10-Q 1 v184422_10q.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x           Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2010
 
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.)
   
6 th 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 ¨ No ¨ *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 ¨

As of May 10, 2010, there were 44,532,241 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.
19
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
26
ITEM 4.
CONTROLS AND PROCEDURES
26
     
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

 
i

 
 
PART I.
 
Financial Information
 
ITEM 1.
Financial Statements

YONGYE INTERNATIONAL, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED BALANCE SHEETS

 
Note
 
March 31, 2010
   
December 31, 2009
 
Current assets
             
Cash
   
$
50,989,166
   
$
65,518,181
 
Accounts receivable, net of allowance for doubtful accounts
3
   
8,774,317
     
6,161,796
 
Inventories
4
   
46,174,371
     
42,033,261
 
Prepayments
5
   
6,023,486
     
6,211,896
 
Prepaid expenses
     
343,106
     
112,879
 
Other receivables
     
323,532
     
383,841
 
Total Current Assets
     
112,627,978
     
120,421,854
 
                   
Property, plant and, equipment, net
6
   
9,048,876
     
9,156,915
 
Intangible asset, net
7
   
82,414
     
85,058
 
Land use right, net
8
   
4,145,645
     
4,166,987
 
Deposits for assets acquisition
9
   
20,019,163
     
-
 
Other assets
10
   
4,426,209
     
2,029,012
 
Goodwill
11
   
9,947,462
     
9,945,862
 
Total Assets
   
$
160,297,747
   
$
145,805,688
 
Current liabilities
                 
Short-term bank loan
12
 
$
-
   
$
2,925,174
 
Long-term loans and payables - current portion
13
   
431,041
     
331,693
 
Accounts payable - related party
19
   
880,167
     
880,026
 
Accounts payable - third parties
     
4,033,650
     
344,774
 
Income tax payable
16
   
4,901,251
     
4,082,424
 
Advance from customers
     
31,311
     
29,157
 
Accrued expenses
     
894,985
     
479,609
 
Due to a related party
19
   
785,765
     
1,663,191
 
Other payables
     
411,182
     
553,286
 
Derivative liabilities – fair value of warrants
14
   
1,367,671
     
1,380,205
 
Total Current Liabilities
     
13,737,023
     
12,669,539
 
                   
Long-term loans and payables
13
   
769,737
     
545,327
 
                   
Total Liabilities
     
14,506,760
     
13,214,866
 
                   
Equity
                 
Yongye International, Inc. shareholders’ equity:
                 
Common stock: par value $.001; 75,000,000 shares authorized; 44,532,241 shares issued and outstanding at March 31, 2010 and December 31, 2009
14
   
44,532
     
44,532
 
Additional paid-in capital
14
   
118,583,308
     
118,583,308
 
Subscription receivable
14
   
-
     
(8,550,000
)
Retained earnings
     
19,877,738
     
15,506,445
 
Accumulated other comprehensive income
     
349,491
     
329,139
 
Total Yongye International, Inc. shareholders’ equity
     
138,855,069
     
125,913,424
 
Noncontrolling interest
     
6,935,918
     
6,677,398
 
Total Equity
     
145,790,987
     
132,590,822
 
                   
Total Liabilities and Equity
   
$
160,297,747
   
$
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
 
   
Note
   
March 31, 2010
   
March 31, 2009
 
                   
Sales
        $ 24,934,716     $ 12,435,775  
                       
Cost of sales
          11,077,957       5,902,607  
                       
Gross profit
          13,856,759       6,533,168  
                       
Selling expenses
          6,288,003       2,620,298  
                       
Research & development expenses
          100,565       288,572  
                       
General and administrative expenses
          1,851,254       345,157  
                       
Income from operations
          5,616,937       3,279,141  
                       
Other expenses/(income)
                     
Interest expense, net
          7,458       5,958  
Other expenses, net
          48,783       441  
Decrease in fair value of derivative liabilities
 
14
      (12,534 )     (208,011 )
                       
Total other expenses/(income), net
          43,707       (201,612 )
                       
Earnings before income tax expense
          5,573,230       3,480,753  
                       
Income tax expense
 
16
      944,488       155,447  
                       
Net income
          4,628,742       3,325,306  
                       
Less: Net income attributable to the noncontrolling interest
          257,449       18,522  
                       
Net income attributable to Yongye International, Inc.
        $ 4,371,293     $ 3,306,784  
                       
Earnings per share:
                     
Basic
 
20
    $ 0.10     $ 0.12  
Diluted
 
20
    $ 0.10     $ 0.12  
                       
Weighted average shares used in computation:
                     
Basic
 
20
      44,532,241       26,760,258  
Diluted
 
20
      44,696,427       26,760,258  

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 Three Months ended March 31, 2010
 
     
Common Stock
                             
 
Note
 
Shares of
Common
Stock
 
Common
Stock
Amount
 
Additional
Paid-in
Capital
 
Subscription
Receivable
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Yongye
International, Inc.
Shareholders’ Equity
 
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
     
-
 
-
   
-
 
-
   
4,371,293
 
-
   
4,371,293
 
257,449
 
4,628,742
 
Foreign currency exchange translation adjustment, net of nil income taxes
     
-
 
-
   
-
 
-
   
-
 
20,352
   
20,352
 
1,071
 
21,423
 
Comprehensive income
                                   
4,391,645
 
258,520
 
4,650,165
 
Subscription received
     
-
 
-
   
-
 
8,550,000
   
-
 
-
   
8,550,000
 
-
 
8,550,000
 
                                                 
Balance as of March 31, 2010
     
44,532,241
 
44,532
   
118,583,308
 
-
   
19,877,738
 
349,491
   
138,855,069
 
6,935,918
 
145,790,987
 

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 Three Months Ended
 
   
March 31, 2010
   
March 31, 2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 4,628,742     $ 3,325,306  
Adjustments to reconcile net income to net cash provided by / (used in) operating activities:
               
