Attached files
file | filename |
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EX-31.2 - Yongye International, Inc. | v193257_ex31-2.htm |
EX-31.1 - Yongye International, Inc. | v193257_ex31-1.htm |
EX-32. - Yongye International, Inc. | v193257_ex32-1.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
|
For the quarterly period ended June 30,
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 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
August 10, 2010, there were 48,187,044 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
|
27
|
||
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
27
|
||
PART
II. OTHER INFORMATION
|
28
|
|||
ITEM
1.
|
LEGAL
PROCEEDINGS
|
28
|
||
ITEM
1A.
|
RISK
FACTORS
|
28
|
||
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
28
|
||
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
28
|
||
ITEM
4.
|
(REMOVED
AND RESERVED)
|
28
|
||
ITEM
5.
|
OTHER
INFORMATION
|
28
|
||
ITEM
6.
|
|
EXHIBITS
|
|
28
|
ii
PART
I.
Financial
Information
ITEM
1.
|
Financial
Statements
|
YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED BALANCE SHEETS
Note
|
June 30, 2010
|
December 31, 2009
|
||||||||
Current
assets
|
||||||||||
Cash
|
$
|
38,165,514
|
$
|
65,518,181
|
||||||
Accounts
receivable, net of allowance for doubtful accounts
|
3
|
54,318,725
|
6,161,796
|
|||||||
Inventories
|
4
|
41,437,200
|
42,033,261
|
|||||||
Prepayments
|
5
|
10,276,841
|
6,211,896
|
|||||||
Prepaid
expenses
|
456,979
|
112,879
|
||||||||
Other
receivables
|
268,040
|
383,841
|
||||||||
Total
Current Assets
|
144,923,299
|
120,421,854
|
||||||||
Property,
plant and equipment, net
|
6
|
11,194,461
|
9,156,915
|
|||||||
Intangible
asset, net
|
7
|
80,077
|
85,058
|
|||||||
Land
use right, net
|
8
|
4,140,288
|
4,166,987
|
|||||||
Deposits
for assets acquisition
|
9
|
20,137,071
|
-
|
|||||||
Other
assets
|
10
|
7,525,840
|
2,029,012
|
|||||||
Goodwill
|
9,987,640
|
9,945,862
|
||||||||
Total
Assets
|
$
|
197,988,676
|
$
|
145,805,688
|
||||||
Current
liabilities
|
||||||||||
Short-term
bank loan
|
11
|
$
|
-
|
$
|
2,925,174
|
|||||
Long-term
loans and payables - current portion
|
12
|
462,224
|
331,693
|
|||||||
Accounts
payable - related party
|
18
|
-
|
880,026
|
|||||||
Accounts
payable - third parties
|
2,172,711
|
344,774
|
||||||||
Income
tax payable
|
15
|
8,732,681
|
4,082,424
|
|||||||
Advance
from customers
|
980,575
|
29,157
|
||||||||
Accrued
expenses
|
10,876,590
|
479,609
|
||||||||
Due
to a related party
|
18
|
-
|
1,663,191
|
|||||||
Other
payables
|
944,270
|
553,286
|
||||||||
Derivative
liabilities – fair value of warrants
|
13
|
825,586
|
1,380,205
|
|||||||
Total
Current Liabilities
|
24,994,637
|
12,669,539
|
||||||||
Long-term
loans and payables
|
12
|
541,713
|
545,327
|
|||||||
Total
Liabilities
|
25,536,350
|
13,214,866
|
||||||||
Equity
|
||||||||||
Common
stock: par value $.001; 75,000,000 shares authorized; 44,587,044 shares
issued and outstanding at June 30, 2010 and 44,532,241 shares issued and
outstanding at December 31, 2009
|
13
|
44,587
|
44,532
|
|||||||
Additional
paid-in capital
|
13
|
119,052,799
|
118,583,308
|
|||||||
Subscription
receivable
|
13
|
-
|
(8,550,000
|
) | ||||||
Retained
earnings
|
44,123,439
|
15,506,445
|
||||||||
Accumulated
other comprehensive income
|
971,148
|
329,139
|
||||||||
Total
equity attributable to Yongye International, Inc.
