10-Q/A 1 v162700_10qa.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q/A
(Amendment No. 1)
 
(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
 
For the quarterly period ended June 30, 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 registrant as specified in its charter)

Nevada
20-8051010
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
6 th Floor, Suite 608, Xue Yuan International Tower,
No. 1 Zhichun Road, Haidian District Beijing, PRC
(Address of principal executive offices)

Yongye Biotechnology International, Inc.
(Former name, former address and former fiscal year, if changed since last report)
 
+86 10 8232 8866
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  o No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). * Yes  o  No  o  *The registrant has not yet been phased into the interactive data requirements.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o   (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o No  x
 
As of August 18, 2009, there were 32,781,065 shares of common stock, par value $.001 per share, 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. Also, in connection with the review of Amendment No. 2 to the Company’s Registration Statement on Form S-3, this filing contains revisions to our Quarterly Report on Form 10-Q initially filed with the Securities and Exchange Commission (the “Commission”) on August 18, 2009 in response to the Commission’s comment letter dated September 1, 2009.
 
   
Page
Part I: Financial Information:
   
     
Item 1 -Financial Statements
 
3
     
Consolidated Balance Sheets
 
3
     
Consolidated Statements of Income and Comprehensive Income
 
4
     
Statements of Changes in Equity
 
5
     
Consolidated Statements of Cash Flows
 
6
     
Notes to Consolidated Financial Statements
 
7
     
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
20
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
 
29
     
Item 4 - Controls and Procedures
 
29
     
Item 4T – Controls and Procedures
 
30
     
Part II. Other Information
   
     
Item 1 - Legal Proceedings
 
31
     
Item 1A – Risk Factors
 
31
     
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
31
     
Item 3 - Defaults Upon Senior Securities
 
31
     
Item 4 - Submission of Matters to a Vote of Security Holders
 
31
     
Item 5 - Other Information
 
32
     
Item 6 – Exhibits
 
32
     
Signatures
 
33

2


Item 1- Financial Statements
 

 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED BALANCE SHEETS

   
June 30, 2009
   
December 31, 2008
 
   
(Restated - Note 1(C))
   
(Restated - Note 1(C))
 
             
CURRENT ASSETS
           
Cash
  $ 4,860,814     $ 4,477,477  
Accounts receivable, net - third parties
    36,562,325       2,748,042  
Accounts receivable, net - related party
    29,219       -  
Inventories
    26,760,401       20,708,193  
Advance payments
    188,808       44,051  
Due from a related party
    193,046       192,741  
Prepaid expenses
    129,590       189,478  
Other receivables
    418,335       680,752  
Total Current Assets
    69,142,538       29,040,734  
                 
PROPERTY AND EQUIPMENT, NET
    7,091,521       5,368,074  
                 
INTANGIBLE ASSETS, NET
    90,274       95,453  
                 
TOTAL ASSETS
  $ 76,324,333     $ 34,504,261  
                 
CURRENT LIABILITIES
               
Long-term loans - current portion
  $ 183,723     $ 167,652  
Accounts payable - related party
    11,414,741       46,739  
Accounts payable - third parties
    41,158       -  
Income tax payable
    4,771,415       219,366  
Advance from customers
    171,847       1,869,400  
Accrued expenses
    5,324,376       583,880  
Other payables
    869,387       774,526  
Derivative liabilities – fair value of warrants
    7,411,982       2,107,931  
Total Current Liabilities
    30,188,629       5,769,494  
                 
LONG-TERM LOANS
    273,615       230,121  
                 
EQUITY
               
Common stock: par value $.001; 75,000,000 shares authorized; 32,594,341 shares issued and outstanding at June 30, 2009 and 26,760,258 shares issued and outstanding December 31, 2008
    32,594       26,760  
Additional paid-in capital - Common stock
    21,540,805       13,633,604  
Retained earnings
    22,661,751       13,310,794  
Accumulated other comprehensive income
    340,577       329,445  
Total Equity of the Company’s Shareholders
    44,575,727       27,300,603  
Noncontrolling interest
    1,286,362       1,204,043  
Total Equity
    45,862,089       28,504,646  
                 
TOTAL LIABILITIES AND EQUITY
  $ 76,324,333     $ 34,504,261  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3

 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

   
For the Three Months Ended
     
For the Six Months Ended
  
     
June 30, 2009
(Restated - Note 1(C))
     
June 30, 2008
(Restated - Note
1(C))
     
June 30, 2009
(Restated - Note
1(C))
     
June 30, 2008
(Restated - Note
1(C))
 
                         
SALES
                       
External customers
 
$
46,271,544
   
$
17,598,671
   
$
56,487,236
   
$
26,986,639
 
Related party
   
-
     
-
     
2,220,083
     
-
 
                                 
TOTAL SALES
   
46,271,544
     
17,598,671
     
58,707,319
     
26,986,639
 
                                 
COST OF SALES
   
21,936,877
     
7,996,521
     
27,839,484
     
12,419,020
 
                                 
GROSS PROFIT
   
24,334,667
     
9,602,150
     
30,867,835
     
14,567,619
 
                                 
SELLING EXPENSES
   
6,450,694
     
777,012
     
9,070,992
     
3,997,477
 
                                 
RESEARCH & DEVELOPMENT EXPENSES
   
1,124,445
     
-
     
1,413,017
     
-
 
                                 
GENERAL AND ADMINISTRATIVE EXPENSES
   
785,565
     
454,697
     
1,130,722
     
812,125
 
                                 
INCOME FROM OPERATIONS
   
15,973,963
     
8,370,441
     
19,253,104
     
9,758,017
 
                                 
OTHER EXPENSES/(INCOME)
                               
