10-Q 1 v202136_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


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
(State or other jurisdiction of
incorporation or organization
20-8051010
(I.R.S. Employer
Identification No.)

6th Floor, Suite 608, Xue Yuan International Tower,
No. 1 Zhichun Road, Haidian District Beijing, PRC
(Address of principal executive offices)

(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     x     No    ¨
 
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 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 ¨
Accelerated filer ¨
Non-accelerated filer x   (Do not check if a smaller reporting company)
Smaller reporting company  ¨

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

As of November 15, 2010, there were 49,370,711 shares of common stock, par value $.001 per share, issued and outstanding.


 
TABLE OF CONTENTS

       
Page
         
PART I. FINANCIAL INFORMATION
 
1
ITEM 1.
 
FINANCIAL STATEMENTS
 
1
ITEM 2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITIONS.
 
17
ITEM 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
25
ITEM 4.
 
CONTROLS AND PROCEDURES
 
25
   
 
PART II. OTHER INFORMATION
 
27
ITEM 1.
 
LEGAL PROCEEDINGS
 
27
ITEM 1A.
 
RISK FACTORS
 
27
ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
27
ITEM 3.
 
DEFAULTS UPON SENIOR SECURITIES
 
27
ITEM 4.
 
(REMOVED AND RESERVED)
 
27
ITEM 5.
 
OTHER INFORMATION
 
27
ITEM 6.
  
EXHIBITS
  
28

 
ii

 
PART I.

FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements

YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS

 
Note
 
September 30, 2010
   
December 31, 2009
 
Current assets
             
Cash
   
$
24,967,963
   
$
65,518,181
 
Restricted cash
     
40,000
     
-
 
Accounts receivable, net of allowance for doubtful accounts
3
   
75,643,791
     
6,161,796
 
Inventories
4
   
39,932,889
     
42,033,261
 
Prepayments
5
   
9,453,220
     
6,211,896
 
Prepaid expenses
     
843,515
     
112,879
 
Other receivables
     
232,627
     
383,841
 
Total Current Assets
     
151,114,005
     
120,421,854
 
                   
Property, plant and equipment, net
6
   
16,977,565
     
9,156,915
 
Intangible assets, net
7
   
23,980,305
     
85,058
 
Land use right, net
8
   
4,186,126
     
4,166,987
 
Prepayment for mining project
9
   
29,381,466
     
-
 
Other assets
10
   
7,553,159
     
2,029,012
 
Goodwill
     
10,152,408
     
9,945,862
 
Total Assets
   
$
243,345,034
   
$
145,805,688
 
Current liabilities
                 
Short-term bank loan
11
 
$
-
   
$
2,925,174
 
Long-term loans and payables - current portion
12
   
462,178
     
331,693
 
Accounts payable - related party
18
   
-
     
880,026
 
Accounts payable - third parties
     
725,074
     
344,774
 
Income tax payable
15
   
7,875,660
     
4,082,424
 
Advance from customers
     
1,446,210
     
29,157
 
Accrued expenses
     
10,947,119
     
479,609
 
Due to a related party
18
   
-
     
1,663,191
 
Other payables
7
   
5,113,861
     
553,286
 
Derivative liabilities fair value of warrants
13
   
837,663
     
1,380,205
 
Total Current Liabilities
     
27,407,765
     
12,669,539
 
                   
Long-term loans and payables
12
   
443,808
     
545,327
 
Total Liabilities
     
27,851,573
     
13,214,866
 
                   
Equity
                 
Common stock: par value $.001; 75,000,000 shares authorized; 48,187,044 shares issued and outstanding at September 30, 2010 and 44,532,241 shares issued and outstanding at December 31, 2009
13
   
48,187
     
44,532
 
Additional paid-in capital
13
   
140,289,199
     
118,583,308
 
Subscription receivable
13
   
-
     
(8,550,000
Retained earnings
     
61,701,706
     
15,506,445
 
Accumulated other comprehensive income
     
4,083,848
     
329,139
 
Total equity attributable to Yongye International, Inc.
     
206,122,940
     
125,913,424
 
Noncontrolling interest
     
9,370,521
     
6,677,398
 
Total Equity
     
215,493,461
     
132,590,822
 
                   
Total Liabilities and Equity
   
$
243,345,034
   
$
145,805,688
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
1

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

     
For the Three Months Ended
   
For the Nine Months Ended
 
 
Note
 
September 30, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
                           
Sales
   
$
71,752,069
   
$
29,279,473
   
$
186,101,173
   
$
87,986,792
 
                                   
Cost of sales
     
29,639,662
     
13,435,326
     
80,095,965
     
41,274,810
 
                                   
Gross profit
     
42,112,407
     
15,844,147
     
106,005,208
     
46,711,982
 
                                   
Selling expenses
     
15,574,981
     
2,644,715
     
38,206,314
     
11,715,707
 
                                   
Research and development expenses
     
2,170,951
     
69,871
     
4,509,847
     
1,482,888
 
                                   
General and administrative expenses
     
3,530,638
     
1,365,075
     
6,996,584
     
2,495,797
 
                                   
Income from operations
     
20,835,837
     
11,764,486
     
56,292,463
     
31,017,590
 
                                   
Other income/(expenses)
                                 
Interest expense, net
     
(6,612)
     
(9,080)
     
(21,341)
     
(25,538)
 
Government subsidy
     
1,427,259
     
185,039
     
1,751,732
     
237,366
 
Other income/(expenses), net
     
      2,067
     
(10,446
)
   
(84,294)
     
(50,036)
 
Change in fair value of derivative liabilities
13
   
(12,077
)
   
(15,836,189
   
157,393
     
(20,905,136
)
                                   
Total other income/ (expenses), net
     
1,410,637
     
(15,670,676
   
1,803,490
     
(20,743,344
                                   
Earnings /(losses) before income tax expense
     
22,246,474
     
(3,906,190
   
58,095,953
     
10,274,246
 
                                   
Income tax expense
15
   
3,705,985
     
3,089,047
     
9,389,307
     
7,836,270
 
                                   
Net income/(loss)
     
18,540,489
     
(6,995,237
   
48,706,646
     
2,437,976
 
                                   
Less: Net income attributable to the noncontrolling interest
     
962,222
     
46,028
     
2,511,385
     
128,284
 
                                   
Net income/(loss) attributable to Yongye International, Inc.
   