|
164,191,973
|
125,913,424
|
||||||||
Noncontrolling
interest
|
8,260,353
|
6,677,398
|
||||||||
Total
Equity
|
172,452,326
|
132,590,822
|
||||||||
Total
Liabilities and Equity
|
$
|
197,988,676
|
$
|
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 Six Months Ended
|
|||||||||||||||||
Note
|
June 30, 2010
|
June 30, 2009
|
June 30, 2010
|
June 30, 2009
|
|||||||||||||||
Sales
|
$ | 89,414,388 | $ | 46,271,544 | $ | 114,349,104 | $ | 58,707,319 | |||||||||||
Cost
of sales
|
39,378,346 | 21,936,877 | 50,456,303 | 27,839,484 | |||||||||||||||
Gross
profit
|
50,036,042 | 24,334,667 | 63,892,801 | 30,867,835 | |||||||||||||||
Selling
expenses
|
16,343,330 | 6,450,694 | 22,631,333 | 9,070,992 | |||||||||||||||
Research
and development expenses
|
2,238,331 | 1,124,445 | 2,338,896 | 1,413,017 | |||||||||||||||
General
and administrative expenses
|
1,614,692 | 785,565 | 3,465,946 | 1,130,722 | |||||||||||||||
Income
from operations
|
29,839,689 | 15,973,963 | 35,456,626 | 19,253,104 | |||||||||||||||
Other
(income)/expenses
|
|||||||||||||||||||
Interest
expense, net
|
7,271 | 10,500 | 14,729 | 16,458 | |||||||||||||||
Other
income, net
|
(286,895 | ) | (13,178 | ) | (238,112 | ) | (12,737 | ) | |||||||||||
(Decrease)/increase
in fair value of derivative liabilities
|
13
|
(156,936 | ) | 5,276,958 | (169,470 | ) | 5,068,947 | ||||||||||||
Total
other (income)/ expenses, net
|
(436,560 | ) | 5,274,280 | (392,853 | ) | 5,072,668 | |||||||||||||
Earnings
before income tax expense
|
30,276,249 | 10,699,683 | 35,849,479 | 14,180,436 | |||||||||||||||
Income
tax expense
|
15
|
4,738,834 | 4,591,776 | 5,683,322 | 4,747,223 | ||||||||||||||
Net
income
|
25,537,415 | 6,107,907 | 30,166,157 | 9,433,213 | |||||||||||||||
Less:
Net income attributable to the noncontrolling interest
|
1,291,714 | 63,734 | 1,549,163 | 82,256 | |||||||||||||||
Net
income attributable to Yongye International, Inc.
|
$ | 24,245,701 | $ | 6,044,173 | $ | 28,616,994 | $ | 9,350,957 | |||||||||||
Earnings
per share:
|
|||||||||||||||||||
Basic
|
19
|
$ | 0.54 | $ | 0.20 | $ | 0.64 | $ | 0.33 | ||||||||||
Diluted
|
19
|
$ | 0.54 | $ | 0.20 | $ | 0.64 | $ | 0.33 | ||||||||||
Weighted
average shares used in computation:
|
|||||||||||||||||||
Basic
|
19
|
44,578,011 | 30,222,243 | 44,555,252 | 28,500,814 | ||||||||||||||
Diluted
|
19
|
44,696,725 | 30,222,243 | 44,674,545 | 28,500,814 |
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
SIX MONTHS ENDED JUNE 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
|
- | - | - | - | 28,616,994 | - | 28,616,994 | 1,549,163 | 30,166,157 | ||||||||||||||||||||||||||||||
Foreign
currency exchange translation adjustment, net of nil income
taxes
|
- | - | - | - | - | 642,009 | 642,009 | 33,792 | 675,801 | ||||||||||||||||||||||||||||||
Comprehensive
income
|
29,259,003 | 1,582,955 | 30,841,958 | ||||||||||||||||||||||||||||||||||||
Subscription
received
|
- | - | - | 8,550,000 | - | - | 8,550,000 | - | 8,550,000 | ||||||||||||||||||||||||||||||
Warrants
exercised
|
13
|
54,803 | 55 | 469,491 | - | - | - | 469,546 | - | 469,546 | |||||||||||||||||||||||||||||
Balance
as of June 30, 2010
|
44,587,044 | 44,587 | 119,052,799 | - | 44,123,439 | 971,148 | 164,191,973 | 8,260,353 | 172,452,326 |
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 Six Months Ended
|
||||||||
June 30, 2010
|
June 30, 2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$
|
30,166,157
|
$
|
9,433,213
|
||||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
