manufactured by Inner Mongolia Yongye at a fixed price of RMB 350 per case for fulvic acid plant based products and RMB 120 per case for fulvic acid animal based products .  The term of the Agreement is for the period from January 15, 2008 to January 14, 2013. Pursuant to the Agreement, the Company can terminate this by giving one month notice to Inner Mongolia Yongye.

Yongye Nongfeng and Inner Mongolia Yongye also entered into certain lease-exchange arrangements related to land-use rights, buildings and equipment. (See Note 14)
 
C. Restatement of Financial Statements
 
Subsequent to the filing of the Company’s interim consolidated financial statements as of and for the three months ended March 31, 2009 on Form 10-Q, management identified an error in the Company’s basic and diluted net income per share presented in its previously issued consolidated financial statements. The Company has incorrectly accounted for the April Escrow Shares and September Escrow Shares (See Note 8) as contingently issuable shares for purposes of calculating earnings per share and excluded such outstanding shares that were placed in escrow from the calculation of the weighted average number of common shares outstanding. It was determined that since April Escrow Shares and September Escrow Shares are neither contingently cancellable nor contingently returnable to the Company, the shares should have been included in the denominator in computing the Company’s basic and diluted net income per share.

 
4

 
 
In connection with the April Offering and September Offering in 2008 (see Note8), the Company issued the “April Warrants” and “September Warrants” to certain investors and Roth Capital Partners, LLC (“Roth”). According to the terms of these warrants, the Company could be required to pay cash to the warrant holders under certain events that are not within the control of the Company.  Specifically, upon the occurrence of certain “fundamental transactions” as defined, the warrant holders (but not the shareholders of the Company’s common stock) are entitled to receive cash equal to the value of the warrants to be determined based on an option pricing model and certain specified assumptions set forth in the warrant agreement.  In accordance with Emerging Issues Task Force Issue (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, such potential cash payments that are not within the Company’s control would preclude equity classification and therefore the warrants should have been classified as a liability and adjusted to fair value through earnings at each reporting dates starting from the issuance date.  In addition, the terms of the warrants include a “down-round” provision under which the exercise price could be affected by future equity offerings undertaken by the Company.  Upon the adoption of EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock, effective January 1, 2009, these warrants are no longer considered to be indexed to the Company’s own stock and should be classified as a liability.
 
As of December 31, 2008, a liability of $2,107,931 representing the fair value of the April Warrants and the September Warrants should have been recorded and the retained earnings should have been increased by $2,118,797 representing the net decrease in fair value of these warrants through December 31, 2008 from their respective dates of issuance. For the three months ended March 31, 2009, the aggregate fair value of the April Warrants and September Warrants decreased by $108,862 and $99,149, respectively. These fair value adjustments should have been recorded through earnings for the respective periods.
 
The restatement adjustments, as summarized below, had no impact on the Company’s previously reported income tax amounts because the changes in fair value of the warrants issued to the investors are not expected to result in future income tax consequences.
 
The following table presents the effect of correcting this error on the consolidated financial statements for the three months ended March 31, 2009 and the year ended December 31, 2008.
 
CONSOLIDATED BALANCE SHEETS
   
March 31, 2009
 
   
As Previously
Reported
   
As
Restated
 
Derivative liabilities – Fair value of warrants
          1,899,920  
Total Current Liabilities
    3,180,897       5,080,817  
Additional paid-in capital-Common stock
    13,976,900       13,633,604  
Additional paid-in capital-Warrant
    3,883,432        
Retained earnings
    12,801,489       15,128,297  
Total Stockholders' Equity
    32,556,907       30,656,987  
Total Equity
    33,777,817       31,877,897  

CONSOLIDATED BALANCE SHEET
   
December 31, 2008
 
   
As Previously
Reported
   
As Restated
 
Derivative liabilities – Fair value of warrants
          2,107,931  
Total current liabilities
    3,661,563       5,769,493  
Additional paid-in capital- Common stock
    13,976,900       13,633,604  
Additional paid-in capital- Warrants
    3,883,432        
Retained earnings
    9,984,085       12,102,882  
Total Stockholders' Equity
    29,410,189       27,300,603  
Total Equity
    30,612,577       28,504,647  

 
5

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
   
Three months ended
March 31, 2009
 
   
As Previously
Reported
   
As
Restated
 
Change in fair value of derivative liabilities
          (208,011 )
                 
TOTAL OTHER EXPENSES (INCOME)
    6,399       (201,612 )
                 
INCOME BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST
    3,272,742       3,480,753  
                 
NET INCOME
    3,117,295       3,325,306  
                 
NET INCOME ATTRIBUTABLE TO YONGYE BIOTECHNOLOGY INTERNATIONAL, INC.
    3,098,773       3,306,784  
                 
COMPREHENSIVE INCOME
    3,146,718       3,354,729  
                 
Net income per share-Basic and diluted
    0.14       0.12  
                 
Weighted average shares used in computation- basic and diluted
    22,760,258       26,760,258  
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Three months ended
March 31, 2009
 
   
As Previously
Reported
   
As
Restated
 
NET INCOME
    3,098,773       3,306,784  
                 
Change in fair value of derivative liabilities
          (208,011 )

 
6

 
 
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
 
The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and include the financial statements of the Company and its majority-owned subsidiaries. All significant intercompany transactions and balances are eliminated on consolidation.
 
The accompanying unaudited consolidated financial statements as of March 31, 2009 and for the three months ended March 31, 2009 and 2008 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X applicable to smaller reporting companies. In the opinion of management, these unaudited consolidated interim financial statements include all adjustments considered necessary to ensure the financial statements are not misleading. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results for the full fiscal year ending December 31, 2009. The unaudited consolidated interim financial statements should be read in conjunction with the Company's audited and consolidated financial statements and notes thereto for the year ended December 31, 2008 that are included in the Company’s 2008 annual report on 10-K/A filed with the Securities and Exchange Commission on October 19, 2009.
 
USE OF ESTIMATES
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
 
CASH AND CASH EQUIVALENTS
 
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 95, “Statement of Cash Flows,” the Company and the Predecessor considers all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents.
 
ACCOUNTS RECEIVABLE AND BAD DEBT ALLOWANCE
 
The Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts receivable. As a consequence, the Company believes that its accounts receivable credit risk exposure beyond such allowances is limited. The Company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectability and are maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Based on the age of the receivables, the Company reserves 10% of accounts receivable balances that have been outstanding for more than 6 months but less than one year, 20% of accounts receivable balances that have been outstanding between one year and two years, 50% of receivable balances that have been outstanding between two year and three years, and 100% of receivable balances that have been outstanding for more than three years. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted.
 
The payment term offered to our major customers is typically 90 days, while we ask our other customers to pay either up front or upon receipt. We based the CJV’s Accounts Receivable and Bad Debt Reserve policy on the historical experience of the Predecessor company’s sale and collection rates for the same products.
 
INVENTORY
 
Inventory is stated at the lower of weighted average cost, which takes into account historical prices on a continuing basis, or market. Cost is determined by the weighted average method. Provision for diminution in value on inventories is made using the specific identification method.
 
PROPERTY AND EQUIPMENT
 
Property and equipment other than leasehold improvements are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are stated at cost and depreciated using the straight-line method over the estimated useful life or lease period, whichever is shorter. Estimated useful lives are as follows:

 
7

 

Estimated Useful Life
 
Buildings and structures
30 years
   
Office equipment and furniture
5 years
   
Machinery and equipment
10 years
   
Vehicles
10 years
   
Software
10 years
   
Leasehold improvements
3 years
 
REVENUE RECOGNITION
 
Our distributors are classified as our customers. Revenue from product sales is recognized when title has been transferred, which is generally at the time of customer’s receipt of product, the risks and rewards of ownership have been transferred to the customer, the fee is fixed and determinable, and the collection of the related receivable is probable. The Company reports revenue net of value added taxes if applicable.
 
If the product has expired or the package is broken at the time of receipt, the distributor has the right to exchange it for a new product with intact package; and distributors do not have the right to return unused, intact product to us after it has been delivered.
 
ADVERTISING COSTS
 
Advertising costs are expensed as incurred. Advertising costs for the three months ended March 31, 2009 and 2008 were $1,902,351 and $ 1,560,835, respectively.
 
RESEARCH AND DEVELOPMENT COSTS
 
Research and development costs are expensed as incurred. Research and development costs for the three months ended March 31, 2009 and 2008 were $288,572 and $0, respectively.
 
IMPAIRMENT OF LONG-LIVED ASSETS
 
The Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Per SFAS 144, the Company is required to periodically evaluate the carrying value of long-lived assets and to record an impairment loss when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset’s carrying amounts.
 