$
17,578,267
   
$
(7,041,265
 
$
46,195,261
   
$
2,309,692
 
                                   
Earnings per share:
                                 
Basic
19
 
$
0.37
   
$
(0.22
)
 
$
1.02
   
$
0.08
 
Diluted
19
 
$
0.37
   
$
(0.22
)
 
$
1.01
   
$
0.08
 
                                   
Weighted average shares used in computation:
                                 
Basic
19
   
47,130,522
     
32,730,054
     
45,423,109
     
29,926,052
 
Diluted
19
   
47,248,570
     
32,730,054
     
45,541,985
     
29,926,052
 

The accompanying notes are an integral part of these consolidated financial statements.
 
2

 
 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

     
Common Stock
                                           
 
Note
 
Shares of
Common
Stock
   
Common
Stock
Amount
   
Additional
Paid-in
Capital
   
Subscription
Receivable
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Equity
attributable to
Yongye
International,
Inc.
   
Noncontrolling
Interest
   
Total
Equity
 
                                                         
Balance as of January 1, 2010
     
44,532,241
     
44,532
     
118,583,308
     
(8,550,000
)
   
15,506,445
     
329,139
     
125,913,424
     
6,677,398
     
132,590,822
 
Net income
     
-
     
-
     
-
     
-
     
46,195,261
     
-
     
46,195,261
     
2,511,385
     
48,706,646
 
Foreign currency exchange translation adjustment, net of nil income taxes
     
-
     
-
     
-
     
-
     
-
     
3,754,709
     
3,754,709
     
181,738
     
3,936,447
 
Comprehensive income
                                                     
49,949,970
     
2,693,123
     
52,643,093
 
Subscription received
     
-
     
-
     
-
     
8,550,000
     
-
     
-
     
8,550,000
     
-
     
8,550,000
 
Stock issued to acquire assets July 1, 2010
13
   
3,600,000
     
3,600
     
21,236,400
     
-
     
-
     
-
     
21,240,000
     
-
     
21,240,000
 
Warrants exercised
13
   
54,803
     
55
     
469,491
     
-
     
-
     
-
     
469,546
     
-
     
469,546
 
Balance as of September 30, 2010
     
48,187,044
     
48,187
     
140,289,199
     
-
     
61,701,706
     
4,083,848
     
206,122,940
     
9,370,521
     
215,493,461
 

The accompanying notes are an integral part of these consolidated financial statements.
 
3

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

   
For the Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
48,706,646
   
$
2,437,976
 
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
   
2,249,302
     
385,337
 
Reversal of bad debt provision
   
-
     
(305,338
Change in fair value of derivative liabilities
   
(157,393
   
20,905,136
 
Changes in operating assets and liabilities:
               
Accounts receivable-related party
   
-
     
23
 
Accounts receivable-third parties
   
(68,136,061
   
(40,270,694
Inventories
   
2,932,733
     
(10,190,333
Prepayments
   
(3,102,063
   
(116,740
Prepaid expenses
   
(719,328
   
65,754
 
Other receivables
   
156,678
     
366,797
 
Other assets
   
(5,954,038
   
-
 
Accounts payable-related party
   
(880,505
   
5,569,674
 
Accounts payable-third parties
   
352,970
     
6,625,498
 
Income tax payable
   
3,626,988
     
7,065,369
 
Advance from customers
   
1,391,839
     
(1,733,928
Accrued expenses
   
10,250,425
     
2,223,070
 
Other payables
   
(59,319
   
130,644
 
Net Cash Used in Operating Activities
   
(9,341,126
) 
   
(6,841,755
) 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Change in restricted cash
   
(40,000
)
   
-
 
Prepayment for mining project
   
(28,866,259
   
-
 
Proceeds from sale of property, plant and equipment
   
92,629
     
-
 
Purchase of property, plant and equipment
   
(6,464,728
   
(2,655,816
Purchase of property, plant and equipment-related party
   
(1,663,769
   
-
 
Net Cash Used in Investing Activities
   
(36,942,127
) 
   
(2,655,816
) 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from bank loans
   
-
     
276,331
 
Repayment of long-term loans and payables
   
(447,800
   
(121,877
Repayment of short-term loans
   
(2,925,675
   
-
 
Proceeds from common stock issued
   
8,550,000
     
9,222,157
 
Proceeds from warrants exercised
   
84,397
     
-
 
Payment for common stock issuance costs
   
-
     
(836,456
Net Cash Provided by Financing Activities
   
5,260,922
     
8,540,155
 
                 
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
   
472,113
     
(11,653
NET DECREASE IN CASH
   
(40,550,218
   
(969,069
Cash and cash equivalent at beginning of period
   
65,518,181
     
4,477,477
 
Cash and cash equivalent at end of period
 
$
24,967,963
   
$
3,508,408
 
                 
Supplemental cash flow information:
               
Cash paid for income taxes
 
$
5,765,758
   
$
770,652
 
Cash paid for interest expense
 
$
70,960
   
$
33,236
 

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

4

 
YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

NOTE 1 -ORGANIZATION AND DESCRIPTION OF BUSINESS

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 and the Companys principal shareholder entered into a share exchange agreement (the “Exchange Agreement”) with Fullmax Pacific Limited (“Fullmax”), a privately held investment holding company organized on May 23, 2007 under the laws of the British Virgin Islands and all the shareholders of Fullmax (the “Fullmax Shareholders”). Pursuant to the terms of the Exchange Agreement, the Fullmax Shareholders transferred all of their shares to the Company in exchange for 11,444,755 shares of the Companys 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 Companys 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 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. 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 entered into a Sino-Foreign cooperative joint venture contract with Inner Mongolia Yongye Biotechnology Co., Ltd. (“Inner Mongolia Yongye”) to form Yongye Nongfeng, pursuant to which, Inner Mongolia Yongye and ASO were to own 10% and 90% of the equity interests in Yongye Nongfeng, respectively. Inner Mongolia Yongye was formed on September 16, 2003 in the Peoples Republic of China (the “PRC”). Mr. Zishen Wu, Chief Executive Officer, President and Chairman of the Company, owns a controlling equity interest in Inner Mongolia Yongye.