Depreciation and amortization
    357,170       107,236  
Reversal of bad debt provision
    -       (73,701 )
Decrease in fair value of derivative liabilities
    (12,534 )     (208,011 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (2,611,556 )     (3,302,662 )
Inventories
    (4,134,389 )     (1,466,830 )
Prepayments
    132,734       (18,828 )
Due from a related party
    -       (72,763 )
Prepaid expenses
    (230,217 )     97,734  
Other receivables
    60,371       424,992  
Other assets
    (2,563,580 )     -  
Accounts payable- related party
    -       43,366  
Accounts payable- third parties
    3,688,858       -  
Income tax payable
    818,179       140,799  
Advance from customers
    2,149       (1,789,453 )
Accrued expenses
    415,120       1,051,410  
Other payables
    (38,885 )     70,298  
Net Cash Provided by / (Used in) Operating Activities
    512,162       (1,671,107 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Deposits made for assets acquisition
    (20,019,368 )     -  
Proceeds from sale of property, plant and equipment
    92,629       -  
Purchase of property, plant and equipment
    (1,068,030 )     (1,446,782 )
Net Cash Used in Investing Activities
    (20,994,769 )     (1,446,782 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from long-term loans and payables
    400,280       89,534  
Repayment of long-term loans and payables
    (81,665 )     (29,870 )
Repayment of short-term loans
    (2,925,675 )     -  
Proceeds from common stock issued
    8,550,000       -  
Net Cash Provided by Financing Activities
    5,942,940       59,664  
                 
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
    10,652       5,016  
NET DECREASE IN CASH
    (14,529,015 )     (3,053,209 )
Cash and cash equivalent at beginning of year
    65,518,181       4,477,477  
Cash and cash equivalent at end of year
  $ 50,989,166     $ 1,424,268  
                 
Supplemental cash flow information:
               
Cash paid for income taxes
    126,310       22,464  
Cash paid for interest expense
    34,962       9,833  

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 THREE MONTHS ENDED MARCH 31, 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 Company’s 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 to the Company all of their shares in exchange for 11,444,755 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 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 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 is engaged in the research, manufacturing, and sale of biochemical products for use in plants and animal growth and 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 research and development, manufacturing, distribution and sale of fulvic acid based liquid and powder nutrient compounds. 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 interest owner of Yongye Nongfeng, respectively.

In October 2009, the Company completed the acquisition of the productive assets of Shengmingsu manufacturing business from Inner Mongolia Yongye (“Acquisition”). The consideration paid for the Acquisition consisted of cash of $4.7 million and 4.5% equity interests in Yongye Nongfeng. Upon completion of the Acquisition, Inner Mongolia Yongye and ASO became 5% and 95% equity interest owner of Yongye Nongfeng, respectively.

 
5

 

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 annual report on Form 10-K.
 
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of March 31, 2010, and the results of operations and cash flows for the three-month periods ended March 31, 2009 and 2010, have been made.

The Company's business is subject to seasonal variations; thus, the results of operations for the three months ended March 31, 2010 are 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.
 
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 March 31, 2010 and December 31, 2009 consisted of the following:

 
March 31, 2010
 
December 31, 2009
 
         
Accounts receivable
 
$
8,774,317
   
$
6,161,796
 
Less: allowance for doubtful accounts
   
-
     
-
 
Total
 
$
8,774,317
   
$
6,161,796
 
 
An allowance for doubtful accounts of $73,701 was reversed for the three months ended March 31, 2009. No provision for allowance for doubtful accounts was recorded during the three months ended March 31, 2010 as management believes no accounts are uncollectible as of March 31, 2010.

 
6

 

NOTE 4 – INVENTORIES

Inventories at March 31, 2010 and December 31, 2009 consisted of the following:
 
   
March 31, 2010
   
December 31, 2009
 
             
Finished goods
 
$
39,059,951
   
$
31,734,252
 
Work in progress
   
6,825,238
     
6,024,323
 
Raw materials
   
119,179
     
3,771,366
 
Consumables and packing supplies
   
170,003
     
503,320
 
Total
 
$
46,174,371
   
$
42,033,261
 
 
NOTE 5 – PREPAYMENTS

In order to secure stock supplies of raw materials, the Company makes prepayments to certain suppliers. As of March 31, 2010 and December 31, 2009, the prepayments to suppliers amounted to $5,933,906 and $6,070,458, respectively.

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment at March 31, 2010 and December 31, 2009 consisted of the following:

   
March 31, 2010
   
December 31, 2009
 
             
Buildings
 
$
5,619,029
   
$
5,644,213
 
Machinery and equipment
   
1,667,008
     
1,535,189
 
Office equipment and furniture
   
389,105
     
356,560
 
Vehicles
   
1,943,997
     
2,037,130
 
Software
   
17,202
     
17,199
 
Leasehold improvements
   
219,423
     
219,388
 
     
9,855,764
     
9,809,679
 
                 
Less: Accumulated depreciation
   
806,888
     
652,764
 
                 
Total
 
$
9,048,876
   
$
9,156,915
 
 
Depreciation expense for the three months ended March 31, 2010 and 2009 was $165,813 and $104,582, respectively. 