In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company concluded that as of March 31, 2009 and December 31, 2008 there were no significant impairments of their long-lived assets.
 
INCOME TAXES
 
Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax bases of existing assets and liabilities based on currently enacted tax laws and tax rates in effect in the PRC for the periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes.
 
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. No material differences were noted between the book and tax bases of the Company assets and liabilities, respectively, therefore, there are no deferred tax assets or liabilities as of March 31, 2009 and December 31, 2008. Yongye Nongfeng is subject to PRC Enterprise Income Tax at a rate of 25% of net income from its foundation on January 4, 2008 to March 31, 2008, and 1.25% of gross revenue since April 1, 2008.

 
8

 
 
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
 
The financial position and results of operations of the Companys Chinese subsidiaries are determined using the local currency (Chinese Yuan) as the functional currency, while the reporting currency is the US dollar. Assets and liabilities of the subsidiaries are translated at the prevailing exchange rate in effect at each period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income statement accounts are translated at the average rate of exchange during the period. Translation adjustments arising from the use of different exchange rates from period to period are included in the cumulative translation adjustment account in shareholders equity. Gains and losses resulting from foreign currency transactions denominated in other than the functional currency are included in operations as incurred. Such gains and losses were immaterial for the three months ended March 31, 2009 and 2008.
 
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The carrying amounts of cash and cash equivalents, trade, related party and other receivables, accounts and other payables approximate their fair value due to the short-term nature of these instruments.
 
NET INCOME PER SHARE
 
Basic net income per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted net income per share reflects the potential dilution that would occur upon the exercise of outstanding warrants at March 31, 2009. The warrants are anti-dilutive for the three months ended March 31, 2009 but they and other potential common share equivalents may be dilutive in the future.
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurement” (FAS 157). While this statement does not require new fair value measurements, it provides guidance on applying fair value and expands required disclosures. FAS157 is effective for the Company beginning in fiscal 2008, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis, and is effective beginning in fiscal 2009, for fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The impact of the adoption of FAS 157 on the Companys financial statement is included in Note 8 to consolidated financial statements.
 
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159). The statement, which is expected to expand fair value measurement, permits entities to choose to measure many financial instruments and certain others items at fair value. FAS 159 is effective for the Company beginning in this first quarter of 2009. This pronouncement does not have a material impact on the Companys financial statements.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133” (“SFAS No. 161”), which required enhanced disclosures about an entitys derivative and hedging activities and was intended to improve the transparency of financial reporting.  SFAS No. 161 applies to all derivative instruments, including bifurcated derivative instruments and related hedging items accounted for under SFAS No. 133 and its related interpretations.  SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of:  (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows.  The provisions of this standard do not require disclosures for earlier periods presented for comparative purposes at initial adoption.  SFAS No. 161 was effective for fiscal years and interim periods beginning after November 15, 2008.  The Company adopted this new standard effective January 1, 2009.  The required disclosures are included in note 8 to consolidated financial statements.
 
NOTE 3-ACCOUNTS RECEIVABLE
 
Net accounts receivable at March 31, 2009 and December 31, 2008 consisted of the following:

   
March 31, 2009
   
December 31, 2008
 
             
Account receivable
  $ 6,360,356     $ 3,053,380  
Less: allowance for doubtful accounts
    (232,010 )     (305,338 )
Total
  $ 6,128,346     $ 2,748,042  
 
 
9

 

   
Three months ended March 31, 2009
 
   
Balance at beginning of
period
   
Additions
   
Reversal
   
Balance at end
of period
 
                         
Allowance for doubtful accounts
    305,338           $ (73,328 )   $ 232,010  
 
Of the accounts receivable at March 31, 2009, $2,191,189 was paid by a customer on March 30, 2009, but due to the transfer process between its bank and ours, the Company was credited for the amount on April 1, 2009.
 
A bad debt provision of $73,701 was reversed for the three months ended March 31, 2009.
 
NOTE 4-INVENTORIES
 
Inventories at March 31, 2009 and December 31, 2008 consisted of the following:

   
March 31, 2009
   
December 31, 2008
 
             
Finished goods
    22,152,212       20,664,930  
Consumables
    49,038       43,263  
Total
  $ 22,201,250     $ 20,708,193  
 
NOTE 5-PROPERTY AND EQUIPMENT
 
Property and equipment at March 31, 2009 and December 31, 2008 consisted of the following:

   
March 31, 2009
   
December 31, 2008
 
             
Buildings and structures
  $ 3,661,586     $ 3,656,992  
Machinery and equipment
    1,481,827       673,480  
Office equipment and furniture
    202,272       85,087  
Vehicles
    1,347,461       824,013  
Software
    17,178       17,156  
Leasehold improvements
    219,119       218,844  
      6,929,443       5,475,572  
                 
Less: Accumulated depreciation
    212,230       107,498  
                 
Total
  $ 6,717,213     $ 5,368,074  
 
Depreciation expense for the three months ended March 31, 2009 and 2008 was $104,582 and $42,784, respectively.
 
Among the vehicles, 14 cars in the initial amount of $865,514 were pledged for the initial long-term banks loans of $528,661 which were received for purchasing those cars (see Note 7).
 
NOTE 6- INTANGIBLE ASSETS
 
Net intangible assets at March 31, 2009 and December 31, 2008 were as follows:

   
March 31, 2009
   
December 31, 2008
 
             
Patent
  $ 106,192     $ 106,059  
Less: accumulated amortization
    13,274       10,606  
                 
Total
  $ 92,918     $ 95,453  
 
Product patent was acquired by the Company in March 2008 with an estimated useful life of 10 years. It is amortized using the straight-line method over its useful life commencing on April 1, 2008. Amortization expense for the three months ended March 31, 2009 and 2008 amounted to $2,654 and $0, respectively. The estimated aggregate amortization expense for each of the five succeeding fiscal years is $10,606.

 
10

 
 
NOTE 7 - LONG-TERM LOANS
 
From August 2008 to March 2009, the Company financed the purchase of 14 cars with initial bank loans of $528,661. The Company pledged those 14 cars with an initial value of $865,541 to the loans. The loans all have 3-year terms and are paid in monthly installments. Interest on the loans ranges from 5.45% to 14.80% annually. These loans were obtained by individuals who are employees of the Company on behalf of the Company. The Company and the individuals entered into agreements of trust whereby the Company is entitled to the cars and is responsible for payments on the loans. Under the loan agreements, the Company must make specified payments monthly. The aggregate amount of such required payments at March 31, 2009 is as follows:
 
2009
  $ 152,856  
2010
    203,807  
2011
    157,261  
2012
    5,991  
Total
    519,915  
Less: Amount representing interest
    (61,969 )
Total at present value
  $ 457,946  

For the period ended, March 31, 2009, the current portion of long-term loans was $166,448 which is scheduled to be repaid on or before March 31, 2010, while the long-term portion is $291,498. The Company's total payments under the agreements were $44,955, which included interest expense of $9,833, during the three months ended March 31, 2009.
 
NOTE 8 - CAPITAL STOCK
 
Concurrent with the “Share Exchange”, the Company entered into a securities purchase agreement on April 17, 2008 with certain investors (the “April Investors”) for the sale in a private placement of an aggregate of 6,495,619 shares of the Company’s common stock, par value $0.001 per share (the “April Investor Shares”) for aggregate gross proceeds equal to $10,000,651 (the “ April Offering ”).

On September 5, 2008, the Company entered into a securities purchase agreement, with certain investors (the “September Investors”), for the sale in a private placement of an aggregate of 6,073,006 shares of the Company’s common stock, par value $0.001 per share (the “September Investor Shares”) for aggregate gross proceeds equal to approximately $9,350,000 (the “September Offering”).

Warrants

Concurrent with the “April Investor Shares”, the Company issued 1,623,905 warrants to purchase 1,623,905 shares of the Company’s common stock (the “April Warrants”) to the “April Investors”. The warrants issued have a 5 years exercise period with an initial exercise price of $1.848. In addition, 649,562 warrants were issued to Roth Capital Partners, LLC (“Roth”) as the placement agent with terms and exercise price identical to the warrants issued to the April Investors.

Concurrent with the “September Investor Shares”, the Company issued 1,518,253 warrants to purchase 1,518,253 shares of the Company’s common stock (the “September Warrants”) to the “September Investors”. The warrants issued have a 5 years exercise period with an initial exercise price of $1.848. In addition, 607,301 warrants were issued to Roth as the placement agent with terms and exercise price identical to the warrants issued to the September Investors.