937,752
|
244,805
|
||||||
Reversal
of bad debt provision
|
-
|
(305,338
|
) | |||||
(Decrease)/increase
in fair value of derivative liabilities
|
(169,470
|
) |
5,068,947
|
|||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable-related party
|
-
|
(29,212
|
) | |||||
Accounts
receivable-third parties
|
(47,954,830
|
) |
(33,525,463
|
) | ||||
Inventories
|
771,354
|
(6,026,638
|
) | |||||
Prepayments
|
(4,111,996
|
) |
-
|
|||||
Due
from a related party
|
-
|
33
|
||||||
Prepaid
expenses
|
(342,900
|
) |
60,096
|
|||||
Other
receivables
|
117,326
|
263,126
|
||||||
Other
assets
|
(5,627,195
|
) |
-
|
|||||
Accounts
payable-related party
|
(880,505
|
) |
11,376,007
|
|||||
Accounts
payable-third parties
|
1,818,461
|
41,187
|
||||||
Income
tax payable
|
4,615,935
|
4,562,992
|
||||||
Advance
from customers
|
947,831
|
(1,699,588
|
) | |||||
Accrued
expenses
|
10,356,848
|
4,742,049
|
||||||
Other
payables
|
165,247
|
85,887
|
||||||
Net
Cash Used in Operating Activities
|
(9,189,985
|
) |
(5,707,897
|
) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Deposits
made for assets acquisition
|
(19,309,188
|
) |
-
|
|||||
Proceeds
from sale of property, plant and equipment
|
92,629
|
-
|
||||||
Purchase
of property, plant and equipment
|
(2,791,242
|
) |
(2,100,266
|
) | ||||
Purchase
of property, plant and equipment-related party
|
(1,663,769
|
) |
-
|
|||||
Net
Cash Used in Investing Activities
|
(23,671,570
|
) |
(2,100,266
|
) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
from long-term loans and payables
|
-
|
129,593
|
||||||
Repayment
of long-term loans and payables
|
(334,675
|
) |
(70,591
|
) | ||||
Repayment
of short-term loans
|
(2,925,675
|
) |
-
|
|||||
Proceeds
from common stock issued
|
8,550,000
|
8,984,595
|
||||||
Proceeds
from warrants exercised
|
84,397
|
-
|
||||||
Payment
for common stock issuance costs
|
-
|
(836,456
|
) | |||||
Net
Cash Provided by Financing Activities
|
5,374,047
|
8,207,141
|
||||||
EFFECT
OF FOREIGN EXCHANGE RATE CHANGES ON CASH
|
134,841
|
(15,641
|
) | |||||
NET
(DECREASE)/INCREASE IN CASH
|
(27,352,667
|
) |
383,337
|
|||||
Cash
and cash equivalent at beginning of period
|
65,518,181
|
4,477,477
|
||||||
Cash
and cash equivalent at end of period
|
$
|
38,165,514
|
$
|
4,860,814
|
||||
Supplemental
cash flow information:
|
||||||||
Cash
paid for income taxes
|
1,070,826
|
192,357
|
||||||
Cash
paid for interest expense
|
51,796
|
21,384
|
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
SIX MONTHS ENDED JUNE 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 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”), is 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.
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 (“Acquisition”). In October 2009, the
Company completed the Acquisition. Management has determined that the
acquisition date of the Acquisition was the closing date or October, 2009, when
all conditions precedent to the closing were met, including obtaining all the
required licenses and permits from the PRC government to operate these
productive assets acquired, obtaining approvals from the PRC government, and on
which the Company legally transferred the 4.5% equity interest in Yongye
Nongfeng to Inner Mongolia Yongye. The reason for the Acquisition was to expand
the Company’s manufacturing business. The operating results of Shengmingsu
manufacturing business have been included in the consolidated financial
statements since that date.