As of March 31, 2010, vehicles with a carrying amount of $1,013,251 were pledged as security for the long-term loans of $439,137 (See Note 13).

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 13). 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 13).

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 12).  Such loan was repaid in February 2010.

 
7

 

NOTE 7 – INTANGIBLE ASSET

Intangible asset at March 31, 2010 and December 31, 2009 represented a patent as follows:

   
March 31, 2010
   
December 31, 2009
 
             
Patent
 
$
106,340
   
$
106,323
 
Less: Accumulated amortization
   
23,926
     
21,265
 
Total
 
$
82,414
   
$
85,058
 

Amortization expense for the three months ended March 31, 2010 and 2009 was $2,659 and $2,654, respectively. The estimated annual amortization expense for intangible asset in each of the next five years is $10,634.

NOTE 8 – LAND USE RIGHT

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

 
March 31, 2010
   
December 31, 2009
 
           
Land use right
  $ 4,189,670     $ 4,188,995  
Less: Accumulated amortization
    44,025       22,008  
Total
  $ 4,145,645     $ 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 12).  Such loan was repaid in February 2010.

 
8

 

NOTE 9 - DEPOSITS FOR ASSETS ACQUISITION

On March 1, 2010, Yongye Nongfeng entered into an asset purchase agreement with 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 March 31, 2010, Yongye Nongfeng has paid deposit of $19,309,255 to Wuchuan Shuntong, and the legal procedures for the transfer of the right to develop have not yet been completed. Management believes that the legal procedures, including obtaining all necessary approvals and licenses from the PRC government, will be completed before December 31, 2010.

As of March 31, 2010, Yongye Nongfeng also made $709,908 deposits to suppliers for equipment to be used and developers of the plant to be built for the lignite coal mine. According to the contracts signed with these suppliers and developers, the Company would pay $2,000,000 by September 2010 upon the delivery of the equipment and completion of the construction.

NOTE 10 – OTHER ASSETS

During the three months ended March 31, 2010 and December 31, 2009, the Company 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 sale 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 Company’s 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.

NOTE 11 – GOODWILL

The goodwill as of March 31, 2010 and December 31, 2009 represents the excess of the consideration paid by the Company over the fair value of the net identifiable assets acquired in the Acquisition.

NOTE 12 – 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 acarrying amount of $4,188,995 and $2,718,269, respectively. On February 4, 2010, Yongye Nongfeng repaid the short-term bank loan to China Citic Bank, and therefore, the pledge of the buildings and land use right was released.

The interest expense for the three months ended March 31, 2010 was $14,737.

NOTE 13 – LONG-TERM LOANS AND PAYABLES

As of March 31, 2010 and December 31, 2009, the long-term loans and payables consisted of the followings:

   
March 31, 2010
   
December 31, 2009
 
             
Vehicle-employees
 
$
439,137
   
$
532,425
 
Mortgage loan
   
-
     
71,618
 
Vehicle-distributors
   
611,810
     
272,977
 
Other loan
   
149,831
     
-
 
Total
 
$
1,200,778
   
$
877,020
 

 
9

 

As of March 31, 2010, vehicle loans of $439,137 were secured by twenty-four vehicles with initial carrying amount of $1,133,792. The vehicle loans have three to five years terms and are paid in monthly installments. Interest rates on the loans range from 5.45% to 14.54% annually, and are subject to the change of the base interest rate prescribed by People’s Bank of China. These 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 pursuant to which (i) the vehicles are legally registered under the individuals’ name, (ii) the Company has the rights of official use and (iii) the Company has the rights to retain the legal title of the vehicles at the time of termination of the employment relationship with the individual. In addition, under the trust agreements, 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 and, and is required to repay the loans in full. The individuals have no right to sell, lease, lend or pledge the vehicles to any other person or entity. 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.  In connection with entering into the Distribution Agreement (See note 9), the Company and the distributors entered into agreements, pursuant to which the Company would assume repayment of the full amount of payables on behalf of these distributors. Accordingly, the Company recorded the long-term payables in the accompanying consolidated balance sheets. These payables have three years terms and are paid in monthly installments. Interest rates on the loans range from 5.40% to 13.00% annually, subject to the change of the base interest rate prescribed by People’s Bank of China.

The following table sets out the remaining contractual maturities at the balance sheet date of long-term loans and payables, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on prevailing rates current at the balance sheet date) and the earliest date the Company would be required to repay:
 
2010
 
$
375,238
 
2011
   
456,120
 
2012
   
424,598
 
2013
   
49,404
 
2014 and thereafter
   
16,864
 
Total
   
1,322,224
 
Less: Amount representing interest
   
(121,446
)
Total at present value
 
$
1,050,947
 

NOTE 14 - 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”) 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 Company’s 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”).

 
10

 

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, was received on January 4, 2010. The subscription receivable of $8,550,000 was recorded as a contra equity item within stockholders’ equity as of December 31, 2009.

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 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 Company’s common stock (the “September Warrants”) to the September Investors as an inducement to the September Offering. 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 year ended December 31, 2009, 2,939,183 “April Warrants” and “September Warrants” were exercised by several “April Investors” and “September Investors”. In connection with the exercises, the Company issued 2,539,653 shares of common stock and received $526,611 from warrant holders.

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 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.  The exercise price of the May Warrants ($1.848) was not affected but is also subject to potential down-round adjustments in future periods. As of March 31, 2010 and December 31, 2009, there were 202,975 warrants outstanding, of which 81,190 and 121,785 warrants will expire if unexercised by April 2013 and September 2013, respectively.