In connection with the September Offering (See Note 13), the Company entered into agreements to acquire the productive assets of Shengmingsu manufacturing business from Inner Mongolia Yongye (the “Acquisition”). In October 2009, the Company completed the Acquisition. The reason for the Acquisition was to expand the Companys manufacturing business.

On July 20, 2010, Yongye Nongfeng set up a wholly-owned subsidiary, Inner Mongolia Yongye Fumin Biotechnology Co., Ltd. (“Yongye Fumin”), with an initial investment cost of $2,946,376 (equivalent to RMB 20 million). Yongye Fumin is to be engaged in the manufacturing and sale of fulvic acid based liquid and powder nutrient compounds. As of September 30, 2010, the production plant of Yongye Fumin was in final stage of construction and has not started official operation.

 NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The December 31, 2009 condensed consolidated balance sheet was derived from the audited consolidated financial statements of the Company. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the December 31, 2009 audited consolidated financial statements of the Company included in the Companys annual report on Form 10-K for the year ended December 31, 2009.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2010, and the results of operations for the three and nine months ended September 30, 2009 and 2010, and cash flows for the nine months ended September 30, 2009 and 2010, have been made. 

The Company's business is subject to seasonal variations; thus, the results of operations for the three and nine months ended September 30, 2010 is not necessarily indicative of the results for the full fiscal year ending December 31, 2010. Generally, the second and third quarters are peak sales periods, and first and fourth quarters are low sales periods for the Company.

B. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to the Company by the weighted average number of common shares outstanding during the period. Diluted earnings 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 earnings per share when their effect would be anti-dilutive.
 
5

 
C. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605):  Multiple-Deliverable Revenue Arrangements (EITF Issue No. 08-1, Revenue Arrangements with Multiple Deliverables ). ASU 2009-13 amends ASC 605-25 to eliminate the requirement that all undelivered elements have vendor specific objective evidence of selling price (“VSOE”) or third party evidence of selling price (“TPE”) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE or TPE for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. Management is currently evaluating the potential impact, if any, of adopting ASU 2009-13 on the Company’s financial position and results of operations.

NOTE 3 ACCOUNTS RECEIVABLE

Accounts receivable at September 30, 2010 and December 31, 2009 consisted of the following:

 
September 30, 2010
 
December 31, 2009
 
         
Accounts receivable
 
$
75,643,791
   
$
6,161,796
 
Less: allowance for doubtful accounts
   
-
     
-
 
Total
 
$
75,643,791
   
$
6,161,796
 

An allowance for doubtful accounts of $0 and $305,338 was reversed for the three and nine months ended September 30, 2009, respectively. No provision for allowance for doubtful accounts was recorded during the three and nine months ended September 30, 2010 as management believes no accounts are uncollectible as of September 30, 2010.
 
6

 
NOTE 4 INVENTORIES

Inventories at September 30, 2010 and December 31, 2009 consisted of the following:
 
   
September 30, 2010
   
December 31, 2009
 
             
Finished goods
 
$
36,989,474
   
$
31,734,252
 
Work in progress
   
2,486,869
     
6,024,323
 
Raw materials
   
355,533
     
3,771,366
 
Consumables and packing supplies
   
101,013
     
503,320
 
Total
 
$
39,932,889
   
$
42,033,261
 

NOTE 5 PREPAYMENTS

In order to secure inventory supplies of raw materials, the Company makes prepayments to certain suppliers. As of September 30, 2010 and December 31, 2009, the prepayments to suppliers amounted to $9,317,065 and $6,070,458, respectively.

NOTE 6 PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment at September 30, 2010 and December 31, 2009 consisted of the following:

   
September 30, 2010
   
December 31, 2009
 
             
Buildings
 
$
10,117,355
   
$
5,644,213
 
Machinery and equipment
   
1,743,488
     
1,535,189
 
Office equipment and furniture
   
429,535
     
356,560
 
Vehicles
   
2,082,890
     
2,037,130
 
Software
   
18,900
     
17,199
 
Leasehold improvements
   
223,944
     
219,388
 
Construction-in-process
   
3,562,951
     
-
 
     
18,179,063
     
9,809,679
 
                 
Less: Accumulated depreciation
   
1,201,498
     
652,764
 
                 
Total
 
$
16,977,565
   
$
9,156,915
 

Depreciation expense for the three months ended September 30, 2010 and 2009 was $189,548 and $137,875, respectively. Depreciation expense for the nine months ended September 30, 2010 and 2009 was $539,793 and $377,369, respectively.

As of September 30, 2010, vehicles with a carrying amount of $1,050,619 were pledged as security for the long-term loans of $372,418 (See Note 12).

As of December 31, 2009, vehicles with a carrying amount of $1,122,845 were pledged as security for the long-term loans of $532,425 (See Note 12). As of December 31, 2009, an apartment with a carrying value of $102,551 was pledged as security for a long-term loan of $71,618 (See Note 12).

As of December 31, 2009, buildings with an original carrying amount of $2,718,269 were pledged as security for the short-term bank loan of $2,925,174 (See Note 11).  The short-term bank loan was repaid in February 2010.

7

 
NOTE 7 INTANGIBLE ASSETS, NET

Intangible assets at September 30, 2010 and December 31, 2009 consisted of the following:

   
September 30, 2010
   
December 31, 2009
 
             
Patent
 
$
108,531
   
$
106,323
 
Customer List
   
24,584,523
     
-
 
     
24,693,054
     
106,323
 
Less: Accumulated amortization
   
712,749
     
21,265
 
Total
 
$
23,980,305
   
$
85,058
 

Amortization expense for the three months ended September 30, 2010 and 2009 was $677,302 and $2,657, respectively. Amortization expense for the nine months ended September 30, 2010 and 2009 was $682,630 and $7,968, respectively. The estimated annual amortization expense for intangible assets in each of the next five years is $2,709,208.