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 Company’s 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 June 30, 2010, and the results of operations and cash flows for the three and
six months ended June 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 six months ended June 30, 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.
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 June 30, 2010 and December 31, 2009 consisted of the
following:
June 30, 2010
|
December 31, 2009
|
|||||||
Accounts
receivable
|
$
|
54,318,725
|
$
|
6,161,796
|
||||
Less:
allowance for doubtful accounts
|
-
|
-
|
||||||
Total
|
$
|
54,318,725
|
$
|
6,161,796
|
An
allowance for doubtful accounts of $232,010 and $305,338 was reversed for the
three and six months ended June 30, 2009, respectively. No provision for
allowance for doubtful accounts was recorded during the three and six months
ended June 30, 2010 as management believes no accounts are uncollectible as of
June 30, 2010.
NOTE 4 –
INVENTORIES
Inventories
at June 30, 2010 and December 31, 2009 consisted of the following:
June 30, 2010
|
December 31, 2009
|
|||||||
Finished
goods
|
$
|
35,792,520
|
$
|
31,734,252
|
||||
Work
in progress
|
5,093,646
|
6,024,323
|
||||||
Raw
materials
|
371,479
|
3,771,366
|
||||||
Consumables
and packing supplies
|
179,555
|
503,320
|
||||||
Total
|
$
|
41,437,200
|
$
|
42,033,261
|
NOTE 5 –
PREPAYMENTS
In order
to secure stock supplies of raw materials, the Company makes prepayments to
certain suppliers. As of June 30, 2010 and December 31, 2009, the prepayments to
suppliers amounted to $10,196,729 and $6,070,458, respectively.
6
NOTE 6 –
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment at June 30, 2010 and December 31, 2009 consisted of the
following:
June 30, 2010
|
December 31, 2009
|
|||||||
Buildings
|
$
|
5,652,592
|
$
|
5,644,213
|
||||
Machinery
and equipment
|
1,694,618
|
1,535,189
|
||||||
Office
equipment and furniture
|
404,332
|
356,560
|
||||||
Vehicles
|
2,041,381
|
2,037,130
|
||||||
Software
|
18,593
|
17,199
|
||||||
Leasehold
improvements
|
220,309
|
219,388
|
||||||
Construction-in-process
|
2,155,874
|
-
|
||||||
12,187,699
|
9,809,679
|
|||||||
Less:
Accumulated depreciation
|
993,238
|
652,764
|
||||||
Total
|
$
|
11,194,461
|
$
|
9,156,915
|
Depreciation
expense for the three months ended June 30, 2010 and 2009 was $184,432 and
$134,912, respectively. Depreciation expense for the six months ended June 30,
2010 and 2009 was $350,245 and $239,494, respectively.
As of
June 30, 2010, vehicles with a carrying amount of $1,062,341 were pledged as
security for the long-term loans of $425,458 (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). Such loan was repaid in February 2010.
NOTE 7 –
INTANGIBLE ASSET, NET
Intangible
asset at June 30, 2010 and December 31, 2009 represented a patent as
follows:
June 30, 2010
|
December 31, 2009
|
|||||||
Patent
|
$
|
106,769
|
$
|
106,323
|
||||
Less:
Accumulated amortization
|
26,692
|
21,265
|
||||||
Total
|
$
|
80,077
|
$
|
85,058
|
Amortization
expense for the three months ended June 30, 2010 and 2009 was $2,669 and $2,657,
respectively. Amortization expense for the six months ended June 30, 2010 and
2009 was $5,328 and $5,311, respectively. The estimated annual amortization
expense for intangible asset in each of the next five years is
$10,656.
NOTE 8 –
LAND USE RIGHT, NET
As of
June 30, 2010 and December 31, 2009, land use right represented:
June 30, 2010
|
December 31, 2009
|
|||||||
Land
use right
|
$
|
4,206,592
|
$
|
4,188,995
|
||||
Less:
Accumulated amortization
|
66,304
|
22,008
|
||||||
Total
|
$
|
4,140,288
|
$
|
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). Such loan was repaid in
February 2010.