On September 12, 2008 Roth Capital executed an irrevocable cashless exercise of its warrants and was issued 686,878 shares of common stock of the Company pursuant to the April 17, 2008 and September 5, 2008 warrants issued to Roth as placement agent. In exchange for the issuance of 354,987 shares, Roth surrendered 649,562 warrants received in the April Offering; and in exchange for the issuance of 331,891 shares, Roth surrendered 607,301 warrants received in the September Offering.

In accordance with the warrant agreements, if the Company, at any time the warrants are outstanding, issues any common stock or common stock equivalents, as defined, at an effective price less than the then warrant exercise price, the exercise price of the warrants will be reduced to the effective price of the newly issued common stock or common stock equivalents.
 
At March 31, 2009, there are 3,142,158 warrants outstanding with a weighted average exercise price of $1.848.  Of this total, 1,623,905 expire in April 2013, and 1,518,253 expire in September 2013.

As of March 31, 2009 the fair value of all of our outstanding derivative liability warrants was $1,899,920. The change in their fair values during the three months ended March 31, 2009 of $208,011 in fair value is reported as a non-cash gain in our consolidated statement of income and comprehensive income.

In January 2008, the Company adopted SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 states that a fair value measurement should be based on the assumptions that market participants would use in pricing the asset or liability and establishes a fair value hierarchy that ranks the inputs used to measure fair value by their reliability. The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:

Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.
Level 2—inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly.

 
11

 

Level 3—unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The estimated fair values of the Company’s Investor Warrants and Roth Warrants were determined at March 31, 2009 and December 31, 2008 using Binominal Option Pricing Model with Level 2 inputs.
 
The following table sets forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted for at fair value as of March 31, 2009 and December 31, 2008.
 
         
Fair Value Measurements Using:
 
         
Quoted Prices in
Active Markets for
Identical Financial
   
Significant Other
   
Significant
 
   
Total
   
Assets and Liabilities
   
Observable Inputs
   
Unobservable Inputs
 
March 31, 2009
        
 Level 1 
   
Level 2   
   
Level 3    
 
                         
Liabilities at fair value:
 
 
   
    
   
   
   
     
 
Derivative liabilitieswarrants
     1,899,920             1,899,920          
                                 
Net Liabilities
  $ 1,899,920     $     $ 1,899,920     $    

         
Fair Value Measurements Using:
 
         
Quoted Prices in  
Active Markets for  
Identical Financial
   
Significant Other
   
Significant
 
   
Total
   
Assets and Liabilities
   
Observable Inputs
   
Unobservable Inputs
 
December 31, 2008
          
Level 1
   
Level 2
   
Level 3
 
                         
Liabilities at fair value:
 
 
   
    
   
   
   
     
 
Derivative liabilitieswarrants
     2,107,931             2,107,931        
                                 
Net Liabilities
  $ 2,107,931     $     $ 2,107,931     $  
 
The fair values of the warrants granted are as follows:
Fair value of Warrant per share (USD) at:
 
2008
April Warrants
   
2008
September Warrants
 
             
April 17, 2008
 
$
1.07
   
 $
N/A
 
September 5, 2008
   
N/A
     
2.08
 
December 31, 2008
   
0.66
     
0.68
 
March 31, 2009
 
$
0.59
   
$
0.62
 

The fair values of the warrants as of March 31, 2009 were determined based on the Binominal option pricing model, using the following assumptions:

   
April Offering
   
September
Offering
 
             
Expected volatility
    62.0 %     61.0 %
Expected dividends yield
    0 %     0 %
Expected time to maturity
 
4.05 years
   
4.44 years
 
Risk-free interest rate per annum
    1.474 %     1.474 %
Fair value of underlying Common Shares (per share)
    1.50       1.50  
Exercise multiple
    2.4       2.4  

 
12

 

Escrow shares

In connection with the April Offering, we also entered into an escrow agreement with Roth as a representative of the Investors, Tri-State Title & Escrow LLC (the “Escrow Agent) and Full Alliance International Limited (The “Full Alliance), one of the Shareholders (the “April Escrow Agreement), pursuant to which 2,000,000 of the Shares (the “April Escrow Shares) were delivered to the Escrow Agent. The Escrow Shares are being held as security for the achievement of $10,263,919 after tax net income (“ATNI) for the year ended December 31, 2008 (the 2008 “Net Income Threshold). As shown in the 2008 Form 10-K, the ATNI threshold has been achieved. The releasing back of Escrow Shares to Full Alliance was not completed as of March 31, 2009.

In connection with the September Offering, we entered into an escrow agreement with Roth, the Escrow Agent and Full Alliance (the “September Escrow Agreement), pursuant to which 4,000,000 of the Shares issued to Full Alliance in the Share Exchange (the “September Escrow Shares) were delivered to the Escrow Agent. Of the September Escrow Shares, 2,000,000 shares (the “Make Good Escrow Shares”) are being held as security for the achievement of 2008 and 2009 Make Good ATNI in the following manner. If the Company achieves (i) the 2008 Net Income Threshold, and (ii) fully diluted earnings per share reported in the 2008 Annual Report on Form 10-K filed with the SEC (the “2008 Annual Report”), of no less than $0.42 (the “2008 Guaranteed EPS”), then the provisions described in the following paragraph apply with respect to the achievement of 2009 net income and fully diluted earnings per share targets and the Make Good Escrow Shares will be retained in escrow for the achievement of certain net income and fully diluted earnings per share targets for the year ending December 31, 2009. If the Company does not achieve the Make Good ATNI, the Make Good Shares will be released pro-rata to the September Offering investors. As shown in the 2008 Form 10-K, the ATNI and EPS thresholds have been achieved.

In the event that (i) the 2009 After Tax Net Income equals or exceeds $12,649,248 and is less than $15,811,560, or (ii) the fully diluted earnings per share reported in the 2009 Annual Report on Form 10-K filed with the SEC (the “2009 Annual Report”), equals or exceeds $0.42 and is less than $0.53, then Make Good Shares equal to the product of (i)(A) $15,811,560 minus the 2009 After Tax Net Income, divided by (B) $15,811,560, and (ii) the Make Good Escrow Shares, shall be transferred to the September Investors on a pro-rata basis, and the remaining Make Good Shares shall be returned to Full Alliance. If the 2009 ATNI exceeds $15,811,560, the 2,000,000 Make Good Escrow Shares will be released back to Full Alliance.
 
The remaining 2,000,000 escrow shares are being held as security for the timely issuance of Inner Mongolia Yongyes fertilizer License into the name of Yongye Nongfeng Biotechnology Co. and completion of the CJV Restructuring as defined below (the “Restructuring Make Good Shares”). This license is issued by the Ministry of Agriculture and gives the owner the right to manufacture and sell fertilizer products domestically. In the event that (1) the License has not been issued to Yongye Nongfeng Biotechnology by June 30, 2009, or such later date as agreed to by us and the September Investors holding a majority of the September Investor Shares at such time (the “License Grant Date”), or (2) the License has been issued by the License Grant Date, but the CJV Restructuring is not completed by the Restructuring Completion Date, the Restructuring Make Good Shares shall be transferred in accordance with the September Escrow Agreement to the September Investors on a pro-rata basis for no consideration other than their respective investment amounts paid to us at the closing of September Offering. The “Restructuring Completion Date” shall be the date that is 132 calendar days after the License Grant Date. If the License is issued by the License Grant Date and the CJV Restructuring is completed by the Restructuring Completion Date, the Restructuring Make Good Shares shall be returned to Full Alliance.
 
NOTE 9 - NONCONTROLLING INTEREST
 
The Companys main operating subsidiary was incorporated on January 4, 2008 under the corporate laws of the PRC by Inner Mongolia Yongye and ASO, a Hong Kong based company. During the year ended December 31, 2008, the Predecessor invested $100,000 in Yongye Nongfeng by contributing a patent and ASO made 4 cash investments totaling $ 16,778,741. No additional investment in CJV was made by Inner Mongolia Yongye or ASO during the three months ended March 31, 2009.

 
13

 
 
Inner Mongolia Yongye was a 0.5% owner of Yongye Nongfeng and ASO 99.5% pursuant to a Sino-Foreign Cooperative Joint Venture Contract (the “Contract”). However, ASO didnt fully pay the contractual registered capital into Yongye Nongfeng. Based upon actual capital injection into the CJV, Inner Mongolia Yongye is a 0.6% owner of Yongye Nongfeng Biotechnology and ASO is a 99.4% owner. For the three months ended March 31, 2009, net income attributable to noncontrolling interest was $18,522.
 