Interest Expense/(Income), net
   
10,500
     
(789)
     
16,458
     
(778)
 
Other Expenses /(Income), net
   
(13,178)
     
387,198
     
(12,737)
     
386,840
 
Increase in fair value of derivative liabilities
   
5,276,958
     
2,154,323
     
5,068,947
     
2,154,323
 
                                 
TOTAL OTHER EXPENSES, NET
   
5,274,280
     
2,540,732
     
5,072,668
     
2,540,385
 
                                 
INCOME BEFORE PROVISION FOR INCOME TAXES
   
10,699,683
     
5,829,709
     
14,180,436
     
7,217,632
 
                                 
PROVISION FOR INCOME TAXES
   
4,591,776
     
219,983
     
4,747,223
     
594,765
 
                                 
NET INCOME
   
6,107,907
     
5,609,726
     
9,433,213
     
6,622,867
 
                                 
LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
   
63,734
     
603,194
     
82,256
     
1,035,005
 
                                 
NET INCOME ATTRIBUTABLE TO YONGYE INTERNATIONAL, INC.
   
6,044,173
     
5,006,532
     
9,350,957
     
5,587,862
 
                                 
OTHER COMPREHENSIVE INCOME/(LOSS)
                               
Foreign Currency Translation Adjustment
   
(36,750)
     
277,101
     
11,195
     
414,771
 
                                 
COMPREHENSIVE INCOME
   
6,071,157
     
5,886,827
     
9,444,408
     
7,037,638
 
                                 
LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
   
63,528
     
604,580
     
82,319
     
1,037,079
 
                                 
COMPREHENSIVE INCOME ATTRIBUTABLE TO YONGYE INTERNATIONAL, INC.
 
$
6,007,629
   
$
5,282,247
   
$
9,362,089
   
$
6,000,559
 
                                 
Net income per share:
                               
Basic
 
$
0.20
   
$
0.27
   
$
0.33
   
$
0.37
 
Diluted
 
$
0.20
   
$
0.27
   
$
0.33
   
$
0.37
 
Weighted average shares used in computation:
                               
Basic
   
30,222,243
     
18,496,093
     
28,500,814
     
14,970,434
 
Diluted
   
30,222,243
     
18,496,093
     
28,500,814
     
14,970,434
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
4

 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2009 (RESTATED – NOTE 1(C))

         
Yongye International, Inc. Shareholders
                         
          
Common Stock
                                 
Comprehensive Income
 
          
Number of
Shares
   
Amount
   
Additional
Paid-in
Capital – Common
Stock
   
Accumulated
Other
Comprehensiv
e
Income
   
Retained
Earnings
   
Noncontr
olling
Interest
   
Total
   
Attribut
able to
Yongye
Internat
ional,
Inc. 
Shareho
lders
   
Attribut
able to
Noncont
rolling
Interests
   
Total
 
    
Note
         
$
   
$
   
$
   
$
   
$
   
$
   
$
   
$
   
$
 
                                                                   
                                                                   
Balance as of December 31, 2008 (Restated)
 
1(C)
      26,760,258       26,760       13,633,604       329,445       13,310,794       1,204,043       28,504,646                    
Net income (Restated)
 
1(C)
      -       -       -       -       9,350,957       82,256       9,433,213       9,350,957       82,256       9,433,213  
Foreign currency exchange translation adjustment, net of nil income taxes
          -       -       -       11,132       -       63       11,195       11,132       63       11,195  
Comprehensive income (Restated)
 
1(C)
                                                              9,362,089       82,319       9,444,408  
Common stock issued for cash May 8, 2009 (Restated)
 
7
      5,834,083       5,834       7,907,201       -       -       -       7,913,035                          
Balance as of June 30, 2009 (Restated)
 
1(C)
      32,594,341       32,594       21,540,805       340,577       22,661,751       1,286,362       45,862,089                          
 
The accompanying notes are an integral part of these consolidated financial statements.

5

 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
For the Six Months Ended
     
For the Six Months Ended
  
     
June 30, 2009
     
June 30, 2008
  
     
(Restated - Note 1(C))
     
(Restated - Note 1(C))
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
9,433,213
   
$
6,622,867
 
Adjustments to reconcile net income to net cash used in operating activities
               
Depreciation and amortization
   
244,805
     
93,263
 
Reversal of bad debt provision
   
(305,338
)
   
-
 
Increase in fair value of derivative liabilities
   
5,068,947
     
2,154,323
 
Changes in assets and liabilities:
               
Accounts receivable - third parties
   
(33,525,463
)
   
(20,613,347
)
Accounts receivable - related party
   
(29,212
)
   
-
 
Inventories
   
(6,026,638
)
   
(5,196,266
)
Advance payments
   
-
     
(65,453
)
Due from a related party
   
33
     
2,397,465
 
Prepaid expenses
   
60,096
     
-
 
Other receivables
   
263,126
     
(216,795
)
Accounts payable- related party
   
11,376,007
     
4,889,694
 
Accounts payable- third parties
   
41,187
     
-
 
Income tax payable
   
4,562,992
     
243,007
 
Advance from customers
   
(1,699,588
)
   
-
 
Accrued expenses
   
4,742,049
     
1,882,643
 
Other payables
   
85,887
     
203,947
 
                 
Net Cash Used in Operating Activities
   
(5,707,897
)
   