 
11

 

The potential cash payments and the down-round provision preclude the classification of these warrants as equity classification.  Accordingly, the warrants are accounted for as a liability and adjusted to fair value through earnings at each reporting date. The gain resulting from the decrease in fair value of warrants was $12,534 and $208,011 for the three months ended March 31, 2010 and 2009, respectively.

The estimated fair values of the warrants issued to April Investor and September Investor were determined at March 31, 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 Company’s financial liabilities that were measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009.

 
12

 

         
Fair Value Measurements Using:
 
         
Quoted Prices in
Active Markets for
Identical Financial
Assets and Liabilities
   
Significant Other
Observable Inputs
   
Significant
Unobservable Inputs
 
March 31, 2010
 
Total
   
Level 1
   
Level 2
   
Level 3
 
   
  
                           
Liabilities at fair value:
                               
Derivative liabilities—warrants
 
$
1,367,671
     
   
$
1,367,671
     
 
 
         
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 liabilities—warrants
 
$
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
 
March 31, 2010
 
$
6.72
   
$
6.75
 
 
The fair values of the warrants outstanding as of March 31, 2010 and December 31, 2009 were determined based on the Binominal option pricing model, using the following key assumptions:

   
March 31,
2010
   
December 31,
2009
 
   
April
Warrants
   
September
Warrants
   
April
Warrants
   
September
Warrants
 
                         
Expected volatility
   
62.5
%
   
61.5
%
   
61.0
%
   
60.0
%
                                 
Expected dividends yield
   
0
%
   
0
%
   
0
%
   
0
%
                                 
Time to maturity
 
3.05 years
   
3.44 years
   
3.30 years
   
3.72 years
 
                                 
Risk-free interest rate per annum
   
2.218
%
   
2.218
%
   
2.218
%
   
2.218
%
                                 
Fair value of underlying common shares (per share)
 
$
8.08
   
$
8.08
   
$
8.13
   
$
8.13
 

NOTE 15 – 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 three months ended March 31, 2010 and 2009, Yongye Nongfeng made appropriations to this statutory reserve of $514,899 and $281,369, respectively. The accumulated balance of the statutory reserve of Yongye Nongfeng as of March 31, 2010 and December 31, 2009 was $4,580,469 and $4,065,570, respectively.

 
13

 

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 $4,351,446, representing the amount of accumulated balance of statutory reserve of Yongye Nongfeng attributable to the Company, as of March 31, 2010.

NOTE 16 – 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.

PRC

Effective from January 1, 2008, the PRC’s 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 Company’s effective income tax rate was 16.95% and 4.47% for the three-month periods ended March 31, 2010 and 2009, respectively. The difference between effective tax rate and statutory tax rate primarily represented the tax effects on the non-taxable income and non-deductible expenses.

The Company had deferred tax assets of approximately $389,315 as of March 31, 2010 that consisted of tax loss carryforwards. The Company had no other temporary differences as of March 31, 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 March 31, 2010.

 
14

 

NOTE 17 – FAIR VALUE MEASUREMENTS

   
March 31, 2010
   
December 31, 2009
 
   
Carrying
         
Carrying
       
   
amount
   
Fair value
   
amount
   
Fair value
 
Financial assets:
                       
Cash
 
$
50,989,166
   
$
50,989,166
   
$
65,518,181
   
$
65,518,181
 
Accounts receivable
   
8,774,317
     
8,774,317
     
6,161,796
     
6,161,796
 
Other receivables
   
323,532
     
323,532
     
383,841
     
383,841
 
                                 
Financial liabilities:
                               
Short-term bank loan
 
$
-
   
$
-
   
$
2,925,174
   
$
2,925,174
 
Long-term loans and payables - current portion
   
431,041
     
431,041
     
331,693
     
331,693
 
Accounts payable - related party
   
880,167
     
880,167
     
880,026
     
880,026
 
Accounts payable - third parties
   
4,033,650
     
4,033,650
     
344,774
     
344,774
 
Accrued expenses
   
894,985
     
894,985
     
479,609
     
479,609
 
Due to a related party
   
785,765
     
785,765
     
1,663,191
     
1,663,191
 
Other payables
   
411,182
     
411,182
     
553,286
     
553,286
 
Derivative liabilities
   
1,367,671
     
1,367,671
     
1,380,205
     
1,380,205
 
Long-term loans and payables
   
769,737
     
751,419
     
545,327
     
545,327
 
 
The fair values of the financial instruments shown in the above table as of March 31, 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 Company’s 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, due from a related party, other receivables, short-term bank loan, long-term loans – 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 15.

Long-term loans: The fair value of the Company’s 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.

NOTE 18 – 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 $57,952 and $62,262 for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, future minimum lease payments under this non-cancellable operating lease agreement for the next twelve months are $173,854.

NOTE 19 – RELATED PARTY TRANSACTIONS AND BALANCES
 
For the three months ended March 31, 2009, Yongye Nongfeng, purchased inventories from Inner Mongolia Yongye amounting to $7,363,768 (100%). 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 March 31, 2010 and December 31, 2009, accounts payable to related party were $880,167 and $880,026, respectively, and represented the payable for the purchase of inventories from Inner Mongolia Yongye.

 
15

 

As of March 31, 2010 and December 31, 2009, the amount due to a related party was $785,765 and $1,663,191, respectively, which mainly represented the payable for the Acquisition from Inner Mongolia Yongye. The Company expects to repay the amount during the year ending December 31, 2010.