7
NOTE 9 -
DEPOSITS FOR ASSETS ACQUISITION
On March
1, 2010, Yongye Nongfeng entered into an asset purchase 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 June 30, 2010,
Yongye Nongfeng has paid deposit of $19,387,246 to Wuchuan Shuntong. As of June
30, 2010, the legal procedures for the transfer of the right to develop have not
yet been completed. Management believes that the remaining legal procedures,
including obtaining all other necessary approvals and licenses from the PRC
government, will be completed before December 31, 2010.
As of
June 30, 2010, Yongye Nongfeng made $749,825 deposits to suppliers for equipment
to be used and developers of the plant to be built for product production.
According to the contracts signed with these suppliers and developers, Yongye
Nongfeng should pay $3,259,740 upon the delivery of the equipment and completion
of the construction.
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
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 –
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 six months ended June 30, 2010 was $0 and
$14,737, respectively.
NOTE 12 –
LONG-TERM LOANS AND PAYABLES
As of
June 30, 2010 and December 31, 2009, the long-term loans and payables consisted
of the following:
June 30, 2010
|
December 31, 2009
|
|||||||
Vehicle-employees
|
$
|
425,458
|
$
|
532,425
|
||||
Mortgage
loan
|
-
|
71,618
|
||||||
Vehicle-distributors
|
578,479
|
272,977
|
||||||
Total
|
$
|
1,003,937
|
$
|
877,020
|
As of
June 30, 2010, vehicle loans of $425,458 were secured by twenty-five vehicles
with initial carrying amount of $1,211,514. The vehicle loans have three to
five years terms and are paid in monthly installments. 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 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.
8
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
repayment of the full amount of payables on behalf of these distributors in
exchange for the distributors agreeing to comply with the sales conditions
specified in Note 10. Accordingly, the Company recorded the long-term payables
in the accompanying consolidated balance sheets. These payables have two or
three years terms and are paid 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 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:
Within
1 year
|
$
|
526,185
|
||
After
1 year but within 2 years
|
376,823
|
|||
After
2 years but within 3 years
|
173,160
|
|||
After
3 years but within 4 years
|
19,988
|
|||
After
4 years
|
13,350
|
|||
Total
|
1,109,506
|
|||
Less:
Amount representing interest
|
(105,569
|
) | ||
Total
at present value
|
$
|
1,003,937
|
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
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”).
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.
9
Warrants
Concurrent
with the April Investor Shares, the Company issued 1,623,905 warrants to
purchase 1,623,905 shares of the Company’s common stock (the “April Warrants”)
to the April Investors. The warrants issued have a 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. 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.
10
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 six months ended June 30, 2010, 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.
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. As of June 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 gain resulting from the decrease in fair value of warrants was $156,936 and
$169,470 for the three and six months ended June 30, 2010, respectively. The
loss resulting from the increase in fair value of warrants was $5,276,958 and
$5,068,947 for the three and six months ended June 30, 2009,
respectively.
The
estimated fair values of the warrants issued to April Investors and September
Investors were determined at June 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 Company’s financial
liabilities that were measured at fair value on a recurring basis as of June 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
|
||||||||||||||
June
30, 2010
|
Total
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
||||||||||||||||
Liabilities
at fair value:
|
||||||||||||||||
Derivative
liabilities—warrants
|
$
|
825,586
|
—
|
$
|
825,586
|
—
|
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
|
—
|
11
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
|
||||
June
30, 2010
|
$
|
5.54
|
$
|
5.59
|
The fair
values of the warrants outstanding as of June 30, 2010 and December 31, 2009
were determined based on the Binominal option pricing model, using the following
key assumptions:
June 30,
2010
|
December 31,
2009
|
|||||||||||||||
April
Warrants
|
September
Warrants
|
April
Warrants
|
September
Warrants
|
|||||||||||||
Expected
volatility
|
61.0
|
%
|
61.5
|
%
|
61.0
|
%
|
60.0
|
%
|
||||||||
Expected
dividends yield
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
||||||||
Time
to maturity
|
2.8
years
|
3.2
years
|
3.3
years
|
3.7
years
|
||||||||||||
Risk-free
interest rate per annum
|
2.218
|
%
|
2.218
|
%
|
2.218
|
%
|
2.218
|
%
|
||||||||
Fair
value of underlying common shares (per share)
|
$
|
6.89
|
$
|
6.89
|
$
|
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”) are held and released back to Full Alliance upon the
Company’s achievement of both 2008 and 2009 financial targets, as defined in the
September Escrow Agreement. The remaining 2,000,000 escrow shares were held for
the timely approval obtained from Ministry of Agriculture of Inner Mongolia in
relation to the transfer of fertilizer license to Yongye Nongfeng from
Inner Mongolia Yongye and completion of Yongye Nongfeng’s restructuring (the
“Restructuring Make Good Shares”). The Yongye Nongfeng’s restructuring refers to
the “Acquisition”, which is disclosed in Note 1. In June 2010, both Make
Good Escrow Shares and Restructuring Make Good Shares were released to Full
Alliance.