(7,604,652
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Acquisition of property and equipment
   
(2,100,266
)
   
(639,519
)
Addition to intangible assets
   
-
     
(122,899
)
Net Cash Used in Investing Activities
   
(2,100,266
)
   
(762,418
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from bank loans
   
129,593
     
-
 
Repayment of bank loans
   
(70,591
)
   
-
 
Proceeds from common stock and warrants issued
   
8,984,595
     
10,100,651
 
Payment for common stock issuance costs
   
(836,456
)
   
(806,159
)
Net Cash Provided by Financing Activities
   
8,207,141
     
9,294,492
 
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH
   
(15,641
)
   
414,771
 
NET INCREASE IN CASH
   
383,337
     
1,342,193
 
CASH– BEGINNING
   
4,477,477
     
8,137
 
CASH - ENDING
 
$
4,860,814
   
$
1,350,330
 
                 
Supplemental cash flow information:
               
Cash paid for income taxes
   
192,357
     
417,744
 
Cash paid for interest expense
   
21,384
     
-
 
Noncash investing and financing activities:
               

During the six months ended June 30, 2008, the non-controlling shareholder of Yongye Nongfeng contributed a patent valued at $100,000 to Yongye Nongfeng.

The accompanying notes are an integral part of these consolidated financial statements.
 
6

 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE SIX MONTHS ENDED JUNE 30, 2009
 
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, Yongye Nongfeng, pursuant to which, Inner Mongolia Yongye and ASO is 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 did not fully inject its share of the capital into Yongye Nongfeng until May 31, 2009. Based upon actual capital injection into Yongye Nongfeng, Inner Mongolia Yongye and ASO were 0.6% and 99.4% owner 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. The Company is in the process of terminating the Agreement after obtaining the fertilizer license referred to in the following paragraph.
 
7

 
On June 1, 2009, Yongye Nongfeng obtained the approval from Ministry of Agricultural for the fertilizer license to produce fulvic acid based products to be held under its name, which was previously held in the name of Inner Mongolia Yongye. As a result, starting from June 1, 2009, Yongye Nongfeng began to manufacture and produce its own fulvic acid based products for sale.  In addition, on June 1, 2009, Yongye Nongfeng purchased all of the inventories of Inner Mongolia Yongye relating to fulvic acid based products for $12,258,000 in cash.
 
In March 2009, in anticipation of commencement of its own production, Yongye Nongfeng purchased production equipment, vehicle and office equipment from Inner Mongolia Yongye for approximately US$577,000, US$351,000 and US$12,000, respectively, which represent the estimated fair value of the assets based on an appraisal by independent valuers.
 
Yongye Nongfeng and Inner Mongolia Yongye also entered into certain lease-exchange arrangements related to land-use rights, buildings and equipment. (See Note 11)
 
C. Restatement of Financial Statements
 
In connection with the April Offering and September Offering in 2008 and the May Offering in 2009, the Company issued the “April Warrants”, “September Warrants” and “Roth May Warrants”, respectively, to certain investors and Roth (See Note 7).  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 date 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.
 
For the three and six months ended June 30, 2008, the increase in fair value of the April Warrants of $2,154,323 should have been recorded as a charge to earnings. 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 and six months ended June 30, 2009, the aggregate fair value of the April Warrants and September Warrants increased by $4,999,717 and $4,791,706, respectively, and the fair value of the Roth May Warrants increased by $277,241 since the date of issuance through June 30, 2009.  These fair value adjustments should have been recorded through earnings as appropriate in the respective interim 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 accompanying unaudited consolidated financial statements.
 
CONSOLIDATED BALANCE SHEETS
 
   
June 30, 2009
   
December 31, 2008
 
    
As Previously
Reported
   
As Restated
   
As Previously
Reported
   
As Restated
 
Derivative liabilities
    -       7,411,982       -       2,107,931  
Total current liabilities
    22,776,647       30,188,629       3,661,563       5,769,494  
Additional paid-in capital-Common stock
    21,799,562       21,540,805       13,976,900       13,633,604  
Additional paid-in capital-Warrant
    4,203,075       -       3,883,432       -  
Retained earnings
    25,611,901       22,661,751       11,191,997       13,310,794  
Total Stockholders' Equity
    51,989,364       44,575,727       29,410,189       27,300,603  
Total Equity
    53,274,071       45,862,089       30,612,577       28,504,646  
 
8

 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

   
Three months ended June 30, 2009
   
Six months ended June 30, 2009
 
   
As Previously
Reported
   
As Restated
   
As Previously
Reported
   
As
Restated
 
                                 
Increase in fair value of derivative liabilities
    -       5,276,958       -       5,068,947  
                                 
Total other expenses/(income), net
    (2,678 )     5,274,280       3,721       5,072,668  
                                 
Income before provision for income taxes
    15,976,641       10,699,683       19,249,383       14,180,436  
                                 
Net income
    11,384,865       6,107,907       14,502,160       9,433,213  
                                 
Net income attributable to Yongye International, Inc.
    11,321,131       6,044,173       14,419,904       9,350,957  
                                 
Comprehensive income
    11,348,115       6,071,157       14,513,355       9,444,408  
                                 
Comprehensive income attributable to Yongye International, Inc.
    11,284,587       6,007,629       14,431,036       9,362,089  
                                 