During the three months ended March 31, 2010, the Company disposed of and 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. No gain or loss was recorded upon disposal and sale 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 Company’s March 31, 2009 results of operations and therefore have not been included.

NOTE 20 - 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
 
   
March 31, 2010
   
March 31, 2009
 
Numerator used in basic net income per share:
           
Net income attributable to Yongye International, Inc.
 
$
4,371,293
   
$
3,306,784
 
Decrease in fair value of derivative liabilities
   
(12,534
)    
-
 
Numerator used in diluted net income per share
   
4,358,759
     
3,306,784
 
                 
Shares (denominator):
               
                 
Weighted average ordinary shares outstanding-basic
   
44,532,241
     
26,760,258
 
Plus: weighted average incremental shares from assumed exercise of warrants
   
164,186
     
-
 
                 
Weighted average ordinary shares outstanding used in computing diluted net income per ordinary share
   
44,696,427
     
26,760,258
 
                 
Net income per ordinary share-basic
 
$
0.10
   
$
0.12
 
Net income per ordinary share-diluted
 
$
0.10
   
$
0.12
 

 
16

 

As of March 31, 2009, the Company had 3,142,158 warrants outstanding that could potentially dilute basic earnings per share in the future, but excluded in the computation of diluted earnings per share as their effect would have been anti-dilutive.

NOTE 21 - CONCENTRATIONS AND CREDIT RISKS

At March 31, 2010 and December 31, 2009, the Company held cash in banks of approximately $50,989,166 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 75% and one major customer accounted for 21% of the Company’s total revenue for the three months ended March 31, 2010. Five major customers accounted for 90% and one major customer accounted for 39% of the Company’s total revenue for the three months ended March 31, 2009. The Company’s total sales to five major customers were $18,747,573 and $11,179,457 for the three months ended March 31, 2010 and 2009, respectively. In addition, all these major customers are distributors in the PRC agriculture industry.

For the three months ended March 31, 2010
 
For the three months ended March 31, 2009
 
Largest
Customers
 
Amount of
Sales
   
% Total
Sales
 
Largest
Customers
 
Amount of
Sales
   
% Total
Sales
 
Customer A
  $ 5,209,290       21 %     
Customer B
  $ 4,852,042           39 %
Customer B
    4,398,671       18 %
Customer F
      2,220,083           18 %
Customer C
    4,096,888       16 %
Customer E
      1,739,657           14 %
Customer D
    2,844,695       11 %
Customer D
      1,290,789           10 %
Customer E
    2,198,029       9 %
Customer G
      1.076,886           9 %
Total
  $ 18,747,573       75
Total
  $  11,179,457           90 %

 
17

 

Three major suppliers accounted for 88% ($15,563,940) and one major supplier accounted for 79% ($13,975,816) of the Company’s inventory purchase for the three months ended March 31, 2010. Inner Mongolia Yongye supplied 100% ($7,363,768) of the Company’s finished goods for the three months ended March 31, 2009. 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 Company’s financial results may be adversely affected.

The Company’s 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.

 
18

 

ITEM 2.         Management’s 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. (formerly known as Yongye Biotechnology 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

We are engaged in the research and development, manufacturing, distribution and sale of fulvic acid based liquid and powder nutrient compounds used in the agriculture industry. Our headquarters is in Beijing, China and additional administrative offices and our manufacturing unit are located in Hohhot, Inner Mongolia, China. Currently, we sell two lines of products, both based on our fulvic acid compound base: a plant nutrition liquid compound and animal nutrition powder which is a food additive. Our products start with our proprietary fulvic acid base which is extracted from humic acid, and to which we add other natural substances to customize the base for use in our plant and animal product lines. Based on our internal data and research, we believe our proprietary technology for fulvic acid extraction creates some of the purest and most effective fulvic acid base on the market in China today. We have found that our fulvic acid has a very light weight molecular composition, which we believe improves the overall permeability of cell walls and allows more complete transport of nutrients across plant membranes, effectively strengthening the overall health of plants. We believe our proprietary process for extracting fulvic acid from humic acid and our patented process for mixing our plant nutrient and patent pending process for mixing our animal nutrient are key differentiators in the market and may help us– provide a high quality product that we can control from procurement of raw materials to final production, which we also believe may help our products to provide reliable results from season to season.

Our products start with our fulvic acid base then, in addition, we add other natural substances to customize the base for use in our plant or animal lines of products. Our plant products are intended to add naturally occurring macro and micro nutrients such as nitrogen, phosphorus, potassium, boron and zinc. Our animal product adds natural herbs which we believe may help to reduce bacterial inflammation (mastitis) in cows. It also assists many animals to digest food more completely and thus we believe that our animal products may help animals who use them to be healthier.

In the first quarter of 2010, we sold approximately 2,066 tons of plant product, which represented 90% of revenue at $22.5 million. We also sold approximately 421 tons of our animal products. This represented 10% of revenue at $2.5 million. Yongye’s top 3 provinces by revenue for the first quarter of 2010 represented 41% of sales and were Hebei at $4.4 million (18%), Hubei at $2.9 million (12%) and Shandong at $2.8 million (11%).

 
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For the year 2009, we sold approximately 8,502 tons of plant product, which represented 93% of revenue at $91.2 million. We also sold approximately 1,175 tons of our animal products. This represented 7% of revenue at $6.9 million. Yongye’s top 3 provinces by revenue for 2009 represented 66% of sales and were Hebei at $29 million (30%), Inner Mongolia at $18.5 million (19%) and Xinjiang at $16.0 million (17%).