On July 1, 2010, Yongye Nongfeng entered into an agreement with its provincial level distributor in Hebei Province, the PRC (“Seller”) to purchase the customer list from Seller (“Customer List”). The acquisition of the Customer List will allow Yongye Nongfeng to sell its products to sub-provincial level distributors in Hebei Province directly. The consideration of the Customer List was 3,600,000 shares of common stock of the Company which was issued in July 2010 and $3 million cash (payable on or before March 1, 2011). The Customer List is amortized over its estimated useful life for 9 years with nil residual value. A straight-line amortization method is used, as management believes that the pattern of economic benefits of the Customer List cannot be reliably determined.

NOTE 8 LAND USE RIGHT, NET

As of September 30, 2010 and December 31, 2009, land use right represented:

 
September 30, 2010
   
December 31, 2009
 
           
Land use right
 
$
4,275,989
   
$
4,188,995
 
Less: Accumulated amortization
   
89,863
     
22,008
 
Total
 
$
4,186,126
   
$
4,166,987
 

As of December 31, 2009, the land use right was pledged as security for the short-term bank loan of $2,925,174 (See Note 11).  The loan was repaid in February 2010.

NOTE 9 - PREPAYMENT FOR MINING PROJECT

On March 1, 2010, Yongye Nongfeng entered into an agreement with Wuchuan Shuntong Humic Acid Company Ltd (“Wuchuan Shuntong”) to acquire from Wuchuan Shuntong the right to develop certain lignite coal resources in Wuchuan area for a cash consideration of approximately $35 million. As of September 30, 2010, Yongye Nongfeng has made prepayment of $29,381,466 to Wuchuan Shuntong. As of September 30, 2010, the legal procedures for the transfer of the right to develop have not yet been completed.

NOTE 10 OTHER ASSETS

The Company has entered into agreements with certain distributors, including sub-distributors (the “Distribution Agreement”), pursuant to which the Company provided the distributor a free vehicle in exchange for the distributor agreeing to comply with certain sales conditions during the term of the agreement of five years.  The sales conditions included (1) meeting the annual sales target set by the Company; (2) not selling the products at a price lower than the price stipulated by the Company; and (3) selling the products only in Companys approved territories.  To the extent the distributor fails any one of these conditions during the term of the agreement; the Company has the right to have the vehicles return back to the Company.

The cost of these vehicles has been recorded as “Other assets” which is expensed over a five years period.

8

 
NOTE 11 SHORT-TERM BANK LOAN

On October 9, 2009, Yongye Nongfeng obtained a short-term bank loan of $2,925,174 from China Citic Bank that bears a fixed annual interest rate of 5.31% and is due on September 26, 2010. The short-term loan was pledged by the land use right and buildings with carrying amount of $4,166,987 and $2,718,269, respectively as of December 31, 2009. On February 4, 2010, Yongye Nongfeng repaid the short-term bank loan, and the pledge of the buildings and land use right was released.

The interest expense for the three and nine months ended September 30, 2010 was $0 and $14,737, respectively.

NOTE 12 LONG-TERM LOANS AND PAYABLES

As of September 30, 2010 and December 31, 2009, the long-term loans and payables consisted of the following:

   
September 30, 2010
   
December 31, 2009
 
             
Vehicle-employees
 
$
372,418
   
$
532,425
 
Mortgage loan
   
-
     
71,618
 
Vehicle-distributors
   
533,568
     
272,977
 
Total
 
$
905,986
   
$
877,020
 

As of September 30, 2010, vehicle-employees loans of $372,418 were secured by twenty-five vehicles with initial carrying amount of $1,231,501. The vehicle loans are payable in monthly installments over three to five years. Interest rates on the loans range from 5.4% to 14.54% annually, and are subject to the change of the base interest rate prescribed by Peoples Bank of China. The vehicle loans were obtained by individual employees of the Company after the Company made the initial down payment of the purchase price of the vehicles. The Company and the individual employees entered into trust agreements that stipulate that (i) the vehicles are legally registered under the individuals name, (ii) the Company has the rights of official use, (iii) the Company has the rights to the legal title of the vehicles at the time of termination of the employment relationship with the individual, (iv) 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, (v) the individuals have no right to sell, lease, lend or pledge the vehicles to any other person or entity, and (vi) the Company is required to repay the loans in full. Consequently, the Company has recognized the cost of the vehicles as assets and the loans as liabilities in its consolidated balance sheet.

Vehicle loans-distributors represent loans that were initially obtained by the distributors from banks and financial institutions. The Company and the distributors entered into agreements, pursuant to which the Company would assume the full repayment of the loans on behalf of these distributors in exchange for the distributors agreeing to comply with certain sales conditions (See Note 10). The loans have two or three years terms and are payable in monthly installments. Interest rates on the loans range from 5.40% to 13.20% annually, subject to the change of the base interest rate prescribed by Peoples Bank of China.
 
9

 
NOTE 13 - 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 Companys common stock, par value $0.001 per share (the “April Investor Shares”) and 1,623,905 warrants (See below) 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 Companys common stock, par value $0.001 per share (the “September Investor Shares”) and 1,518,253 warrants (See below) 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 aggregate gross proceeds equal to $8,984,595 (the “May Offering”).

On September 26, 2009, the Company entered into an underwriting agreement with Roth Capital Partner, LLC (“Roth”) and Oppenheimer and Company Inc. (the “Underwriters”), pursuant to which the Company agreed to issue and sell 8,000,000 shares of common stock (the “Firm Stock”), par value $0.001 per share, to the Underwriters at a price per share of $7.50 (the ”December Offering”). The sale of the Firm Stock was consummated on December 17, 2009 and closed on December 22, 2009. The aggregate proceeds from the offering were $60,000,000. Underwriting discounts and commissions and offering expenses were $3,692,000 and were recorded as a reduction of additional paid-in capital.

The Company also granted the Underwriters an option to purchase up to an additional 1,200,000 shares to cover over-allotments, if any, at the same price as the Firm Stock. On December 31, 2009 the Underwriters agreed to purchase the over-allotment for gross proceeds of $9,000,000, which after net of commissions and underwriting discounts of $450,000, were received on January 4, 2010.

In connection with the acquisition of Customer List (See note 7), the Company issued 3,600,000 shares of common stock of the Company in July 2010 to the Seller as part of the consideration.