NOTE 10 - STATUTORY COMMON WELFARE FUND
 
As stipulated by the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
 
(i)
Making up cumulative prior years losses, if any;
(ii)
Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the
 
fund amounts to 50% of the Companys registered capital;
(iii)
Allocation of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Companys “Statutory common welfare
 
fund”, which is established for the purpose of providing employee facilities and other collective benefits to the Companys employees. Chinese
 
companies invested in by companies registered outside mainland China, including joint ventures, are exempted from contributing to this fund;
(iv) 
 Allocations to the discretionary surplus reserve, if approved in the shareholders annual general meeting.
 
The Companys subsidiary, Yongye Nongfeng, provided $281,369 to the statutory surplus reserve for the three months ended March 31, 2009. Yongye Nongfeng did not provide a reserve for the welfare fund for the three months ended March 31, 2008.
 
NOTE 11 EMPLOYEE BENEFIT PLANS
 
The employees of the Company who are domiciled in the PRC receive coverage under a comprehensive benefit plan as required by the local social security governing bureau. The calculation for contribution by eligible employees is based on 20% of the base salary. The contribution paid by the Company and Yongye Nonfeng on behalf of their employees for this defined benefit plan was $12,205 and $5,366 for the three months ended March 31, 2009 and 2008, respectively.
 
In addition, the Company is required to contribute a portion of the employees base salary for those employees domiciled in Beijing in the following manner - approximately 10% for medical benefits, 1.5% for unemployment benefits and 1.3% for workers compensation. Contributions for the employees located in Inner Mongolia for these benefits are not required for the three months ended March 31, 2009 and 2008. The PRC government is directly responsible for the payments of the benefits to these employees. The amounts contributed by the Company and Yongye Nonfeng were $5,870 and $2,802 for the three months ended March 31, 2009 and 2008, respectively.
 
NOTE 12 - INCOME TAXES
 
A reconciliation between taxes computed at the United States statutory rate of 34% and the Companys and Yongye Nongfengs effective tax rates is as follows:
 
Yongye
 
Yongye
 
 
International, Inc. and Subsidiaries
 
Nongfeng
 
 
Three months ended March 31, 2009
 
Three months ended March 31, 2008
 
             
Income before income taxes
$
  3,480,753  
  1,493,708  
Income tax on pretax income at statutory rate
    1,183,456       507,861  
Effect of different tax rates of subsidiary operating in other jurisdictions
    (1,028,009 )     (134,434 )
Income tax at effective rate
  155,447  
$
  373,427  

 
14

 
 
NOTE 13 - LEASE COMMITMENTS
 
The Company entered into a building lease to secure the Beijing office. The lease for the Beijing office spans from January 1, 2008 to December 31, 2010. The lease expense for the Beijing office was $62,262 and $55,338 for the three months ended March 31, 2009 and 2008, respectively. Future minimum lease payments under non-cancellable operating lease agreements at March 31, 2009 are as follows:

December 31, 2009
  $ 176,147  
December 31, 2010
    231,484  
Total
  $ 407,631  
 
NOTE 14 - RELATED PARTY TRANSACTIONS AND BALANCES
 
As of March 31, 2009, the Predecessor is a 0.6% shareholder of the Companys main operating subsidiary, Yongye Nongfeng, and is Yongye Nongfengs only vendor, providing $7,363,768 (100%) and $8,946,780 (100%) of the Companys purchased finished goods for the three months ended March 31, 2009 and 2008, respectively. According to the contract, the Predecessor sells to Yongye Nongfeng at fixed prices of RMB 350 per case for plant products and RMB 120 per case for animal products.
 
As of March 31, 2009 and December 31, 2008, due to the contract manufacturer (Predecessor Company) was $90,169 and $46,739, respectively, and represented the payable generated in purchasing inventory. Due from related party was $274,758 which represented the payment the Company made for the Predecessor for its professional fees and research and development fee of $192,983. It also included $81,775 paid for individual income tax for employees which was subsequently collected through salary deductions. As of December 31, 2008, due from related party is $192,741 and represents the payment the Company made for the Predecessor for its professional fees and research and development fee. The amounts are unsecured and non-interest bearing, and have no defined payment terms.
 
Yongye Nongfeng and the Predecessor entered a lease-exchange arrangement to lease land, buildings and equipment to each other. On June 1, 2008, a land lease agreement was entered into in which Yongye Nongfeng would lease land of 74,153 square meters from the Predecessor from June 1, 2008 to May 31, 2009. On September 28, 2008, a building lease agreement and an equipment lease agreement were entered into in which the Predecessor would lease a building of 3,967 square meters and a set of equipment from Yongye Nongfeng from September 28, 2008 to September 27, 2009. The estimated value of rentals of land lease and the combination of building and equipment lease are not materially different. Therefore, pursuant to the agreements, both Yongye Nongfeng and the Predecessor would not charge any rental to each other for the lease. Additionally, the rental income to be received by the Company and the rental expense to be paid are not material to the Companys 2009 and 2008 results of operations and therefore have not been included.
 
In March 2009, Yongye Nongfeng purchased a set of machinery and equipment, vehicles and office equipment in the amount of $940,531 from Inner Mongolia Yongye (See Note 5 for details of property and equipment).
 
NOTE 15-NET INCOME PER SHARE
 
The following table sets forth the computation of basic and diluted income per share for the periods indicated:
 
   
Yongye International, Inc.
       
   
and Subsidiaries
       
   
(f/k/a Yongye Biotechnology
International, Inc.)
   
Yongye
Nongfeng
 
    
Three months ended
   
Three months ended
 
    
March 31, 2009
   
March 31, 2008
 
    
(Restated - Note 1(C))
       
             
Numerator used in basic net income per share:
           
Net income
  $ 3,306,784     $ 1,120,281  
                 
Shares (denominator):
               
Weighted average ordinary shares outstanding
    26,760,258       11,444,755  
Plus: weighted average incremental shares from assumed exercise of warrants
           
Weighted average ordinary shares outstanding used in computing diluted  net income per ordinary share
    26,760,258       11,444,755  
                 
Net income per ordinary share-basic
  $ 0.12     $ 0.10  
Net income per ordinary share-diluted
  $ 0.12     $ 0.10  

 
15

 
 
NOTE 16 -CONCENTRATIONS AND CREDIT RISKS
 
At March 31, 2009 and December 31, 2008, the Company had a credit risk exposure of uninsured cash in banks of approximately $1,424,268 and $4,477,477, respectively. The Company does not require collateral or other securities to support financial instruments that are subject to credit risk.
 
Five major customers accounted for 90% and one major customer accounted for 39% of the Companys net revenue for the three months ended March 31, 2009. Five major customers accounted for 99% and one major customer accounted for 55% of Yongye Nongfengs net revenue for the three months ended March 31, 2008. The Company and Yongye Nongfengs total sales to five major customers were $11,179,457 and $9,431,953 for the three months ended March 31, 2009 and 2008, respectively.
 
Yongye International, Inc. and Subsidiaries
   
Yongye
 
(f/k/a Yongye Biotechnology International, Inc.)
   
Nongfeng
 
Three months ended March 31, 2009
   
Three months ended March 31, 2008
 
Largest Customers
 
Amount of Sales
   
% Total Sales
   
Largest Customers
 
Amount of Sales
   
%Total Sales
 
Customer A
  $ 4,852,042       39 %  
Customer A
  $ 5,194,640       55 %
Customer B
  $ 2,220,083       18 %  
Customer E
  $ 2,720,548       29 %
Customer C
  $ 1,739,657       14 %  
Customer C
  $ 1,007,885       10 %
Customer D
  $ 1,290,789       10 %  
Customer F
  $ 379,941       4 %
Customer E
  $ 1,076,886       9 %  
Customer D
  $ 128,939       1 %
Total
  $ 11,179,457       90 %  
Total
  $ 9,431,953       99 %
 
The Predecessor is the Companys only vender who provided 100% of the Company purchased finished goods for the three months ended March 31, 2009 and 2008 in the amount of $7,363,768 and $8,946,780, respectively.
 
The company's business is subject to seasonal variations; thus, the results of operations for the three months ended March 31, 2009 and 2008 are not necessarily indicative of a full year's results. Generally, the second and third quarters are peak sales periods, and first and fourth quarters are low sales periods for the Company.
 
The Companys operations are carried out in the PRC. Accordingly, the Company and the Predecessors business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRCs economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
NOTE 17 - RECLASSIFICATIONS
 
Certain reclassifications have been made to the December 31, 2008 balances in order to conform to the current periods presentation.

 
16

 
 
Item 2. Managements Discussion and Analysis of Operations and Financial Conditions.
 