Net income per ordinary share-basic
  $ 0.37     $ 0.20     $ 0.51     $ 0.33  
Net income per ordinary share-diluted
  $ 0.37     $ 0.20     $ 0.50     $ 0.33  
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

   
Three months ended June 30, 2008
   
Six months ended June 30, 2008
 
    
As Previously
Reported
   
As Restated
   
As Previously
Reported
   
As
Restated
 
                                 
Increase in fair value of derivative liabilities
    -       2,154,323       -       2,154,323  
                                 
Total other expenses, net
    386,409       2,540,732       386,062       2,540,385  
                                 
Income before provision for income taxes
    7,984,032       5,829,709       9,371,955       7,217,632  
                                 
Net income
    7,764,049       5,609,726       8,777,190       6,622,867  
                                 
Net income attributable to Yongye International, Inc.
    7,160,855       5,006,532       7,742,185       5,587,862  
                                 
Comprehensive income
    7,437,956       5,886,827       8,156,956       7,037,638  
                                 
Net income per ordinary share-basic
  $ 0.39     $ 0.27     $ 0.52     $ 0.37  
Net income per ordinary share-diluted
  $ 0.38     $ 0.27     $ 0.51     $ 0.37  
                                 
Weighted average ordinary shares outstanding used in computing diluted net income per ordinary share
    19,084,248       18,496,093       15,089,375       14,970,434  
 
9

 
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six months ended June 30, 2009
   
Six months ended June 30, 2008
 
    
As Previously
Reported
   
As Restated
   
As Previously
Reported
   
As
Restated
 
                                 
Net income
    14,502,160       9,433,213       8,777,190       6,622,867  
Increase in fair value of derivative liabilities
    -       5,068,947       -       2,154,323  
 
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 (“U.S. GAAP”) and include the financial statements of the Company and its subsidiaries. The accompanying unaudited consolidated balance sheet as of June 30, 2009, unaudited consolidated statements of income and comprehensive income for the three months and six months ended June 30, 2009 and unaudited consolidated statements of changes in equity and cash flows for the six months ended June 30, 2009 include Yongye International, Inc. and its directly and indirectly owned subsidiaries, Fullmax, ASO and Yongye Nongfeng. The Company’s unaudited consolidated statements of income and comprehensive income and cash flows for the three months and six months ended June 30, 2008 consist of the financial results of Yongye Nongfeng for such periods and the financial results of Fullmax and ASO from the period April 17, 2008 to June 30, 2008.  For the period from January 1, 2008 to April 17, 2008, the financial results of Fullmax and ASO are not material.
 
All significant intercompany transactions and balances are eliminated on consolidation.

The accompanying unaudited consolidated financial statements as of June 30, 2009 and for the three months and six months ended June 30, 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, the accompanying unaudited consolidated interim financial statements include all adjustments considered necessary to ensure the financial statements are not misleading. Management has evaluated subsequent events through August 19, 2009, which was the date the interim financial statements as of and for the three months and six months ended June 30, 2009, before the restatement adjustments described in Note 1(C), were originally issued, and also through October 19, 2009, the date of issuance of the accompanying restated interim financial statements.

The Company's business is subject to seasonal variations; thus, the results of operations for the three and six months ended June 30, 2009 and 2008 are not necessarily indicative of the results for the full fiscal year ending December 31, 2009. Generally, the second and third quarters are peak sales periods, and first and fourth quarters are low sales periods for the Company.

10

The unaudited consolidated interim financial statements should be read in conjunction with the Company's audited 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.

NET INCOME PER SHARE
 
Basic net income per share is computed by dividing net income attributable to common shareholders of the Company 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. Common share equivalents are excluded from the computation of the diluted net income per share in periods when their effect would be anti-dilutive.
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurement” (SFAS No. 157). While this statement does not require new fair value measurements, it provides guidance on applying fair value and expands required disclosures. SFAS No. 157 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 disclosure of the Company’s fair value measurement required under SFAS No. 157 is included in Note 7 to consolidated interim financial statements.
 
 
11

 
 
In December 2007, the FASB issued FASB Statement No. 141(R), Business Combinations, and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment to ARB No. 51 . SFAS No. 141(R) and No. 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS No. 141(R) will be applied to business combinations occurring after the effective date. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date.  In April 2009, the FASB issued FSP FAS 141(R)-1,  Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies , which amends and clarifies FAS141(R) to address application issues on initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination. Other than the change in presentation of noncontrolling interests, the adoption of FAS 141(R) and FAS 160 has no impact on the Company’s financial statement.

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.  See Note 7 to consolidated interim financial statements for disclosure required under SFAS No. 161.
 
In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (SFAS No. 165). The statement established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS No. 165 is effective for the Company beginning in this second quarter of fiscal 2009.
 
NOTE 3-ACCOUNTS RECEIVABLE
 
Net accounts receivable at June 30, 2009 and December 31, 2008 consisted of the following:

   
June 30, 2009
   
December 31, 2008
 
Accounts receivable-third parties
  $ 36,562,325     $ 3,053,380  
Accounts receivable-related party
    29,219       -  
Less: allowance for doubtful accounts
    -       (305,338 )
Total
  $ 36,591,544     $ 2,748,042  

A bad debt provision of $232,010 was reversed for the three months ended June 30, 2009, and $305,338 was reversed for the six months ended June 30, 2009 as the total amount of the related accounts receivable, which was previously provided for as of December 31, 2008 was repaid by the customer during the six months ended June 30, 2009. No bad debt expense provision was required for the three and six months ended June 30, 2009 as management believes no accounts are uncollectible as of June 30, 2009.