Warrants

Concurrent with the April Investor Shares, the Company issued 1,623,905 warrants to purchase 1,623,905 shares of the Companys common stock (the “April Warrants”) to the April Investors. The warrants issued have a five years exercise period with an initial exercise price of $1.848. In addition, 649,562 warrants were issued to 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 Companys common stock (the “September Warrants”) to the September Investors. The warrants issued have a five 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 executed an irrevocable cashless exercise of its warrants. In exchange for the issuance of 354,987 shares of the Company, Roth surrendered 649,562 warrants received in the April Offering; and in exchange for the issuance of 331,891 shares of the Company, Roth surrendered 607,301 warrants received in the September Offering.

Concurrent with the offering of the “May Shares”, the Company issued to Roth as the placement agent, 246,224 warrants (“May Warrants”).  The warrants have a five years exercise period and an initial exercise price of $1.848. On November 9, 2009, Roth executed an irrevocable cashless exercise of all the “May Warrants”. The Company issued 198,247 shares of common stock of the Company in exchange for the surrender of all the May Warrants.

During the three and nine months ended September 30, 2010, nil and 54,803 “April Warrants” and “September Warrants” were exercised by April Investors and September Investors. In connection with the exercise, the Company issued 54,803 shares of common stock and received $84,397 from warrant holders.

 
10


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 Companys 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 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.  If the Company issues any common stock or common stock equivalents, as defined, at any time the warrants are outstanding, 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. As of September 30, 2010, there were 148,172 warrants outstanding, of which 48,714 and 99,458 warrants will expire if unexercised by April 2013 and September 2013, respectively.
 
The potential cash payments and the down-round provision preclude the classification of these warrants as equity. Accordingly, the warrants are accounted for as a liability and adjusted to fair value through earnings at each reporting date. The loss resulting from the increase in fair value of warrants was $12,077 for the three months ended September 30, 2010. The gain resulting from the decrease in fair value of warrants was $157,393 for the nine months ended September 30, 2010. The loss resulting from the increase in fair value of warrants was $15,836,189 and $20,905,136 for the three and nine months ended September 30, 2009, respectively.

The estimated fair values of the warrants issued to April Investors and September Investors were determined at September 30, 2010 and December 31, 2009 using Binominal Option Pricing Model with Level 2 inputs. The following table sets forth, by level within the fair value hierarchy, the Companys financial liabilities that were measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009.

         
Fair Value Measurements Using:
 
         
Quoted Prices in
Active Markets for
Identical Financial
Assets and Liabilities
   
Significant Other
Observable Inputs
   
Significant
Unobservable Inputs
 
September, 2010
 
Total
   
Level 1
   
Level 2
   
Level 3
 
   
  
                           
Liabilities at fair value:
                               
Derivative liabilitieswarrants
 
$
837,663
     
-
   
$
837,663
     
-
 
 
         
Fair Value Measurements Using:
 
         
Quoted Prices in
Active Markets for
Identical Financial
Assets and Liabilities
   
Significant Other
Observable Inputs
   
Significant
Unobservable Inputs
 
December 31, 2009
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
Liabilities at fair value:
                               
Derivative liabilitieswarrants
 
$
1,380,205
     
-
   
$
1,380,205
     
-
 

The fair values of the warrants are summarized as follows:

   
April Warrants
   
September Warrants
 
Fair value of Warrant per share (US$) at:
           
Date of issuance
 
$
1.07
   
$
2.08
 
December 31, 2009
 
$
6.78
   
$
6.81
 
September 30, 2010
 
$
5.64
   
$
5.66
 

 
11

 
The fair values of the warrants outstanding as of September 30, 2010 and December 31, 2009 were determined based on the Binominal option pricing model, using the following key assumptions:

   
September 30,
2010
   
December 31,
2009
 
   
April
Warrants
   
September
Warrants
   
April
Warrants
   
September
Warrants
 
                         
Expected volatility
   
57.3
%
   
57.0
%
   
61.0
%
   
60.0
%
                                 
Expected dividends yield
   
0
%
   
0
%
   
0
%
   
0
%
                                 
Time to maturity
 
2.6 years
   
3.0 years
   
3.3 years
   
3.7 years
 
                                 
Risk-free interest rate per annum
   
1.764
%
   
1.764
%
   
2.218
%
   
2.218
%
                                 
Fair value of underlying common shares (per share)
 
$
7.06
   
$
7.06
   
$
8.13
   
$
8.13
 

Escrow shares

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”) were held and to be released back to Full Alliance upon the Companys achievement of both 2008 and 2009 financial targets, as defined in the September Escrow Agreement. The remaining 2,000,000 escrow shares were held and to be released back to Full Alliance upon the Company obtaining the approval from Ministry of Agriculture of Inner Mongolia in relation to the transfer of fertilizer license to Yongye Nongfeng from Inner Mongolia Yongye and the completion of Yongye Nongfengs restructuring (the “Restructuring Make Good Shares”). In June 2010, both Make Good Escrow Shares and Restructuring Make Good Shares were released to Full Alliance.

NOTE 14 STATUTORY RESERVE

Yongye Nongfeng is 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 its registered capital. For the nine months ended September 30, 2010 and 2009, Yongye Nongfeng made appropriations to this statutory reserve of $5,051,225 and $2,328,546, respectively. The accumulated balance of the statutory reserve of Yongye Nongfeng as of September 30, 2010 and December 31, 2009 was $9,116,795 and $4,065,570, 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 the Company in the form of dividends, which amounted to $8,660,955, representing the amount of accumulated balance of statutory reserve of Yongye Nongfeng attributable to the Company, as of September 30, 2010.

NOTE 15 INCOME TAXES

The Company and its subsidiaries file separate income tax returns.

The United States of America

Yongye International, Inc. is incorporated in the State of Nevada in the U.S., and is subject to a gradual U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not impose any corporate state income tax.

British Virgin Islands

Fullmax is incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, Fullmax is not subject to tax on income or capital gains. In addition, upon payments of dividends by Fullmax, no British Virgin Islands withholding tax is imposed.

Hong Kong

ASO is incorporated in Hong Kong. ASO did not earn any income that was derived in Hong Kong and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.
 