The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. Yongye International, Inc. (f/k/a Yongye Biotechnology International, Inc.) is referred to herein as “we” or “our.” The words or phrases “would be,”will allow,”expect to”, “intends to,” will likely result,”are expected to,”will continue,”is anticipated,”estimate,” or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
 
Restatement of Financial Statements
 
Due to the complexities of placing the April 2008 Escrow Shares and September 2008 Escrow Shares into escrow and subsequently accounting for the performance measures and potential transfer of such shares, the Company believed and accounted for such shares as contingently issuable shares for purposes of calculating earnings per share and excluded such outstanding escrowed shares from the calculation of the weighted average number of common shares outstanding.  However, after further examination, it was determined that since the April 2008 Escrow Shares and September 2008 Escrow Shares are neither contingently cancellable nor contingently returnable to the Company, the shares should have been included in the denominator in computing the Company’s basic and diluted net income per share. The correcting adjustments had no impact on the Company’s previously issued consolidated balance sheet as of March 31, 2008 and consolidated statement of cash flows for the three months then ended.
 
Subsequent to the preparation of the Company’s interim consolidated financial statements as of and for the three months ended March 31, 2009, management identified an error in the Company’s basic and diluted net income per share presented in its previously issued consolidated financial statements. The Company has incorrectly accounted for the April Escrow Shares and September Escrow Shares (See Financial Statements Note 8) as contingently issuable shares for purposes of calculating earnings per share and excluded such outstanding shares that were placed in escrow from the calculation of the weighted average number of common shares outstanding. It was determined that since April Escrow Shares and September Escrow Shares are neither contingently cancellable nor contingently returnable to the Company, the shares should have been included in the denominator in computing the Company’s basic and diluted net income per share.
 
In connection with the April Offering and September Offering in 2008, the Company issued the “April Warrants” and “September Warrants” to certain investors and Roth Capital Partners, LLC (“Roth”) (See Financial Statements Note 8). According to the terms of these warrants, the Company could be required to pay cash to the warrant holders under certain events that are not within the control of the Company.  Specifically, upon the occurrence of certain “fundamental transactions” as defined, the warrant holders (but not the shareholders of the Company’s common stock) are entitled to receive cash equal to the value of the warrants to be determined based on an option pricing model and certain specified assumptions set forth in the warrant agreement.  In accordance with EITF No. 00-19 , such potential cash payments that are not within the Company’s control would preclude equity classification and therefore the warrants should have been classified as a liability and adjusted to fair value through earnings at each reporting dates starting from the issuance date.  In addition, the terms of the warrants include a “down-round” provision under which the exercise price could be affected by future equity offerings undertaken by the Company.  Upon the adoption of EITF Issue No. 07-5, effective January 1, 2009, these warrants are no longer considered to be indexed to the Company’s own stock and should be classified as a liability.
 
As of December 31, 2008, a liability of $2,107,931 representing the fair value of the April Warrants and the September Warrants should have been recorded and the retained earnings should have been increased by $2,118,797 representing the net decrease in fair value of these warrants through December 31, 2008 from their respective dates of issuance. For the three months ended March 31, 2009, the aggregate fair value of the April Warrants and September Warrants decreased by $108,862 and $99,149, respectively. These fair value adjustments should have been recorded through earnings for the respective periods. Refer to Note 1(C) to the accompanying consolidated financial statements for details.
 
Company Overview
 
We are engaged in the research, development and distribution of fulvic acid based liquid and powder nutrient compounds used in the agriculture industry. Our headquarters is in Beijing, China and additional administrative offices and our manufacturing unit are located in Hohhot, Inner Mongolia, China. Currently, we sell two lines of products, both based on our fulvic acid compound base: a plant nutrition liquid compound and animal nutrition powder which is a food additive. Our products start with our proprietary fulvic acid base which is extracted from humic acid, and to which we add other natural substances to customize the base for use in our plant and animal product lines. Based on our internal data and research, we believe our proprietary technology for fulvic acid extraction creates some of the purest and most effective fulvic acid base on the market in China today. We have found that our fulvic acid has a very light weight molecular composition, which we believe improves the overall permeability of cell walls and allows more complete transport of nutrients across plant membranes, effectively strengthening the overall health of plants. We believe our proprietary process for extracting fulvic acid from humic acid and our patented process for mixing our plant nutrient and patent pending process for mixing our animal nutrient are key differentiators in the market and may help us provide a high quality product that we can control from procurement of raw materials to final production, which we also believe may help our products to provide reliable and predictable results from season to season.
 
We are headquartered in Beijing, China and Inner Mongolia Yongye’s manufacturing plant is located in the Inner Mongolia province of China. Currently, we sell two lines of product based on our fulvic acid base: plant nutrition liquid compound and animal nutrition food additive. Our products start with our fulvic Acid base then, in addition, we add other natural substances to customize the base for use in our plant or animal lines of products. Our plant products are intended to add naturally occurring macro and micro nutrients such as nitrogen, phosphorus, potassium, boron and zinc. Our animal products add natural herbs which we believe may help to reduce bacterial inflammation (mastitis) in cows. It also assists many animals to digest food more completely and thus we believe that our animal products may help animals who use them to be healthier.
 
In 2008, we sold approximately 5,100 tons of plant product (427,200 units), which represented 93% of revenue at USD $44.8M. We also sold approximately 6 tons of our animal product (approximately 98,000 units). This represented 7% of revenue at USD $3.25M. In its highly concentrated form, based on internal sales data and readily available government data, our plant product was sprayed on approximately 2% of all available arable land in our 10 provinces and in our largest province, Xinjiang, it was applied to 5% of the land available for cultivation. Yongye’s top 3 provinces by revenue for 2008 represented 82% of sales and were Hebei at $20,541,267 (43%), Xinjiang at $13,177,694 (27%) and Gansu at $ 5,663,011 (12%). By the end of 2008, our manufacturing partner’s capacity enabled us to produce approximately 10,000 ton per annum of Shengmingsu product. These facilities run at almost full capacity to meet peak season demands and store inventory for next year. On average, our Shengmingsu products sell for approximately $10,000 per ton.

 
17

 

Currently, crop production in China is limited to only 155 million hectares of arable farm land which is about 10% of all of Chinas land source. The high population density in China requires that each hectare of land feed an average of 10 people versus the 4.4 world average, which means farm land is being used at close to capacity levels just for domestic production levels. Exports push this to maximum capacity levels so further growth in farming capacity must come from new input technologies.
 
Also, with the growth of the economy has come consumers demand for a wider choice of food options and one key area of growth is the demand for dairy products. The Chinese Government has now attached great importance to the development of this industry and it is now growing after being dormant for many years. However, average yield per cow is only about 2,000kg, indicating relatively low productivity. One major reason for this low production is Mastitis, which is an inflammation of the teats which slows down milk production. This is an industry wide problem where 35-40 cows out of 100 have some form of Mastitis and it is typically treated with antibiotics.
 
With this as a backdrop, we began selling our plant and animal nutrient products into the agriculture industry to help farmers increase their farming outputs. In crop production, our product assists farmers in generating higher yields from their crops and our first line of animal product for dairy cows assists with the reduction of Mastitis to increase milk production.
 
Recent Developments
 
We have recently begun working with distributors in five new provinces, Yunnan, Hainan, Liaoning, Jilin and Heilongjiang, and these distributors are beginning to put our products into a trials process in each province. While we do not expect these provinces to generate a significant portion of our revenue for 2009, our plan is for them to begin to generate revenue in the same manner as our other provinces: strong growth after several growing seasons due to a successful trials process carried out by our distributors. Two of these provinces are in regions with less seasonality impacts on farming and this would help mitigate some or the seasonality on sales which we experience annually. Additionally, we began packaging our animal product into larger containers for bulk sales into farming areas.
 
Overview of First Quarter
 
Demand for our products
 
 One major tenet of the PRC government’s 11th Five-Year National Economic and Social Plan (the “NESDP”) (2006-2010) is the focus towards developing China’s western region.  This is one of the top-five economic priorities of the nation. The goal is to increase rural income growth which will in turn increase demand for more food and agriculture products. Currently, a large majority of our products are sold in this western region and we hope that   this government focus will increase our opportunity to sell more plant and animal nutrients to farmers who have to keep up with the demand for higher quantity and higher quality of products.
 
According to World Bank statistics, well over 45% of the nation’s total workforce at the end of 2008 was comprised of low-income, rural farmers. According to the NESDP (2006-2010), raising the level of rural income is a top economic and social goal for the country. Many government initiatives, including removal of certain agricultural and local product taxes, have been implemented to spur rural income development. The government expects annual rural income to grow between 5% and 10% through 2010 (according to a study issued by the Chinese Academy of Sciences, in April 2009). Additionally, according to the National Population and Family Planning Commission, China’s population will reach 1.5 billion by 2030. Therefore, the country has the challenge of producing approximately 100 million more tons of crops needed to feed the additional 200 million people, which has put pressure on the agricultural system to increase production capacity.
 