Recent Developments
 
On December 22, 2009, the Company closed an offering of 8,000,000 shares of the Company’s common stock and received net proceeds of approximately $56.3 million from the offering, after deducting underwriting discounts and estimated offering expenses.  Pursuant to the exercise by the Underwriters of their over-allotment option, an additional 1,200,000 shares of common stock were issued on December 31, 2009, bringing the total net proceeds raised in connection with the offering (the “December Offering”) to $64.87 million.

On January 6, 2010, the Company announced that it had received government approval regarding Yongye's sole operating entity in the PRC, Yongye Nongfeng, for a preferential corporate income tax rate of 15% for the full years of 2009 and 2010.  Yongye Nongfeng had previously accrued its income tax expenses for the first three quarters of 2009 based on the statutory income tax rate of 25%.  Prior to such approval, Yongye Nongfeng received the approval from the local tax authority of Hohhot, Inner Mongolia Autonomous Region, that Yongye Nongfeng qualified for a preferential 15% corporate income tax rate. As a result, Yongye will pay its income tax expenses for the full 2009 tax year based on the preferential 15% corporate income tax rate.

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 square 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. In addition to this, Nongfeng plans to build a new factory with 20,000 tons of plant nutrient product and 10,000 tons animal nutrient product annual capacity in a nearby economic development zone located near the coal resources project. According to government regulations, the acquisition will not be completed until Nongfeng makes full payment to Shuntong and receives in return the full, unencumbered title to the development rights.
 
Factors affecting our operating results

Demand for Our Products

One major tenet of the PRC government’s 11th Five-Year National Economic and Social Plan (the “NESDP”) (2006-2010) is the focus towards developing China’s western region. This is one of the top-five economic priorities of the nation. The goal is to increase rural income growth which will in turn increase demand for more food and agriculture products. Currently, a large majority of our products are sold in this western region and we hope that this government focus will increase our opportunity to sell more plant and animal nutrients to farmers who have to keep up with the demand for higher quantity and higher quality of products.

 
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According to the Asian Development Bank statistics, well over 60% of the nation’s 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, China’s population will reach 1.5 billion by 2030. Therefore, the country has the challenge of producing approximately 100 million more tons of crops needed to feed the additional 200 million people, which has put pressure on the agricultural system to increase production capacity.

Supply of Finished Goods

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

Seasonality

Our Shengmingsu products faces 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 year’s net sales.

Agriculture Sector

Agriculture continues to be a heavily invested sector in China. Brand name investors continue to invest into China’s agriculture space because they have confidence in China’s long term outlook. The market volume for agriculture products is large, both for domestic sales and export and there is no set threshold for foreign investment into the sector as opposed to other industries, such as energy, finance, mining, and telecommunications. This is driven by the growing demand for higher quality food products domestically and international reliance on food products from China. Currently, China is the world’s biggest grower and consumer of grains and yet must boost crop yields by at least 1 percent a year to ensure the country has enough food to feed its 1.3 billion people, according to the Minister of Agriculture, Sun Zhengcai (China Economic Net, July 21, 2008). Additional policy changes 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 world’s 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 government’s 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 year’s 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.

 
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New Land Reform Policy

Farmland in China is owned by the local government, but given to local farmers under 30 year use contracts. With the allure of higher incomes and better living conditions in the city, farmers have abandoned the land and no others farmers have stepped in to bring it back into production. This has created a shortage of 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 nation’s farmers. This creates a new model for China’s 730 million farmers with the idea being to create more stable farmland by shifting the country away from the single household farm plot model to the amalgamation of larger-scale operations which should be more productive due to technology and economies of scale. Farmers will be able to transfer their land-use rights to others through a new market system for rural land-use rights. 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.” (China’s Ongoing Agriculture Modernization, USDA, April 2009)

RESULTS OF OPERATIONS

   
For the Three Months Ended
 
   
March 31, 2010
   
March 31, 2009
 
   
 
   
 
 
Sales
  $ 24,934,716     $ 12,435,775  
                 
Cost of sales
    11,077,957       5,902,607  
                 
Gross profit
    13,856,759       6,533,168  
                 
Selling expenses
    6,288,003       2,620,298  
                 
Research & development expenses
    100,565       288,572  
                 
General and administrative expenses
    1,851,254       345,157  
                 
Income from operations
    5,616,937       3.279,141  
                 
Other expenses/(income)
               
Interest expense, net
    7,458       5,958  
Other expenses, net
    48,783       441  
Decrease in fair value of derivative liabilities
    (12,534 )     (208,011 )
                 
Total other expenses/(income), net
    43,707       (201,612 )
                 
Earnings before income tax expense
    5,573,230       3,480,753  
                 
Income tax expense
    944,488       155,447  
                 
Net income
    4,628,742       3,325,306  
                 
Less: Net income attributable to the noncontrolling interest
    257,449       18,522  
                 
Net income attributable to Yongye International, Inc.
  $ 4,371,293     $ 3,306,784  
                 
Earnings per share:
               
Basic
  $ 0.10     $ 0.12  
Diluted
  $ 0.10     $ 0.12  
                 
Weighted average shares used in computation:
               
Basic
    44,532,241       26,760,258  
Diluted
    44,696,427       26,760,258  

 
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THREE MONTHS ENDED MARCH 31, 2010 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2009

Net Sales

Sales of $24,934,716 in the first quarter of 2010 was an increase of $12,498,941 from $12,435,775 in the same period in 2009, which was an overall increase of 101% in revenue.