12

 
PRC

Effective from January 1, 2008, the PRCs statutory income tax rate is 25%. According to an approval from the Inner Mongolia Autonomous Region National Tax Authority on December 11, 2009, Yongye Nongfeng, being a foreign investment enterprise located in the Western Region of the PRC, is entitled to a preferential income tax rate of 15% for the years ended December 31, 2009 and 2010.

The Companys effective income tax rate was 16.66% and 16.16% for the three months and nine months ended September 30, 2010, respectively. The difference between effective tax rate and statutory tax rate primarily represented the tax effects on non-taxable income and non-deductible expenses.

The Company had deferred tax assets of approximately $389,318 as of September 30, 2010 that consisted of tax loss carryforwards. The Company had no other temporary differences as of September 30, 2010. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those tax loss carryforwards 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 States 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 was established for the full value of the deferred tax asset as of September 30, 2010.

NOTE 16  FAIR VALUE MEASUREMENTS

   
September 30, 2010
   
December 31, 2009
 
   
Carrying
         
Carrying
       
   
amount
   
Fair value
   
amount
   
Fair value
 
Financial assets:
                       
Cash
 
$
24,967,963
   
$
24,967,963
   
$
65,518,181
   
$
65,518,181
 
Restricted cash
   
40,000
     
40,000
     
-
     
-
 
Accounts receivable
   
75,643,791
     
75,643,791
     
6,161,796
     
6,161,796
 
Other receivables
 
$
232,627
   
232,627
   
383,841
   
383,841
 
                                 
Financial liabilities:
                               
Short-term bank loan
 
$
-
   
$
-
   
$
2,925,174
   
$
2,925,174
 
Long-term loans and payables - current portion
   
462,178
     
462,178
     
331,693
     
331,693
 
Accounts payable - related party
   
-
     
-
     
880,026
     
880,026
 
Accounts payable - third parties
   
725,074
     
725,074
     
344,774
     
344,774
 
Accrued expenses
   
10,947,119
     
10,947,119
     
479,609
     
479,609
 
Due to a related party
   
-
     
-
     
1,663,191
     
1,663,191
 
Other payables
   
5,113,861
     
5,113,861
     
553,286
     
553,286
 
Derivative liabilities
   
837,663
     
837,663
     
1,380,205
     
1,380,205
 
Long-term loans and payables
 
443,808
   
443,808
   
545,327
   
545,327
 
 
The fair values of the financial instruments shown in the above table as of September 30, 2010 and December 31, 2009 represent the estimated amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Companys own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, available observable and unobservable inputs.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash, accounts receivable, other receivables, short-term bank loan, long-term loans and payables current portion, accounts payables, accrued expenses, due to a related party and other payables: The carrying amounts approximate fair value because of the short maturity of these instruments.

Derivative liabilities: The method and assumptions used to estimate the fair value of derivative liabilities are set out in Note 13.

Long-term loans and payables: The fair value of the Companys long-term loans and payables is estimated by discounting future cash flows using current market interest rates offered to the Company and its subsidiaries for debts with substantially the same characteristics and maturities.
 
13

 
NOTE 17 LEASE COMMITMENTS

The Company entered into an operating lease for an office space in Beijing, PRC for the period from January 1, 2008 to December 31, 2010. The lease expense for the Beijing office was $58,428 and $57,909 for the three months ended September 30, 2010 and 2009, respectively. The lease expense for the Beijing office was $174,354 and $165,448 for the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, future minimum lease payments under this non-cancellable operating lease agreement for the next twelve months are $59,145.

NOTE 18 RELATED PARTY TRANSACTIONS AND BALANCES

For the three and nine months ended September 30, 2009, Yongye Nongfeng, purchased inventories from Inner Mongolia Yongye amounting to $0 and $37,923,422, respectively. In January 2008, upon receiving governmental approval of its establishment, Yongye Nongfeng entered into an agreement (the “Agreement”) with Inner Mongolia Yongye, pursuant to which Yongye Nongfeng agreed to purchase finished products from Inner Mongolia Yongye at a fixed price of RMB 350 per case for fulvic acid based plant products and RMB 120 per case for fulvic acid based animal products.  The term of the Agreement was for the period from January 15, 2008 to January 14, 2013. Pursuant to the Agreement, the Company could terminate the Agreement by giving one month notice to Inner Mongolia Yongye. Upon Yongye Nongfeng obtaining its own fertilizer license, the Agreement was terminated in July 2009.

As of December 31, 2009, accounts payable to related party was $880,026, and represented the payable for the purchase of inventories from Inner Mongolia Yongye. The accounts payable was repaid in the nine months ended September 30, 2010.

As of December 31, 2009, the amount due to a related party was $1,663,191, which mainly represented the payable for the Acquisition from Inner Mongolia Yongye. The amount due to a related party was repaid in the nine months ended September 30, 2010.

During the nine months ended September 30, 2010, the Company sold three vehicles with net book value of $135,191 and an apartment with net book value of $102,263 to Inner Mongolia Yongye. In addition, the long-term loans of $144,513 that were secured by these assets were assumed by Inner Mongolia Yongye. Upon disposal, no gain or loss was recorded and the Company received cash of $92,941.

Yongye Nongfeng and Inner Mongolia Yongye entered a series of lease arrangements 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 June 1, 2009, upon the expiry of this agreement, Yongye Nongfeng and Inner Mongolia Yongye entered into another lease agreement in which Yongye Nongfeng would lease a land of 79,920 square meters and a production building from Inner Mongolia Yongye from June 1, 2009 to October 10, 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 and certain equipment from Yongye Nongfeng from September 28, 2008 to September 27, 2009. The agreements were terminated on June 1, 2009 upon Yongye Nongfeng obtaining the fertilizer license from Ministry of Agriculture.
   
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. The equipment lease agreement was not renewed upon expiration.
 
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 results of operations for the three and nine months ended September 30, 2009 and therefore have not been included.

14


NOTE 19 - EARNINGS PER SHARE
 
The following table sets forth the computation of basic and diluted income per share for the periods indicated:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
Numerator used in basic net income per share:
                       
Net income/(loss) attributable to Yongye International, Inc.
 