 Supply of Finished Goods
 
 Currently, we purchase our finished goods from our main supplier, Inner Mongolia Yongye, and then sell them through our distribution system. In order to generate greater profit margins, we set out to control our cost of goods sold and have put into place a fixed rate contract with our main supplier and this will extend over the next five years. Each quarter we will go through a review process with our supplier to adjust the fixed rate for the next quarter. We did not receive any rate increases in 2008, or to date in 2009.
 
 Earthquake in Sichuan
 
 The earthquake in Sichuan was a devastating event in the recent history of China. While the impact was felt all the way to Beijing, the disruption of business and the ensuing relief efforts were largely contained to the province itself and mainly to the areas nearest the epicenter. Because of this, the impact to our business was minimal. China’s Agriculture Minister Sun Zhengcai said in an interview with Xinhua that agriculture production would not be widely changed due to the earthquake in Sichuan primarily because the local output of the impacted area was quite small. He also mentioned that harvesting had been stepped up to ensure food security nationwide.
 
Seasonality
 
We typically face the seasonal demand patterns similar to other companies in our sector. In general, the first and fourth quarters are typically our slowest quarters and in 2008 we brought in approximately 20% and 6% of sales in these quarters. The second and third quarters drive the bulk of our overall sales with 36% and 38% respectively of the year’s net sales. Our Shengmingsu plant line faces the most seasonality of our two product lines with our Shengmingsu for animals experiencing less fluctuation during the year as a result of seasonal buying patterns. This year, while we did experience fluctuations by quarter of our animal line, we believe that this was due more in part to fluctuations in our sales and marketing efforts than due to seasonal buying patterns. We do not expect to face this type of revenue fluctuation for our animal product, which doesn’t typically experience the same seasonal tapering that our plant product faces.
 
 Drought
 
 In the last six months of 2008, it was widely reported that China faced substantial drought conditions in important agricultural areas (as noted by The Economist in its “China’s Dry Patch” article dated February 6, 2009). This led many to the conclusion that this weather condition would have an overall negative impact on China’s annual agricultural output for 2008 and potentially for 2009 which would then have an impact on our company’s revenue. At the time, we did not believe this to be the case and set out to corroborate this with related government agencies, our sales and support staff, distributors, and branded store network owners in our provincial locations. We then gathered localized information about ways the drought might impact our distributors, their customers and our end users and found that they believed it would not create an impact on their sales and thus on our revenue for 2008. We also do not believe it will impact our sales activities in 2009 at this point in time.
 
In the ensuing months after the initial reports, there were several key events which occurred to mitigate some of the impact of the drought conditions faced by the farmers such as additional governmental spending on increased efforts to irrigate land using other water sources and additional rainfall which fell on once drought impacted areas in northern China as reported in Xinhua on February 9, 2008. The State Flood Control and Drought Relief Headquarters reported that there was a reduction of farmland affected because of these key events (Xinhua February 9, 2009). The government has also begun their stimulus injections into the agriculture community to help ward off the affects of any drought induced financial hardships (as reported in USA Today, February 8, 2009).

 
18

 

Additionally, we believe that several market conditions also bode well for us in the sales of our plant product during this time. Overall, the drought has impacted northern China and primarily large field crop growers such as wheat, corn and soy bean. Currently, our distributors concentrate on selling to farmers who grow economic crops such as tomatoes, celery, turnips, and carrots though in Xinjiang province our product is used on larger farms where field crops are grown such as Lajiao peppers. Additionally, in all drought situations, we believe that the drought resistant nature of our plant product will actually benefit crops because of the increased water retention characteristics of our product. Internal research has shown that fulvic acid has the ability to strengthen plant cells and root systems which then allows plants to retain water more effectively and use it more efficiently, which we believe may, along with other mitigating factors discussed above, help us ward off the impact of the 2008 fall and winter droughts on our sales in our current market area.
 
Agriculture Sector
 
Agriculture continues to be a heavily invested sector in China. Brand name investors continue to invest into China’s agriculture space because they have confidence in China’s long term outlook. The market volume for agriculture products is large, both for domestic sales and export and there is no set threshold for foreign investment into the sector as opposed to other industries, such as energy, finance, mining, and telecommunications. This is driven by the growing demand for higher quality food products domestically and international reliance on food products from China. Currently, China is the world’s biggest grower and consumer of grains and yet must boost crop yields by at least 1 percent a year to ensure the country has enough food to feed its 1.3 billion people, according to the Minister of Agriculture, Sun Zhengcai (China Economic Net, July 21, 2008).
 
Additional policy changes are expected to include protecting farmland and working to increase rural incomes to retain farming interest with the goal being to maintain self-sufficiency in food production by improving yields based on stable farmland. This extended to ensuring crop production for 2009 by targeting idle farmland to grow new crops.
 
New Land Reform Policy
 
Farmland in China is owned by the local government, but given to local farmers under 30 year use contracts. With the allure of higher incomes and better living conditions in the city, farmers have abandoned the land and no others farmers have stepped in to bring it back into production. This has created a shortage of productive agricultural land. The government has acknowledged this issue and recently enacted a new land use reform policy which liberalizes the exchange of land among the nation’s farmers. This creates a new model for China’s 730 million farmers with the idea being to create more stable farmland by shifting the country away from the single household farm plot model to the amalgamation of larger-scale operations which should be more productive due to technology and economies of scale. Farmers will be able to transfer their land-use rights to others through a new market system for rural land-use rights. This will ensure national food security through increasing the supply of agricultural products

 
19

 
 
RESULTS OF OPERATIONS
 
Financial Highlights
 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
   
Yongye International, Inc.
       
   
and Subsidiaries
       
   
(f/k/a Yongye Biotechnology
International, Inc.)
   
Yongye
Nongfeng
 
   
For the Three Months Ended
   
For the Three Months Ended
 
   
March 31, 2009
   
March 31, 2008
 
    
(Unaudited)
   
(Unaudited)
 
             
    
(Restated  Financial Statements
Note 1(C))
       
SALES
  $ 12,435,775     $ 9,528,055  
                 
COST OF SALES
    5,902,607       4,484,261  
                 
GROSS PROFIT
    6,533,168       5,043,794  
                 
SELLING EXPENSES
    2,620,298       3,192,797  
                 
RESEARCH & DEVELOPMENT EXPENSES
    288,572        
                 
GENERAL AND ADMINISTRATIVE EXPENSES
    345,157       357,192  
                 
INCOME FROM OPERATIONS
    3,279,141       1,493,805  
                 
OTHER EXPENSES (INCOME)
               
Interest expenses
    5,958        
Other expenses
    441       97  
Change in fair value of derivative liabilities
    (208,011 )      
TOTAL OTHER EXPENSES
    (201,612 )     97  
                 
INCOME BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST
    3,480,753       1,493,708  
                 
PROVISION FOR INCOME TAXES
    155,447       373,427  
                 
NET INCOME
    3,325,306       1,120,281  
                 
LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTERST
    18,522        
                 
NET INCOME ATTRIBUTABLE TO YONGYE BIOTECHNOLOGY INTERNATIONAL, INC.
    3,306,784       1,120,281  
                 
OTHER COMPREHENSIVE INCOME                 
Foreign Currency Translation Adjustment
    47,945       30,531  
                 
COMPREHENSIVE INCOME
  $ 3,354,729     $ 1,150,812  
                 
Net income per share:
               
Basic
  $ 0.12     $ 0.10  
Diluted
  $ 0.12     $ 0.10  
Weighted average shares used in computation:
               
Basic
    26,760,258       11,444,755  
Diluted
    26,760,258       11,444,755  

 
20

 
 
THREE MONTHS ENDED MARCH 31, 2009 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2008
 
Our business for the three months ended March 31, 2009 remained on track with our estimates due to the growth in revenue of 31% and the overall growth of net income of 195% over the same period in 2008. This demonstrates that while the first quarter is one of our slower quarters due to seasonality, we were still able to increase sales to meet our overall growth plans. This is due largely to the Company selling over 97,465 units of its plant nutrient product in the quarter ended March 31, 2009, which was a 26% increase over the 75,596 units sold in the corresponding period in 2008. This increase in units sold was due primarily to expansion of the distribution network, and a strong performance by the distributors who develop and maintain the independently owned, branded store network which sells our plant products.