The Company’s normal credit terms to customers with well-established trading records are three months while the Company generally requests other customers to pay either in advance or upon delivery.

NOTE 4-INVENTORIES
 
Inventories at June 30, 2009 and December 31, 2008 consisted of the following:
 
   
June 30, 2009
   
December 31, 2008
 
             
Finished goods
  $ 19,548,221     $ 20,664,930  
Semi-finished goods
    6,669,587       -  
Packing supplies
    81,103       -  
Raw materials
    401,705       -  
Consumables
    59,785       43,263  
Total
  $ 26,760,401     $ 20,708,193  
 
 
12

 
 
NOTE 5-PROPERTY AND EQUIPMENT
 
Property and equipment at June 30, 2009 and December 31, 2008 consisted of the following:

   
June 30, 2009
   
December 31, 2008
 
             
Buildings and structures
  $ 3,662,014     $ 3,656,992  
Machinery and equipment
    1,508,349       673,480  
Office equipment and furniture
    212,946       85,087  
Vehicles
    1,409,910       824,013  
Software
    17,180       17,156  
Leasehold improvements
    219,144       218,844  
Construction-in-process
    409,049       -  
      7,438,592       5,475,572  
                 
Less: Accumulated depreciation
    347,071       107,498  
                 
Total
  $ 7,091,521     $ 5,368,074  
 
Depreciation expense for the three months ended June 30, 2009 and 2008 was $134,912 and $45,190, respectively.  Depreciation expense for the six months ended June 30, 2009 and 2008 was $239,494 and $87,974, respectively. Vehicles with an original carrying amount of $996,827 were pledged as security for the long-term banks loans of $571,237 which were provided by the banks for the purchase of the vehicles (See Note 6).

NOTE 6 – LONG-TERM LOANS
 
From August 2008 to June 2009, the Company financed the purchase of seventeen vehicles with bank loans of $571,237. The Company pledged the seventeen vehicles with an initial carrying amount of $996,827 as security for the bank loans. The loans all have three-year terms and are paid in monthly installments. Interest rates on the loans range from 5.57% to 14.80% annually. The bank loans were initially obtained by individual employees of the Company on behalf of the Company. The Company and the individual employees entered into trust agreements whereby the Company is entitled to all the risk and ownership of the vehicles and assumes all the responsibility and obligations for making the monthly payments on the bank loans. The aggregate amount of such required payments at June 30, 2009 is as follows:
 
2009
  $ 110,065  
2010
    220,131  
2011
    174,708  
2012
    9,432  
Total
    514,336  
Less: Amount representing interest
    (56,998 )
Total at present value
  $ 457,338  
 
At June 30, 2009, the current portion of bank loans was $183,723 which is scheduled to be repaid on or before June 30, 2010, while the long-term portion of the bank loans is $273,615. The Company made total payments of $54,414, which included interest expense of $11,551, during the three months ended June 30, 2009.
 
According to the trust agreements, while the vehicles are registered under the individuals’ name, the Company receives the full risk and ownership of the vehicles, including the rights of official use of the vehicles and the rights to retain the legal title of the vehicles at the time of termination of the employment relationship with the individual. The Company assumes the risk of loss, damage, penalty and other obligations related to the operation and ownership of the vehicle, including repairs and maintenance. The Company is also required to make the initial down payment at the date of purchase and repay the bank loans. The individuals have no right to sell, lease, lend or pledge the vehicles to any other person. Consequently, the Company has recognized the cost of the vehicles as assets and the bank loans as liabilities in its consolidated balance sheet.
 
 
13

 
 
NOTE 7 - CAPITAL STOCK

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 ”).

On May 8, 2009, the Company entered into a securities purchase agreement with certain investors (the “May Investors ”), for the sale in a private placement of an aggregate of 5,834,083 shares of the Company common stock, par value $0.001 per share (the“ May Shares ”) for a aggregate gross proceeds equal to $8,984,488 (the “ May Offering ”).

In connection with the May Offering, the Company entered into a registration rights agreement with the investors, in which the Company agreed to file a registration statement with the SEC to register for resale the shares, including the shares to be issued under the warrants (see below), within 45 calendar days of the closing date of the May Offering, and to use its best efforts to have the registration statement declared effective within 150 calendar days of the closing date of the May Offering.  The Company is obligated to pay liquidated damages of 1% of the dollar amount of the shares sold in the May Offering per month, payable in cash, up to a maximum of 10%, if the registration statement is not filed and declared effective within the foregoing time periods.  Offering expenses for the issuance of the shares were $836,456, which were recorded as a reduction of Additional Paid-in Capital on the June 30, 2009 Consolidated Balance Sheet.

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” as an inducement to the April offering. 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” as an inducement to the September offering. 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.

Concurrent with the offering of “May Shares”, the Company issued to Roth as the placement agent, 246,224 warrants (“Roth May Warrants).  The warrants have a 5 years exercise period and an initial exercise price of $1.848.

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 warrants will be reduced to the effective price of newly issued common stock or common stock equivalents.  In the “May Offering”, the Company issued new common stock at a price of $1.54 per share and accordingly, the exercise price of the April Warrants and the September Warrants was reduced to $1.54 per share.  The exercise price of Roth May Warrants ($1.848) was not affected but will be subject to potential down-round adjustments in future periods. As of June 30, 2009, there were 3,388,382 warrants outstanding, of which 1,623,905, 1,518,253, 246,224 warrants will expire if unexercised by April 2013, September 2013 and May 2014, respectively.