12
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 six months ended June 30, 2010 and 2009, Yongye
Nongfeng made appropriations to this statutory reserve of $3,098,328 and
$1,412,592, respectively. The accumulated balance of the statutory reserve of
Yongye Nongfeng as of June 30, 2010 and December 31, 2009 was $7,163,898
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 $6,805,703, representing the amount of
accumulated balance of statutory reserve of Yongye Nongfeng attributable to the
Company, as of June 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.
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 15.65% and 42.92% for the three months
ended June 30, 2010 and 2009, respectively and 15.85% and 33.48% for the six
months ended June 30, 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 $389,318 as of June 30, 2010
that consisted of tax loss carryforwards. The Company had no other temporary
differences as of June 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
June 30, 2010.
13
NOTE 16 –
FAIR VALUE MEASUREMENTS
June 30, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying
|
Carrying
|
|||||||||||||||
amount
|
Fair value
|
amount
|
Fair value
|
|||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
|
$
|
38,165,514
|
$
|
38,165,514
|
$
|
65,518,181
|
$
|
65,518,181
|
||||||||
Accounts
receivable
|
54,318,725
|
54,318,725
|
6,161,796
|
6,161,796
|
||||||||||||
Other
receivables
|
268,040
|
268,040
|
383,841
|
383,841
|
||||||||||||
Financial
liabilities:
|
||||||||||||||||
Short-term
bank loan
|
$
|
-
|
$
|
-
|
$
|
2,925,174
|
$
|
2,925,174
|
||||||||
Long-term
loans and payables - current portion
|
462,224
|
462,224
|
331,693
|
331,693
|
||||||||||||
Accounts
payable - related party
|
-
|
-
|
880,026
|
880,026
|
||||||||||||
Accounts
payable - third parties
|
2,172,711
|
2,172,711
|
344,774
|
344,774
|
||||||||||||
Accrued
expenses
|
10,876,590
|
10,876,590
|
479,609
|
479,609
|
||||||||||||
Due
to a related party
|
-
|
-
|
1,663,191
|
1,663,191
|
||||||||||||
Other
payables
|
944,270
|
944,270
|
553,286
|
553,286
|
||||||||||||
Derivative
liabilities
|
825,586
|
825,586
|
1,380,205
|
1,380,205
|
||||||||||||
Long-term
loans and payables
|
541,713
|
541,713
|
545,327
|
545,327
|
The fair
values of the financial instruments shown in the above table as of June 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 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, 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 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 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 $57,974 and $49,677 for the three months ended June 30,
2010 and 2009, respectively. The lease expense for the Beijing office was
$115,926 and $107,539 for the six months ended June 30, 2010 and 2009,
respectively. As of June 30, 2010, future minimum lease payments under this
non-cancellable operating lease agreement for the next twelve months are
$115,880.
14
NOTE 18 –
RELATED PARTY TRANSACTIONS AND BALANCES
For the
three and six months ended June 30, 2009, Yongye Nongfeng, purchased inventories
from Inner Mongolia Yongye amounting to $30,559,654 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 six months ended June 30,
2010.
15
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 six months ended June 30,
2010.
During
the six months ended June 30, 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 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 June 30, 2009 results of
operations and therefore have not been included.