The approximate 2,000 retail stores selling Shengmingsu products have been assembled into a network of stores through the work of our distributors. These stores have typically been in existence for many years and sell many other agriculture products including competitive products and we do not receive payment from the owner and they do not pay Yongye Nongfeng any fees or distribute any profits to us. Each distributor works to source successful, independently owned agricultural product stores to bring them into their segment of the branded store network. Our distributors work with the store owner to feature Yongye products in a prominent fashion and will also display brochures and advertisements for our products. Some stores will feature a computer which runs our current infomercials. Before the store is brought into the Branded Store network, it may be selling Yongye products as a “non-branded” store as arranged with our distributors. To become a “branded store” the distributor may require the store to go through a trials process to ensure the store reaches certain performance standards set by the distributor and the distributor will alone determine whether or not the store is considered a branded store. While we work with all of our distributors to standardize this model so that a minimum level of similarity is replicated across all the branded stores, it is implemented by the distributor.
 
Net Sales
 
Sales of $12,435,775 in the first quarter of 2009 was an increase of $2,907,720 from $9,528,055 in the same period in 2008, which was an overall increase of 31% in revenue. This increase was driven by increased customer demand throughout our distribution channels including an increase in the number independently owned stores brought into our network which are now selling our product. Included in the 31% increase is 6% attributable to appreciation of Chinese Yuan related to US dollar in three months ended March 31, 2009 compared to three months ended March 31, 2008.
 
Sales Revenue and Gross Profit
 
Sales revenue increased by $2,907,720 to $12,435,775 in the period ended March 31, 2009 from $9,528,055 in the same period ended March 31, 2008 which was a 31% increase overall. Gross Profit also increased 30% over the prior period, which was an increase from $5,043,794 to $6,533,168, or $1,489,374, over the period ended March 31, 2008. Gross Margin stayed flat between the two periods and was primarily due to our fixed rate contract with our finished goods supplier which has remained constant in price since it was established.
 
The number of independently owned stores brought into our branded store network grew to 2,000 in the period ended March 31, 2009 from 350 in the same period ended March 31, 2008, which was an increase of 471%. This was due in large part to continued growth of the network throughout 2008 and the conversion of many non-branded stores into branded stores. Additionally, another 1,500 of these stores were brought into our network and either carry our product as a retail sales point or are on a “trials” basis and will be evaluated by the distributor as to their qualifications to become a branded store. This brings the total number of stores selling our Shengmingsu product to 3,500.

 
21

 
 
Sales by Product Line
 
The revenue of our plant product increased 32% and the revenue of our animal product increased 22% in the period ended March 31, 2009 compared to the same period in 2008.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative (“SG&A”) expenses decreased by $295,962 to $3,254,027 in the period ended March 31, 2009 from $3,549,989 in the previous period in 2008, which was a 8% decrease. As a percentage of sales for this period ended March 31, 2008, SG&A decreased 11% to 26% as compared to 37% in the period ended March 31, 2008. This decrease in overall percentage of sales was due primarily to one-time going public company expenses incurred by the Company in the period ended March 31, 2008.
 
Research and Development
 
Additionally, we incurred $288,572 of research and development fees in the period ended March 31, 2009 as compared to $0 in the period ended March 31, 2008. This is a planned increase in the scope of our business as contemplated in the cooperation agreement when the CJV was established and will enable the Company to further develop the Shenmingsu brand of products.
 
Change in fair value of derivative liabilities
 
The Company has accounted for warrants issued to investors in April Offering and September Offering in year 2008 as liabilities measured at fair value. The change in their fair value during the three months ended March 31, 2009 was recorded in Consolidated Statement of Operation as a gain of $208,011.
 
Income Tax
 
The Company did not carry on any business and did not maintain any branch office in the United States during the three months ended March 31, 2009 and 2008. Therefore, no provision for withholding or U.S. federal income taxes or tax benefits on the undistributed earnings and/or losses of the Company has been made.

The Company’s Cooperative Joint Venture subsidiary, Yongye Nongfeng Biotechnology Co. (“Yongye Nongfeng”), is subject to PRC Enterprise Income Tax at a rate of 25% of net income from its foundation on January 4, 2008 to March 31, 2008, and 1.25% of gross revenue since April 1, 2008.  The difference in tax rates occurred because, while the CJV was entitled to the “Check and Ratify” taxation method rate, and did apply for it, the CJV did not receive approval for such rate until the second quarter of 2008. Under the PRC taxation system, the enterprise income taxation is conducted on a quarter by quarter basis and, therefore, we were subject to the rate of 25% of net income for the full first quarter of 2008 and computed the tax at 1.25% of gross revenue for the remaining three quarters of 2008 and this first quarter of 2009. Subsequent to initial filing of our Form 10-Q for the quarter ended March 31, 2009, the PRC tax authorities notified us that the “Check and Ratify” taxation method is no longer valid for the CJV and it is now subject to 25% of net income before tax from January 1, 2009.
 
For the three months ended March 31, 2009, the Company’s income tax expense was $ 155,447 and income tax payable as of March 31, 2009 was $352,644 compared to $373,427 and $381,255 for the same period in 2008.
 
Net income
 
Net income for the period ended March 31, 2009 increased by $2,186,503 to $3,306,784 from $1,120,281 in the same period ended March 31, 2008, which was a 195% increase. However, this also represented an increase in net margin of 15% in the period ended March 31, 2009 to 27% compared to 12% in the same period ended 2008. This is due to a more normal operating cycle of expenses as mentioned above.
 
Basic and diluted earnings per share (EPS) for the three months ended March 31, 2009, were $0.12 and $0.12, respectively, compared to $0.10 and $0.10, in the same period last year. The weighted average shares outstanding used to calculate basic and diluted EPS for the comparative periods were 26,8 million and 26.8 million and 11.4 million and 11.4 million, respectively.
 
Foreign Currency Translation and Transactions
 
The financial position and results of operations of the Company’s Chinese subsidiaries are determined using the local currency (Chinese Yuan) as the functional currency, while the reporting currency is the US dollar. Assets and liabilities of the subsidiaries are translated at the prevailing exchange rate in effect at each period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income statement accounts are translated at the average rate of exchange during the period. Translation adjustments arising from the use of different exchange rates from period to period are included in the cumulative translation adjustment account in shareholders’ equity. Gains and losses resulting from foreign currency transactions denominated in other than the functional currency are included in operations as incurred. Such gains and losses were immaterial for the three months ended March 31, 2009 and 2008.
 
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.

 
22

 
 
Liquidity and Capital Resources
 
Inner Mongolia Yongye has historically financed its operations and capital expenditures principally through shareholder loans, bank loans, and cash provided by operations. As a newly formed Cooperative Joint Venture, Yongye Nongfeng, has used the net proceeds of both the April and September Offerings of approximately $20 million to finance the purchase of raw materials and finished inventory from Inner Mongolia Yongye, capital equipment and an expansion of our facilities and production, build out of our distribution network through advertising and marketing programs and their associated expenses, and increasing the number of our branded stores that distributors will do once they have more product available and more advertising coverage. We believe customers will increase, product will be pulled through the channels and distributors will penetrate the market with more branded stores to accommodate and spur sales growth.
 
As is customary in the industry, we provide payment terms to most of our distributors which typically exceed the terms that we ourselves receive from our finished goods suppliers.  We typically provide 90 day terms to our provincial level customers and ask for all others to make cash payments up front or upon delivery.  Therefore, the Company’s liquidity needs have generally consisted of working capital necessary to finance receivables and raw material inventory. We believe that over the next 12 months our existing cash, cash equivalents and cash flows from operations will be sufficient to meet our anticipated future cash needs. We may, however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. We will determine how to meet these specific cash flow needs as they arise. Therefore, there can be no assurance that such additional investment will be available to us, or if available, that it will be available on terms acceptable to us. Cash and Cash Equivalents balance amounted to $1,424,268 and $157,579 as of March 31, 2009 and March 31, 2008 respectively.
 
Financial Cash Flow Highlights Three Months Ended

   
Yongye
   
Yongye
       
   
International, Inc.
   
Nongfeng
   
Increase /
 
   
March 31, 2009
   
March 31, 2008
   
(decrease)
 
Net cash (used in)/provided by operating activities
  $ (1,671,107 )   $ 194,640       (959 )%
Net cash used in investing activities
  $ (1,446,782 )   $ (213,919 )     576 %
Net cash provided by financing activities
  $ 59,664     $ 150,000       (60 )%
Effect of exchange rate change on cash and cash equivalents
  $ 5,016     $ 26,858       (81 )%
Net (Decrease)/increase in cash and cash equivalents
  $ (3,053,209 )   $ 157,579       (2,038 )%
Cash and cash equivalents at beginning of period
  $ 4,477,477     $       N/A  
Cash and cash equivalents at end of period
  $ 1,424,268     $ 157,579       804 %
 
In summary, our cash flows were:
 
Net cash used in operating activities decreased in the period ended March 31, 2009 by $1,865,747 to $1,671,107 from net cash provided by operating activities of $194,640 for the period ended March 31, 2008, which represented a 959% decrease over the prior period.
 