The Company measures the fair value of the warrants in accordance with SFAS No. 157, which requires 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.
 
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.
 
14

 
The estimated fair values of the Company’s Investor Warrants and Roth Warrants were determined at June 30, 2008, June 30, 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 measured on a recurring basis at fair value as of June 30, 2008, June 30, 2009 and December 31, 2008.

         
Fair Value Measurements Using:
 
   
Total
   
Quoted Prices in
Active Markets for
Identical Financial
Assets and Liabilities
   
Significant Other
Observable Inputs
   
Significant
Unobservable Inputs
 
June 30, 2009
       
Level 1
   
Level 2
   
Level 3
 
                         
Liabilities at fair value:
                       
Derivative liabilities—warrants
    7,411,982             7,411,982        

         
Fair Value Measurements Using:
 
   
Total
   
Quoted Prices in
Active Markets for
Identical Financial
Assets and Liabilities
   
Significant Other
Observable Inputs
   
Significant
Unobservable Inputs
 
December 31, 2008
       
Level 1
   
Level 2
   
Level 3
 
                         
Liabilities at fair value:
                       
Derivative liabilities—warrants
    2,107,931             2,107,931        

         
Fair Value Measurements Using:
 
   
Total
   
Quoted Prices in
Active Markets for
Identical Financial
Assets and Liabilities
   
Significant Other
Observable Inputs
   
Significant
Unobservable Inputs
 
June 30, 2008
       
Level 1
   
Level 2
   
Level 3
 
                         
Liabilities at fair value:
                       
Derivative liabilities—warrants
    4,578,517             4,578,517        

As of June 30, 2009 the fair value of the derivative liability related to the outstanding warrants is $7,411,982. The changes in the fair value of the warrants are recorded through earnings and amounted to $5,276,958 and $5,068,947 for the three and six months ended June 30, 2009, respectively.

The fair values of the warrants are summarized as follows:

Fair value of Warrant per share (US$) at:
 
April Warrants
   
September Warrants
 
Roth May Warrants
               
Date of Issuance
   
1.07
     
2.08
 
0.95
December 31, 2008
   
0.66
     
0.68
 
N/A
March 31, 2009
   
0.59
     
0.62
 
N/A
June 30, 2009
   
2.19
     
2.20
 
2.08

The fair values of the warrants as of June 30, 2009 were determined based on the Binominal option pricing model, using the following key assumptions:

   
April Offering
   
September
Offering
   
May Offering
 
                   
Expected volatility
    63.5 %     62.0 %     60.0 %
                         
Expected dividends yield
    0 %     0 %     0 %
                         
Time to maturity
 
3.8 years
   
4.19 years
   
4.86 years
 
                   
Risk-free interest rate per annum
    2.218 %     2.218 %     2.218 %
                         
Fair value of underlying Common Shares (per share)
    3.61       3.61       3.61  
                         
Exercise multiple
    2.4       2.4       2.4  
 
 
15

 
 
Escrow shares

In connection with the April Offering, the Company entered into an escrow agreement with Roth as a representative of the April Investors, Tri-State Title & Escrow LLC (the “Escrow Agent”) and Full Alliance, one of the Company’s shareholders (the “April Escrow Agreement”), pursuant to which 2,000,000 shares of the Company held by Full Alliance (the “April Escrow Shares”) were delivered to the Escrow Agent. The Escrow Shares were held for the Company’s achievement of $10,263,919 after tax net income (“ATNI”) for the year ended December 31, 2008 (the “2008 Net Income Threshold”). As reported in the Company’s 2008 Form 10-K, the ATNI threshold has been achieved. The Escrow Shares were released in full back to Full Alliance as of June 30, 2009.

In connection with the September Offering, the Company entered into an escrow agreement with Roth, the Escrow Agent and Full Alliance (the “September Escrow Agreement”), pursuant to which 4,000,000 shares of the Company 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 for the Company’s achievement of 2008 and 2009 financial targets described below:

If the Company achieves (i) the 2008 Net Income Threshold, and (ii) fully diluted earnings per share reported in the Company’s 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 sentence 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. In the event that (i) the 2009 ATNI is less than $12,649,248, or the fully diluted earnings per share reported in 2009 Annual Report on Form 10-K filed with the SEC (the “2009 Annual Report”) is less than $0.42, all of the 2,000,000 Make Good Escrow Shares shall be distributed to the September Investors on a pro-rata basis, (ii) the 2009 ATNI equals or exceeds $12,649,248 and is less than $15,811,560, or the fully diluted earnings per share reported in the 2009 Annual Report, equals or exceeds $0.42 and is less than $0.53, then the Make Good Shares equal to the product of  (i)(A) $15,811,560 minus the 2009 ATNI, 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 share shall be returned to Full Alliance, (iii) the 2009 ATNI exceeds $15,811,560, the 2,000,000 Make Good Escrow Shares will be released back to Full Alliance.

If the Company does not achieve (i) the 2008 Net Income Threshold, or (ii) 2008 Guaranteed EPS, the Make Good Escrow Shares will be released pro-rata to the September Offering investors. As shown in the 2008 Form 10-K, the 2008 Net Income Threshold and 2008 Guaranteed EPS have been achieved.