This increase was driven by increased end-user demand throughout our market area which included the growth of several new markets as well, resulting in all of such growth being due to an increase in the quantity of product sold while our prices remained stable.

Gross profit increased 112% over the prior period, which was an increase to $13,856,759 from $6,533,168, or $7,323,591, over the period ended March 31, 2009.

Gross margin increased between the two periods to 56% from 53%, or an overall 3% increase in margin. The increase in GP ratio was mainly due to the lower self-production cost as compared to the purchase price from Inner Mongolia Yongye. Upon obtaining the fertilizer license on June 1, 2009, we started producing our products ourselves.

Cost of Goods Sold

Cost of goods sold for the three months ended March 31, 2010 was $11,077,957 which is 44% of revenues. This is an increase of $5,175,350 over the previous period and represents an 88% increase overall. As a percent of revenue, this represented a decrease of 3% when compared with the corresponding period in 2009, which was 47%. The decrease in cost of goods sold as a percentage of revenue for the first quarter of 2010 was mainly due to the lower self-production cost as compared to the purchase price from Inner Mongolia Yongye. Upon obtaining the fertilizer license on June 1, 2009, we started producing our products ourselves.

Sales by Product Line

In the three months ended March 31, 2010, we sold approximately 2,141 tons of plant product, which represented 90% of revenue at USD $22,470,151. We also sold approximately 421 tons of our animal product. This represented 10% of our total revenue or USD $2,464,565. The revenue of our plant product increased to $22,470,151 from $10,504,401 or 114% in the three months ended March 31, 2010 as compared to the same period in 2009 and the revenue of our animal product increased to $2,464,565 from $1,931,374, or 28% in the three months ended March 31, 2010 compared to the same period in 2009.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased by $5,173,802 to $8,139,257 in the three months ended March 31, 2010 from $2,965,455 in the previous period in 2009. As a percentage of sales for the three months ended March 31, 2010, SG&A increased by 9% to 33% as compared to 24% of net sales in the three months ended March 31, 2009 due in part to an increase of $2,159,890 in advertising expenses which resulted from promotional activities commenced earlier in 2010; an increase in freight expenses of $190,790; an increase in salaries of $466,271 and professional fees of $556,426; an increase in travel expenses of $507,450 and office expense of $226,130.

 
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Research and Development

Additionally, we incurred $100,565 of research and development fees in the three months ended March 31, 2010 as compared to $288,572 in the three months ended March 31, 2009. This decrease in expense is the result of less research and development activities performed in the three months ended March 31, 2010.

Loss/gain on change in fair value of warrants

The warrants issued in April Offering and September Offering were treated as derivative liabilities and measured at fair value at each reporting date. The decrease in fair value during the three months ended March 31, 2010 resulted in a gain of $12,534.  The decrease in fair value of the warrants was primarily due to the decrease in our stock price from $8.13 per share at December 31, 2009 to $8.08 at March 31, 2010.  Similar change in fair value of the warrants resulted in a gain of $208,011 for the three months ended March 31, 2009.

Income Tax

The Company did not carry on any business and did not maintain any branch office in the United States during the three months ended March 31, 2010 and 2009 and does not intend to repatriate any earnings from the Chinese operations. Therefore, no provision for withholding taxes for the undistributed earnings of foreign subsidiaries or U.S. federal income taxes or deferred income tax benefits has been made.

The Company’s effective income tax rates were 16.95% and 4.47% for the three-month period ended March 31, 2010 and 2009, respectively.

For the three months ended March 31, 2010, the Company’s income tax expense was $944,488 as compared to $155,447 for the three months ended March 31, 2009.

Net Income

Net income for the three months ended March 31, 2010 increased by $1,303,436 to $4,628,742 from $3,325,306 in the same period ended March 31, 2009, which was a 39% increase. This also represented an overall decrease in net margin of 8% in the three months ended March 31, 2010 to 19% as compared to 27% in the same period ended 2009. The decrease in our net margin is primarily due to increased selling expenses due to earlier commencement of marketing programs.

Liquidity and Capital Resources

The Company has historically financed its operations and capital expenditures principally through issuance of common shares and bank loans. As is customary in the industry, we provide credit terms to most of our distributors which typically exceed the terms that we receive from our suppliers. Currently, we typically provide 6 months terms to our key provincial level customers and ask for all others to make cash payments up front or upon delivery. Therefore, the Company’s liquidity needs have generally consisted of working capital necessary to finance receivables and raw material and finished goods inventory. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated future cash needs for the coming growing season. We may, however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. Therefore, there can be no assurance that such additional investment will be available to us, or if available, that it will be available on terms acceptable to us.

In summary, our cash flows were:

Net cash provided by and used in operating activities were $512,162 and $1,671,107 for the three months ended March 31, 2010 and 2009, respectively. These changes were mainly brought about by the increase of $12,498,941 in sales resulting in an increase of $2,092,477 in earnings before income tax expense together with an increase in accounts payable due to our new status as the direct manufacturer of our products.

 
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Net cash used in investing activities increased by $19,547,987 or 1,351% to $20,994,769 in the period ended March 31, 2010 compared to $1,446,782 the same period ended in 2009. The increase was due to deposits for assets acquisition of $20,019,368 for the acquisition of the right to develop certain lignite coal resources in the Wuchuan area. The consideration of the right to develop is $35 million. As of March 31, 2010, the legal procedures for the transfer of the right to develop have not yet been completed. We believe that the legal procedures, including obtaining all necessary approvals and licenses from the PRC government will be completed before December 31, 2010.