$
17,578,267
   
$
(7,041,265)
   
$
46,195,261
   
$
2,309,692
 
Change in fair value of derivative liabilities
   
12,077
     
-
     
(157,393)
     
-
 
Numerator used in diluted net income per share
   
17,590,344
     
(7,041,265)
     
46,037,868
     
2,309,692
 
                                 
Shares (denominator):
                               
                                 
Weighted average ordinary shares outstanding-basic
   
47,130,522
     
32,730,054
     
45,423,109
     
29,926,052
 
Plus: weighted average incremental shares from assumed exercise of warrants
   
118,048
     
-
     
118,876
     
-
 
                                 
Weighted average ordinary shares outstanding used in computing diluted net income per ordinary share
   
47,248,570
     
32,730,054
     
45,541,985
     
29,926,052
 
                                 
Net income per ordinary share-basic
 
$
0.37
   
$
(0.22)
   
$
1.02
   
$
0.08
 
Net income per ordinary share-diluted
 
$
0.37
   
$
(0.22)
   
$
1.01
   
$
0.08
 

As of September 30, 2009, the Company had 3,161,051 warrants outstanding that was excluded in the computation of diluted earnings per share as their effect would have been anti-dilutive.

NOTE 20 - CONCENTRATIONS AND CREDIT RISKS

At September 30, 2010 and December 31, 2009, the Company held cash in banks of approximately $25,007,963 and $65,518,181, 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 55% and one major customer accounted for 21% of the Companys revenue for the three months ended September 30, 2010. Five major customers accounted for 59% and one major customer accounted for 17% of the Companys revenue for the nine months ended September 30, 2010. Five major customers accounted for 92% and one major customer accounted for 51% of the Companys revenue for the three months ended September 30, 2009. Five major customers accounted for 83% and one major customer accounted for 31% of the Companys revenue for the nine months ended September 30, 2009. The Companys total sales to five major customers were $39,197,220 and $112,111,180 for the three and nine months ended September 30, 2010, respectively. The Companys total sales to five major customers were $26,724,973 and $73,451,769 for the three and nine months ended September 30, 2009, respectively. All these major customers are distributors in the PRC agriculture industry.

15


For the three months ended September 30, 2010
 
For the nine months ended September 30, 2010
 
Largest
Customers
 
Amount of
Sales
   
% Total
Sales
 
Largest
Customers
 
Amount of
Sales
   
% Total
Sales
 
Customer A
 
$
15,313,847
     
21
Customer F
 
$
32,370,197
     
17
Customer B
   
7,214,600
     
10
Customer G
   
28,093,886
     
15
Customer C
   
6,888,311
     
10
%
Customer C
   
19,139,975
     
10
Customer D
   
5,060,233
     
7
%
Customer H
   
17,193,243
     
9
Customer E
   
4,720,229
     
7
%
Customer A
   
15,313,847
     
8
Total
 
$
39,197,220
     
55
%
Total
 
$
112,111,180
     
59
%


For the three months ended September 30, 2009
 
For the nine months ended September 30, 2009
 
Largest
Customers
 
Amount of
Sales
   
Total
Sales
 
Largest
Customers
 
Amount of
Sales
   
% Total
Sales
 
Customer G
 
$
14,840,002
     
51
Customer F
 
$
27,230,124
     
31
Customer H
   
4,614,438
     
16
Customer H
   
15,902,407
     
18
Customer F
   
3,672,634
     
13
Customer G
   
14,840,002
     
17
Customer I
   
1,900,374
     
6
Customer J
   
9,775,088
     
11
Customer C
   
1,697,525
     
6
Customer K
   
5,704,148
     
6
Total
 
$
26,724,973
     
92
%
Total
 
$
73,451,769
     
83
%

Three major suppliers accounted for 86% ($26,529,521) and one major supplier accounted for 64% ($19,771,633) of the Companys inventory purchase for the three months ended September 30, 2010. Three major suppliers accounted for 87% ($73,219,730) and one major supplier accounted for 69% ($57,856,688) of the Companys inventory purchase for the nine months ended September 30, 2010. Inner Mongolia Yongye supplied 0% ($0) and 67% ($37,923,422) of the Companys inventories for the third quarter of 2009 and nine months ended September 30, 2009, respectively. If these suppliers terminate their supply relationship with the Company, the Company may be unable to purchase sufficient raw material on acceptable terms, and finally the Companys financial results may be adversely affected.

The Companys business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC such as 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 21 SUBSEQUENT EVENT

In October 2010, the Company granted 1,183,667 restricted shares to management and independent directors of the Company in accordance with Yongye International, Inc. 2010 Omnibus Securities and Incentive Plan, as an incentive to such individuals to promote the success of the Company’s business. Shares vest on the six month anniversary of the date of grant. Management was granted shares of 1,137,000 on October 8, 2010, and the independent directors were granted shares of 46,667 on October 15, 2010.
 
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. Except as otherwise indicated or as the context may otherwise require, all references to “we”, “the Company”, “us” and “our” refer to Yongye International, Inc. and its consolidated subsidiaries. The following discussion contains forward-looking statements. 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.
 
Company Overview
 
In April 2008, we entered into a share exchange transaction (the “Share Exchange”) prior to which we were a public “shell” company with nominal assets.  Following the Share Exchange, we changed our name to Yongye International, Inc. and through our Cooperative Joint Venture subsidiary, Yongye Nongfeng Biotechnology Co. Ltd. (“Yongye Nongfeng”), are engaged in the research and development, manufacturing, distribution and sales 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 feed 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. Our plant products add naturally occurring macro and micro nutrients such as nitrogen, phosphorus, potassium, boron and zinc. Our animal products add natural herbs which help to reduce bacterial inflammation (mastitis) in cows. It also assists various animals digest food more completely and thus be more healthy. Based on industry research and government testing, 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 believe our fulvic acid has a very light weight molecular composition, which may improve the overall permeability of cell walls, thus it allowing more complete transport of nutrients across plant membranes, and effectively strengthening the overall health of plants. We believe our patented processes for mixing our plant nutrient and animal nutrient are key differentiators in the market. We believe this will help us ensure that we have a high quality product that we can control from procurement of raw materials to final production. We believe this also ensures our products provide reliable results from season to season.
 