The remaining 2,000,000 escrow shares are being held for the timely approval obtained from Ministry of Agriculture of Inner Mongolia in relation to the transfer of fertilizer license to Yongye Nongfeng from Inner Mongolia Yongye and completion of Yongye Nongfeng’s restructuring (the “Restructuring Make Good Shares”). The fertilizer license is issued by the Ministry of Agriculture and provides the holder the right to manufacture and sell fertilizer products in the PRC.  The Company is undergoing a restructuring process under which the Company will purchase the land, buildings and equipment which comprised of the 10,000 tonnes per annum capacity of the fulvic acid based products (“Yongye Nongfeng Restructuring”).

In the event that (1) the fertilizer license has not been issued to Yongye Nongfeng by June 30, 2009, or such later date as agreed to by the Company and the September Investors holding a majority of the September Investor Shares at such time (the “ License Grant Date ”), or (2) the fertilizer license has been issued by the License Grant Date, but the Yongye Nongfeng 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. The “Restructuring Completion Date” shall be the date that is 132 calendar days after the License Grant Date. The fertilizer license was issued on June 1, 2009 by the Ministry of Agriculture to Yongye Nongfeng in accordance with the deadline, however Yongye Nongfeng Restructuring is required to be completed by the Restructuring Completion Date, if the Restructuring Make Good Shares shall be returned to Full Alliance. The Company is in the process of completing the legal procedures for obtaining the land and building from Inner Mongolia Yongye.
 
 
16

 
 
The purpose of the April Escrow Arrangement and September Escrow Arrangement was an inducement made to facilitate the respective offerings, and not part of a compensatory arrangement to management. The escrow shares will not be released or cancelled due to the discontinued employment of any management of the Company.

NOTE 8 – STATUTORY RESERVE

The Company’s subsidiary, Yongye Nongfeng, was required to allocate at least 10% of its after tax profits as determined under generally accepted accounting principal in the PRC to a statutory surplus reserve until the reserve balance reaches 50% of their registered capital. For the six months ended June 30, 2009 and 2008, Yongye Nongfeng made appropriations to this statutory reserve of $1,412,592 and $771,107, respectively. The accumulated balance of the statutory reserve at Yongye Nongfeng as of June 30, 2009 and December 31, 2008 were $2,620,504 and $1,207,912, respectively.

In accordance with the PRC laws and regulations, Yongye Nongfeng is restricted in its ability to transfer a portion of its net assets to Yongye International, Inc. in the form of dividends, which amounted to $2,620,504 as of June 30, 2009.

NOTE 9 – INCOME TAXES

The Company’s effective income tax rate was 28.74% and 2.76% for the three-month periods ended June 30, 2009 and 2008, respectively and 24.66% and 6.35% for the six-month periods ended June 30, 2009 and 2008, respectively. Income tax expense mainly consists of foreign income tax at statutory rates and the effects of permanent differences. According to the approval from the tax authority in the city level of Hohhot in Inner Mongolia Autonomous Region, Yongye Nongfeng was assessed to use the deemed profit method to determine the amount of income tax provision for the year ended December 31, 2008 which was based on 1.25% on its gross revenue. The deemed profit method is not applicable to Yongye Nongfeng for the year ending December 31, 2009. With effective from January 1, 2009, Yongye Nongfeng applied the statutory income tax rate of 25% on its assessable income in accordance with the relevant income tax rules and regulations of the PRC. The income tax rate applied by Yongye Nongfeng to determine the income tax provision for the three and six month periods ended June 30, 2009 is consistent with the tax notice issued by the State Administration of Taxation in the PRC on July 14, 2009.

Deferred tax asset and allowance

The Company has a deferred tax asset of approximately $97,034 as of June 30, 2009 primarily relating to the loss from the change in fair value of warrants issued to Roth as placement agent available to offset future taxable income.
 
The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those net operating losses are available. The Company considers projected future taxable income and tax planning strategies in making its assessment. At present, the Company does not have a sufficient operation in the United Statement of America to conclude that it is more-likely-than-not that the Company will be able to realize all of its tax benefits in the near future and therefore a valuation allowance of $97,034 was established for the full value of the deferred tax asset.
 
A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance. Should the Company start operation in the United States of America in future periods with supportable trend, the valuation allowance will be reversed accordingly.
 
NOTE 10 – LEASE COMMITMENTS

The Company entered into an operating lease to secure an office space in Beijing, PRC. The lease term for the Beijing office is from January 1, 2008 to December 31, 2010. The lease expense for the Beijing office was $49,677 and $107,539 for the three and six months ended June 30, 2009, respectively. The lease expense for the Beijing office was $56,842 and $96,429 for the three and six months ended June 30, 2008, respectively. Future minimum lease payments under non-cancellable operating lease agreement at June 30, 2009 are as follows:

December 31, 2009
 
$
115,756
 
December 31, 2010
   
231,512
 
Total
 
$
347,268
 
 
NOTE 11 – RELATED PARTY TRANSACTIONS AND BALANCES
 
For the three months and six months ended June 30, 2009, the Company's subsidiary, Yongye Nongfeng purchased inventories from Inner Mongolia Yongye amounting to $30,559,654 and $37,923,422, respectively. For the three months and six months ended June 30, 2008, the Company's subsidiary, Yongye Nongfeng purchased inventories from Inner Mongolia Yongye amounting to $8,537,112 and $17,468,749, respectively.