Although our sales in the first quarter of 2009 increased $2,907,720 compared to the first quarter of 2008, the cash used in accounts receivables decrease $3,897, 395 which was mainly because as we has build up our brand name among farmers, we do not provide such long credit terms to the new distributors but require them to pay most of the amounts in advance. This change in credit policy caused us to receive large advances from customers $1,869,400 at December 31, 2008. As the customers used these advance payments to purchase our products in the current quarter, the cash provided by advance from customer decreased $1,789,533 compared to the three months ended March, 31, 2008.
 
When compared to the first quarter of 2008, we experienced increased sales and a higher turnover rate which caused the cash used for inventories to decrease by $3,089,386. On the other side, to insure the manufacturing quantity and goods supply from our only supplier, we made quicker payments to our supplier, which caused the cased provided by accounts payable decreased 6,924,404. Cash provided by accrued expenses of 2,320,525 was mainly due to significant going-listed expenses during the first quarter of 2008, which did not occurred in 2009. This was off-set by an increase in net income of $2,203,917 or an increase of 195% over the prior period ended March 31, 2008. Additionally, as mentioned above, payments to offset accounts receivable outstanding would have increased substantially more by the end of March 31, 2009, however, a payment of $2,191,189 was remitted by one customer on March 30, 2009, but due to an elongated cross bank transfer process, the Company didn’t receive the payment until April 1, 2009.
 
Net cash used in investing activity increased by $1,232,863 in the period ended March 31, 2009 compared to the same period ended in 2008 which is due to our acquisition of machinery and equipment and vehicles from Inner Mongolia Yongye and third parties.
 
Net cash provided by financing activities decreased by $90,336 to $59,664 in the period ended March 31, 2009 compared to the same period ended in 2008. This was because during the three months ended March 31, 2008, Yongye Nongfeng’s shareholder ASO invested $150,000 into Yongye Nongfeng, while during the three months ended March 31, 2009, we only financed $89,534 from the bank loans which was off-set by the $29,870 repayment to the bank loan during the period.
 
The Financial Crisis
 
While in many ways imperceptible to the general populace in China, the global credit crisis has indeed impacted China over the past six to nine months. The consumer goods and logistics industries have been the hardest hit with increased prices and decreased demand which has resulted in factory closings primarily in the south. However, some have said this is a blessing in disguise as China aims to modify its economic structure after three decades of breakneck growth (Reuters, February 5, 2009). This is because, China will find it impossible to avoid the global downturn due to its reliance on international trade and this will indicate to China that this reliance is not healthy and it needs to change these unhealthy trade patterns. (Xinhua, October 13, 2008). China’s economy has maintained an average annual growth of about 10 percent for 30 years since the reform and opening-up policy was adopted, compared with a mere 3.3 percent for the world economy. For the last five years, it expanded 10.6 percent each year on average.

 
23

 
 
Financial position at quarter ended March 31, 2009 (unaudited) and the year ended December 31, 2008:

   
March 31, 2009
Unaudited
   
December 31, 2008
   
Increase/(decrease)
 
   
(Restated- Financial
Statement Note 1(C))
   
(Restated- Financial
Statement Note 1(C))
       
Cash
  $ 1,424,268     $ 4,477,477       (68 )%
Accounts Receivable, net
  $ 6,128,346     $ 2,748,042       123 %
PP&E, net
  $ 6,717,213     $ 5,368,074       25 %
Total assets
  $ 37,250,212     $ 34,504,261       8 %
Long term debt
  $ 291,498     $ 230,121       27 %
Total stockholders’ equity
  $ 30,656,987     $ 27,300,603       12 %
 
Cash decreased to $1,424,268 at the end of March 31, 2009 from $4,477,477 at the end of December 31, 2008 which was an overall decrease of $3,053,209, or 68%. This was primarily due to an increase in accounts receivable, and payments for the increase in property, plant and equipment. Accounts receivables increased by 123% to $6,128,346 as of March 31, 2009 from $2,748,042 as of December 31, 2008, due to increased growth in sales for the recent period. Of the accounts receivable outstanding on March 31, 2009, a payment of $2,191,189 was remitted by one customer on March 30, 2009, but due to an elongated cross bank transfer process, the Company didn’t receive the payment until April 1, 2009.
 
The changes described above were generally due to the fact that our largest customers typically pay us 90 days after we ship products to them, which is according to the terms set in the agreements with them.  Because we are constrained by the seasonal forces and the elongated payment terms of the agriculture industry, we slowly build up accounts receivable starting in the first quarter and more rapidly add to this throughout the peak season of the second and third quarter. As the end of the year approaches, we typically have had the ability to collect a great deal of our receivables so as to start the new year with a much lower balance.
 
Because of the seasonal nature of agriculture industry, the peak season for the sale of our product is in the second and third quarters of the year. We normally build up inventory in the first and fourth quarters to prepare for shipments to customers as they order product for the peak selling season in the second and third quarters. The significant increase in the balance of inventory we recently experienced was in line with this business practice. Additionally, our contract manufacturer brought on increased capacity from 2,000TPA to 10,000TPA in preparation for increased sales of the product which we expect to occur. We expect that we will maintain a similar balance in the future year ends.
 
Property, plant and equipment increased to $6,717,213 at March 31, 2009 from $5,368,074 at December 31, 2008, which was a 25% increase and was largely due to the restructuring effort put underway as part of the September Financing whereby we were required to acquire the Predecessor’s 2000TPA equipment after being valued by an independent valuation company.
 
Additionally, shareholders’ equity increased by $3,356,384 to $30,656,987 at the end of March 31, 2009, which was an overall 12% increase compared to $27,300,603 at December 31, 2008 and was due primarily to an increase in retained earnings of $3,025,415 or 25% in March 31, 2009 over the period ending December 31, 2008.
 
Accounts receivable Days Sales Outstanding (“DSO”) is defined as average accounts receivable for the period divided by net sales per day and decreased 2 days to 32 days for the period ended March 31, 2009 from 34 days in the same period ended 2008, which is due to our increased efforts to collect accounts receivable and gain more advanced payments from distributors. Days Sales in Inventory (“DIO”) is defined as average inventory in the period divided by the cost of sales per day and increased to 341 days in the period ended March 31, 2009 from 91 days in the same period ended 2008 due to our build up of inventory to prepare for the major selling season starting in the second quarter.
 
Impact of inflation
 
We are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment measures. We do not believe that inflation risk is material to our business or our financial position, results of operations or cash flows at this time.
 
Off Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements as defined by standards issued by the Financial Accounting Standards Board, and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Use of estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the useful lives of and impairment for property, plant and equipment, and potential losses on uncollectible receivables. Actual results could differ from these estimates.
 
We estimate the useful lives of our property, plant and equipment (“PP&E”) under the assumption that they are capable for use in the period commonly observed for the similar type of PP&E, and there is no indication that revolutionary technology will appear in the foreseeable future that would cause them to be obsolete.
 
24

 
As we discussed in the notes to financial statements, we routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of our customers, establishes an allowance for uncollectible accounts receivable. As a consequence, we believe that our accounts receivable credit risk exposure beyond such allowances is limited. The Company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectability and are maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Based on the age of the receivables, the Company reserves 10% of accounts receivable balances that have been outstanding for more than 6 months but less than one year, 20% of accounts receivable balances that have been outstanding between one year and two years, 50% of receivable balances that have been outstanding between two year and three years, and 100% of receivable balances that have been outstanding for more than three years. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer's inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. We base the Accounts Receivable and Bad Debt Reserve policy on the historical experience of the Predecessor company’s sale and collection rates for the same products.
 
We believe that the accounting estimates related to useful lives of PP&E and potential losses on uncollectible receivables are “critical accounting estimate” because: (1) It is susceptible to change from period to period because it requires company management to make assumptions about future sales and cost of sales over the lives of the PP&E; and (2) the impact that recognizing an allowance for uncollectible accounts receivables would have on the assets reported on our balance sheet as well as our net profit/loss would be material. Management's assumptions about future sales prices and future sales volumes require significant judgment because actual sales prices and volumes have fluctuated in the past and are expected to continue to do so. Management has discussed the development and selection of this critical accounting estimate with the audit committee of our board of directors and the audit committee has reviewed the company's disclosure relating to it in this MD&A.

 
25

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

 
Yongye International, Inc.
     
Dated: October 19, 2009
By:
/s/ Zishen Wu  
   
Name: Zishen Wu
 
   
Title: Chief Executive Officer and President
       
 
By:
/s/ Sam Yu  
   
Name: Sam Yu
 
   
Title: Chief Financial Officer

 
26