In the three months ended September 30, 2010, we sold approximately 6,352 tons of plant product, which represented 99.9% of our total revenue or $71,647,884. We also sold approximately 18 tons of our animal product, which represented 0.1% of our total revenue or $104,185. 
 
Recent Developments
 
In March 2010, Yongye Nongfeng signed a preliminary agreement with a local supplier of humic acid to purchase an undeveloped lignite coal resources project in Inner Mongolia, PRC. Consummation of the acquisition requires the satisfaction of certain customary closing conditions, including receipt of governmental approval.  The preliminary agreement with Wuchuan Shuntong Humic Acid Trading Company Limited ("Shuntong") provides for the acquisition of Shuntong's development rights to a currently undeveloped lignite coal resource project located in Wuchuan County, a suburb located outside the city of Hohhot, Inner Mongolia, where the Company's major operations reside in the PRC. According to a third party valuation report, the project area is estimated to contain over 40 million cubic meters of surface level lignite coal which can supply the Company's long-term needs. According to the agreement, Nongfeng will pay Shuntong RMB240 million ($35.1 million) to acquire the development rights for this project. This acquisition will not be completed until Nongfeng makes full payment to Shuntong and receives in return the full, unencumbered title to the development rights. Nongfeng is still in the process of obtaining the related titles.
 
17

 
In June 2010, Yongye Nongfeng entered into an agreement to acquire the Shengmingsu distribution network from its provincial level distributor in Hebei Province which is solely comprised of a customer list, which was completed in July 2010. The Company has issued 3.6 million shares of common stock and will pay an additional $3.0 million in cash to the seller on or before March 2011, as consideration for the acquisition. The Company has commenced to trade with these customers in July 2010. The customer list is comprised of all of the sub-provincial level distributors who sell the Company's Shengmingsu plant and animal nutrient products in Hebei Province, which is Yongye's largest regional market in China, representing approximately 30% and 28.8% of the Company's revenues in 2009 and the nine months periods in 2010, respectively. Previously, in Hebei Province, Yongye sold its products to its provincial level distributor who then resold those products to lower level distributors. After the acquisition of the customer list, Yongye sold directly to those sub-provincial level distributors in Hebei Province.

On July 20, 2010, Yongye Nongfeng set up a wholly owned subsidiary, Inner Mongolia Yongye Fumin Biotechnology Co., Ltd. (“Yongye Fumin”), in a nearby economic development zone located near the coal resources project, with investment of $2,946,376 (RMB 20 million). Yongye Fumin is to be engaged in manufacturing and sale of fulvic acid based liquid and powder nutrient compounds and will have 20,000 tons of plant nutrient product and 10,000 tons animal nutrient product annual capacity. As of September 30, 2010, Yongye Fumin is in final stage of construction and has not started official operation.

In October 2010, the Company granted 1,183,667 restricted shares to management and independent directors of the Company in accordance with the Yongye International, Inc. 2010 Omnibus Securities and Incentive Plan, as an incentive to such individuals to promote the success of the Company’s business. Shares vest on the six-month anniversary of the date of grant. Management was granted shares of 1,137,000 on October 8, 2010, and the independent directors were granted shares of 46,667 on October 15, 2010.

Factors affecting our operating results

Demand for Our Products

One major tenet of the PRC governments 11th Five-Year National Economic and Social Plan (the “NESDP”) (2006-2010) is the focus towards developing Chinas 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 the Asian Development Bank statistics, well over 60% of the nations total population of 1.3 billion people is 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, Chinas 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

Before June 1, 2009, we purchased our finished goods from our main supplier, Inner Mongolia Yongye and then sold them through our distribution system. Upon obtaining the fertilizer license on June 1, 2009, we commenced the manufacturing of our product.

Seasonality

Our Shengmingsu products face seasonality in our sector. In general, the first and fourth quarters are typically our slowest quarters. 13% and 10% of our total net sales for the year 2009 were from these quarters, respectively. The second and third quarters drove the bulk of our overall sales in 2009 with 47% and 30%, respectively, of the total 2009 years net sales.
 
18

 
Agriculture Sector

Agriculture continues to be a heavily invested sector in China. Brand name investors continue to invest into Chinas agriculture space because they have confidence in Chinas 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 worlds 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 will include protecting farmland and working to increase rural incomes to retain farming interest.

The goal is to maintain self-sufficiency in food production because no other country can feed the worlds biggest population, according to Sun. “Our strategy must be based on stable farmland, and seeking ways to improve yields,” Sun said in a speech to local officials, outlining the governments near- and long-term agriculture policy and objectives. China, which harvested more summer crops, aims also to boost grain and oilseed output this year, Sun said. To ensure next years crops, officials must “stabilize” area planted in winter wheat and use idle land in the off season to grow rapeseed, Sun said.

This growth, however, does not come without challenges and China has faced many of these with regards to the continued concern over the quality of milk and eggs sold both domestically and internationally in the dairy industry. We believe that the government is making every effort to bring back consumer confidence in these domestically produced products and overall this will bring about an even stronger industry once planned new licensing and safety procedures have been put into place.

 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 other farmers have stepped in to bring it back into production. This has created a shortage of a key raw material in the agricultural supply chain productive land. The government has acknowledged this issue and recently enacted a new land use reform policy which liberalizes the exchange of land among the nations farmers. This creates a new model for Chinas 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. Chinese authorities commented that, “Without modernizing agriculture, China cannot modernize; without stability and prosperity in rural areas, China cannot have stability and prosperity. These changes are enacted to “ensure national food security and the supply of major agricultural products, and promote increases in agricultural production, farm incomes and rural prosperity.” (Chinas Ongoing Agriculture Modernization, USDA, April 2009)
 
19

 
RESULTS OF OPERATIONS
 
Summary Statement of Income Data

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
                         
Sales
  $ 71,752,069     $ 29,279,473     $ 186,101,173     $ 87,986,792  
                                 
Cost of sales
    29,639,662       13,435,326       80,095,965       41,274,810  
                                 
Gross profit
    42,112,407       15,844,147       106,005,208       46,711,982  
                                 
Selling expenses
    15,574,981       2,644,715       38,206,314       11,715,707  
                                 
Research and development expenses
    2,170,951       69,871       4,509,847       1,482,888  
                                 
General and administrative expenses