As of June 30, 2009 and December 31, 2008, accounts payable related party were $11,414,741 and $46,739, respectively, and represented the payable for the purchases of inventories from Inner Mongolia Yongye. Due from related party was $193,046 and $192,741 as of June 30, 2009 and December 31, 2008 which represented the payment the Company made on behalf of Inner Mongolia Yongye for audit fees and research and development fees in the year ended December 31, 2008. As of June 30, 2009, accounts receivable related party was $29,219 and represented the receivable from Hubei Longshangxing Xinnongcun Fuwu Youxiangongsi, which is 51% owned by Inner Mongolia Yongye, for the sale of fulvic acid plant based products. For the six months ended June 30, 2009, the Company sold products of $2,220,083 to Hubei Longshangxing Xinnongcun Fuwu Youxiangongsi.

For the six months ended June 30, 2008, the Company borrowed $1,638,581 from Yin Ping, the wife of CEO Mr. Zishen Wu, $762,524 from Inner Mongolia Yongye and $10,000 from Kim McElroy, a director of the Company who resigned in April 2008. The amounts are unsecured and non-interesting bearing, and were repaid in full as of December 31, 2008.

In March 2009, Yongye Nongfeng purchased machinery and equipment, vehicles and office equipment in the amount of $940,531 from Inner Mongolia Yongye (See Note 1).

 
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Yongye Nongfeng and Inner Mongolia Yongye entered a series of lease-exchange arrangement to lease land, buildings and equipment to and from each other as follows:

·
On June 1, 2008, a land lease agreement was entered into in which Yongye Nongfeng would lease land of 74,153 square meters from Inner Mongolia Yongye 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 Inner Mongolia Yongye would lease a building occupied area of 3,967 square meters and certain equipment from Yongye Nongfeng from September 28, 2008 to September 27, 2009.
 
·
On March 15, 2009, an equipment lease agreement was entered into in which Inner Mongolia Yongye would lease a set of production equipment from Yongye Nongfeng from March 15, 2009 to May 31, 2009.
 
·
On June 1, 2009, a land lease agreement and a building lease agreement were entered into in which Yongye Nongfeng would lease buildings occupied area of 5,767 square meters and land of 79,920 square meters from Inner Mongolia Yongye from June 1, 2009 to October 10, 2009.

Pursuant to these agreements, both Yongye Nongfeng and Inner Mongolia Yongye did not charge any rental to each other for the lease.  Additionally, the estimated rental income to be received and the rental expense to be paid by the Yongye Nongfeng are not material to the Company’s 2009 and 2008 results of operations and therefore have not been included.

NOTE 12 - NET INCOME PER SHARE
 
The following table sets forth the computation of basic and diluted income per share for the periods indicated:

   
Three months ended
   
Six months ended
 
   
June 30, 2009
   
June 30, 2008
   
June 30, 2009
   
June 30, 2008
 
   
As restated -
Note 1(C)
   
As restated -
Note 1(C)
   
As restated -
Note 1(C)
   
As restated -
Note 1(C)
 
Numerator used in basic net income per share:
                       
Net income attributable to Yongye International, Inc.
    6,044,173       5,006,532       9,350,957       5,587,862  
                                 
Shares (denominator):
                               
Weighted average ordinary shares outstanding-basic and diluted
    30,222,243       18,496,093       28,500,814       14,970,434  
                                 
Net income per ordinary share-basic and diluted
  $ 0.20     $ 0.27     $ 0.33     $ 0.37  
 
As of June 30, 2009, the Company had 3,388,382 ordinary shares equivalents outstanding that could potentially dilute basic income per share in the future, but which were excluded in the computation of diluted income per share in the periods presented, as their effect would have been anti-dilutive.

NOTE 13 - CONCENTRATIONS AND CREDIT RISKS
 
At June 30, 2009 and December 31, 2008, the Company had a credit risk exposure of cash in banks of approximately $4,860,814 and $4,477,477, respectively that is uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily places cash deposits only with large financial institution in the PRC with acceptable credit rating.

Five major customers accounted for 94% and one major customer accounted for 40% of the Company’s net revenue for the three months ended June 30, 2009. Five major customers accounted for 89% and one major customer accounted for 40% of the Company’s net revenue for the six months ended June 30, 2009. Five major customers accounted for 80% and one major customer accounted for 26% of the Company’s net revenue for the three months ended June 30, 2008. Five major customers accounted for 89% and one major customer accounted for 26% of the Company’s net revenue for the six months ended June 30, 2008. The Company’s total sales to five major customers were $43,700,271 and $52,061,902 for the three and six months ended June 30, 2009, respectively. The Company’s total sales to five major customers were $14,062,646 and $24,068,529 for the three and six months ended June 30, 2008, respectively. In addition, all these major customers are distributors in the PRC agriculture industry.

 
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Three months ended June 30, 2009
   
Six months ended June 30, 2009
 
Largest
Customers
 
Province
 
Amount of
Sales
 
% Total
Sales
   
Largest
Customers
 
Province
 
Amount of
Sales
 
% Total
Sales
 
Customer A
 
Hebei
    18,705,448     40 %  
Customer A
 
Hebei
    23,557,490     40 %
Customer B
 
Inner
Mongolia
    9,548,312     21 %  
Customer B
 
Inner
Mongolia
    11,287,969     19 %
Customer C
 
Xinjiang
    8,698,201     19 %  
Customer C
 
Xinjiang
    9,775,088     17 %
Customer D
 
Xinjiang
    4,338,428     9 %  
Customer D
 
Xinjiang
    4,978,162     9 %
Customer E
 
Gansu
     2,409,882     5 %