16
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 Six Months Ended
|
|||||||||||||||
June
30, 2010
|
June
30, 2009
|
June
30, 2010
|
June
30, 2009
|
|||||||||||||
Numerator
used in basic net income per share:
|
||||||||||||||||
Net
income attributable to Yongye International, Inc.
|
$ | 24,245,701 | $ | 6,044,173 | $ | 28,616,994 | $ | 9,350,957 | ||||||||
Decrease
in fair value of derivative liabilities
|
(156,936 | ) | - | (169,470 | ) | - | ||||||||||
Numerator
used in diluted net income per share
|
24,088,765 | 6,044,173 | 28,447,524 | 9,350,957 | ||||||||||||
Shares
(denominator):
|
||||||||||||||||
Weighted
average ordinary shares outstanding-basic
|
44,578,011 | 30,222,243 | 44,555,252 | 28,500,814 | ||||||||||||
Plus:
weighted average incremental shares from assumed exercise of
warrants
|
118,714 | - | 119,293 | - | ||||||||||||
Weighted
average ordinary shares outstanding used in computing
diluted net income per ordinary share
|
44,696,725 | 30,222,243 | 44,674,545 | 28,500,814 | ||||||||||||
Net
income per ordinary share-basic
|
$ | 0.54 | $ | 0.20 | $ | 0.64 | $ | 0.33 | ||||||||
Net
income per ordinary share-diluted
|
$ | 0.54 | $ | 0.20 | $ | 0.64 | $ | 0.33 |
As of
June 30, 2009, the Company had 3,388,382 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 June
30, 2010 and December 31, 2009, the Company held cash in banks of approximately
$38,165,514 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 84% and one major customer accounted for 31% of
the Company’s revenue for the three months ended June 30, 2010. Five major
customers accounted for 80% and one major customer accounted for 28% of the
Company’s revenue for the six months ended June 30, 2010. Five major customers
accounted for 94% and one major customer accounted for 40% of the Company’s
revenue for the three months ended June 30, 2009. Five major customers accounted
for 89% and one major customer accounted for 40% of the Company’s revenue for
the six months ended June 30, 2009. The Company’s total sales to five major
customers were $75,432,080 and $91,324,592 for the three and six months ended
June 30, 2010, respectively. The Company’s total sales to five major customers
were $43,700,271 and $52,061,902 for the three and six months ended June 30,
2009, respectively. In addition, all these major customers are distributors in
the PRC agriculture industry.
17
For the three months ended June
30, 2010
|
For the six months ended June
30, 2010
|
||||||||||||||||||
Largest
Customers
|
Amount of
Sales
|
% Total
Sales
|
Largest
Customers
|
Amount of
Sales
|
% Total
Sales
|
||||||||||||||
Customer A
|
$
|
27,971,525
|
31
|
%
|
Customer A
|
$
|
32,370,196
|
28
|
% | ||||||||||
Customer
B
|
18,708,074
|
21
|
%
|
Customer
B
|
23,917,364
|
21
|
% | ||||||||||||
Customer
C
|
11,101,032
|
12
|
%
|
Customer
C
|
13,299,061
|
12
|
% | ||||||||||||
Customer
D
|
9,406,970
|
11
|
%
|
Customer
D
|
12,251,665
|
11
|
% | ||||||||||||
Customer
E
|
8,244,479
|
9
|
%
|
Customer
E
|
9,486,306
|
8
|
% | ||||||||||||
Total
|
$
|
75,432,080
|
84
|
%
|
Total
|
$
|
91,324,592
|
80
|
% |
For the three months ended June
30, 2009
|
For the six months ended June
30, 2009
|
||||||||||||||||||
Largest
Customers
|
Amount of
Sales
|
% Total
Sales
|
Largest
Customers
|
Amount of
Sales
|
% Total
Sales
|
||||||||||||||
Customer
A
|
$
|
18,705,448
|
40
|
% |
Customer
A
|
$
|
23,557,490
|
40
|
% | ||||||||||
Customer
C
|
9,548,312
|
21
|
% |
Customer
C
|
11,287,969
|
19
|
% | ||||||||||||
Customer
F
|
8,698,201
|
19
|
% |
Customer
F
|
9,775,088
|
17
|
% | ||||||||||||
Customer
G
|
4,338,428
|
9
|
% |
Customer
G
|
4,978,162
|
9
|
% | ||||||||||||
Customer
H
|
2,409,882
|
5
|
% |
Customer
H
|
2,463,193
|
4
|
% | ||||||||||||
Total
|
$
|
43,700,271
|
94
|
% |
Total
|
$
|
52,061,902
|
89
|
% |
Three
major suppliers accounted for 88% ($31,126,269) and one major supplier accounted
for 68% ($24,109,239) of the Company’s inventory purchase for the three months
ended June 30, 2010. Three major suppliers accounted for 88% ($46,690,209) and
one major supplier accounted for 72% ($38,085,055) of the Company’s inventory
purchase for the six months ended June 30, 2010. Inner Mongolia
Yongye supplied 60% ($30,559,654) and 92% ($37,923,422) of the
Company’s finished goods for the three and six months ended June 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 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.