Net cash provided by financing activities increased by $5,883,276, or 9,861% to $5,942,940 in the period ended March 31, 2010. We received $8,550,000 in proceeds from the issuance of shares upon exercise of an over-allotment granted to the underwriters in the December Offering. We also repaid certain short-term and long-term loans and payables of $3,007,340 during the three months ended March 31, 2010.

Net current assets at March 31, 2010 decreased by $8,861,360 to $98,890,955 from $107,752,315 or 8% over December 31, 2009.

Summary consolidated balance sheet data:
 
  
 
Yongye
   
Yongye
       
  
 
International, Inc.
   
International, Inc.
   
Increase
 
  
 
March 31, 2010
   
December 31, 2009
   
/ (decrease)
 
Cash
  $ 50,989,166     $ 65,518,181       (22 )%
Accounts receivable, net of allowance for doubtful accounts
  $ 8,774,317     $ 6,161,796       42 %
Property, plant and equipment, net
  $ 9,048,876     $ 9,156,915       (1 )%
Total assets
  $ 160,297,747     $ 145,805,688       10 %
Short-term bank loan
  $ -     $ 2,925,174       (100 )%
Long-term loans and payables - current portion
  $ 431,041     $ 331,693       30 %
Long-term loans and payables
  $ 769,737     $ 545,327       41 %
Total Yongye International, Inc. shareholders’ equity
  $ 138,855,069     $ 125,913,424       10 %

Total current liabilities increased by $1,067,484 to $13,737,023 at March 31, 2010 from $12,669,539 at December 31, 2009, which was largely due to an increase in accounts payable of $3,689,017 and income taxes payable of $818,827, primarily due to the significant increase in sales and increased purchases of inventories. Increase in income tax payable was due to the increase in the Company’s net income before income tax. We repaid the short-term bank loan and payable due to a related party during the three months ended March 31, 2010 which decreased current liabilities by $2,925,174, and payable due to a related party decreased by $877,426.

Total equity increased by $13,200,165 to $145,790,987 at the end of March 31, 2010, compared to $132,590,822 at December 31, 2009. The increase in our total equity was primarily due to increase in paid in capital of $8,550,000 which was mainly from the December Offering, and increase in retained earnings $4,628,742 due to the net income during the period.

Accounts receivable Days Sales Outstanding here is defined as average accounts receivable for the period divided by net sales per day and decreased by 5 days to 27 days for the three months ended March 31, 2010 from 32 days in the same period ended 2009, because we increased our efforts in collection.

 
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Foreign Currency Translation and Transactions

The financial position and results of operations of the Company’s subsidiaries in the PRC are measured using the Renminbi as the functional currency, while the Company’s reporting currency is the US dollar. Assets and liabilities of the subsidiaries are translated at the prevailing exchange rate in effect at each period end. Income statement accounts are translated at the average rate of exchange during the period. Translation adjustments are included in the cumulative translation adjustment account in the consolidated statements of stockholders’ equity and comprehensive income.

Impact of inflation

We are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment measures. We do not believe that inflation risk is material to our business or our financial position, results of operations or cash flows at this time.

Off balance sheet arrangement

We do not have any significant off-balance sheet arrangements and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
ITEM 2.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 3.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Disclosure Controls and Procedures
 
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and regulations and that such information is accumulated and communicated to our management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our Principal Executive Officer and Principal Financial Officer evaluated, with the participation of other members of management, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 15d-15(e)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
 
Primarily, we have engaged an outside consulting firm to assist us in the implementation of SOX 404 compliance controls and procedures and we have concluded the review and testing of all the key business cycles. This has been done to provide assurance that our unaudited consolidated financial statements included in this quarterly report were prepared in accordance with generally accepted accounting principles (“GAAP”) and fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. The result of the last testing process has concluded that there are no material weakness in our internal controls over financial reporting.
 
Specifically, this project has included implementing controls over sales and receivables, inventory, purchasing and payments, production cost accounting, financial reporting and taxes, currency and capital management, expense management, fixed asset management and overall management controls. We believe that the foregoing actions, as they have been implemented, have improved our internal control over financial reporting, as well as our disclosure controls and procedures. Our management, with the oversight of our audit committee, will continue to identify and take steps to remedy known material weaknesses as expeditiously as possible and enhance the overall design and capability of our control environment.

 
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Although the management of our Company, including the Principal Executive Officer and the Principal  Financial Officer, believes that our disclosure controls and internal controls currently provide reasonable assurance that our desired control objectives have been met, management does not expect that our disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Changes in Internal Controls over Financial Reporting
 
During the period covered by this quarterly report on Form 10-Q, there was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II.
 
OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
None.
 
ITEM 1A. 
RISK FACTORS
 
There have been no material changes from the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2009.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Not applicable.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.
(REMOVED AND RESERVED)
 
Not applicable.
 
ITEM 5.
OTHER INFORMATION
 
None.

 
27

 
 
ITEM 6.
EXHIBITS
 
Exhibit No.
 
Description
31.1
 
Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of the Chief Financial Officer (Principal Financial and Accounting Officer)  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

 
Yongye International, Inc.
   
 
By:
/s/ Zishen Wu
   
Name: Zishen Wu
May 11, 2010
 
Title: Chief Executive Officer and President (Principal
Executive Officer)
     
 
By:
/s/ Sam Yu
   
Name: Sam Yu
   
Title: Chief Financial Officer (Principal Financial and
Accounting Officer)

 
29