NOTE 21 –
SUBSEQUENT EVENT
In June
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”). Pursuant to the agreement, Yongye Nongfeng will
sell its products to sub-provincial level distributors in Hebei Province
directly. The acquisition of the Customer List was completed in July 2010. The
consideration of the Customer List is 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).
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. (f/k/a 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
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 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. 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 most 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
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. 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 and predictable results from season to
season.
In the
three months ended June 30, 2010, we sold approximately 8,342 tons of plant
product, which represented 99.9% of revenue at $89,344,146. We also
sold approximately 12 tons of our animal product. This represented 0.1% of our
total revenue or $70,242.
19
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. 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. 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 and expects to complete the transaction by the end of
2010.
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 by 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 to over 2,700 branded stores located in Hebei Province, which is
Yongye's largest regional market in China, representing approximately 30% of the
Company's revenues in 2009. Previously, in Hebei Province, Yongye sold its
products to its provincial level distributor who then resold those products to
lower level distributors and on to the branded stores. After the acquisition of
the customer list, Yongye will sell directly to its sub-provincial level
distributors in Hebei Province and these distributors will sell directly to the
retail network.
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.
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.
20
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 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.
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 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)
21
RESULTS
OF OPERATIONS
Summary
Statement of Income Data
For the Three Months Ended
|
For the Six Months Ended
|
|||||||||||||||
June
30, 2010
|
June
30, 2009
|
June
30, 2010
|
June
30, 2009
|
|||||||||||||
Sales
|
$ | 89,414,388 | $ | 46,271,544 | $ | 114,349,104 | $ | 58,707,319 | ||||||||
Cost
of sales
|
39,378,346 | 21,936,877 | 50,456,303 | 27,839,484 | ||||||||||||
Gross
profit
|
50,036,042 | 24,334,667 | 63,892,801 | 30,867,835 | ||||||||||||
Selling
expenses
|
16,343,330 | 6,450,694 | 22,631,333 | 9,070,992 | ||||||||||||
Research
& development expenses
|
2,238,331 | 1,124,445 | 2,338,896 | 1,413,017 | ||||||||||||
General
and administrative expenses
|
1,614,692 | 785,565 | 3,465,946 | 1,130,722 | ||||||||||||
Income
from operations
|
29,839,689 | 15,973,963 | 35,456,626 | 19,253,104 | ||||||||||||
Other
(income) /expenses
|
||||||||||||||||
Interest
expense, net
|
7,271 | 10,500 | 14,729 | 16,458 | ||||||||||||
Other
income, net
|
(286,895 | ) | (13,178 | ) | (238,112 | ) | (12,737 | ) | ||||||||
(Decrease)
/increase in fair value of derivative liabilities
|
(156,936 | ) | 5,276,958 | (169,470 | ) | 5,068,947 | ||||||||||
Total
other (income) /expenses,
net
|
(436,560 | ) | 5,274,280 | (392,853 | ) | 5,072,668 | ||||||||||
Earnings
before income tax expense
|
30,276,249 | 10,699,683 | 35,849,479 | 14,180,436 | ||||||||||||
Income
tax expense
|
4,738,834 | 4,591,776 | 5,683,322 | 4,747,223 | ||||||||||||
Net
income
|
25,537,415 | 6,107,907 | 30,166,157 | 9,433,213 | ||||||||||||
Less:
Net income attributable to the noncontrolling interest
|
1,291,714 | 63,734 | 1,549,163 | 82,256 | ||||||||||||
Net
income attributable to Yongye International, Inc.
|
$ | 24,245,701 | $ | 6,044,173 | $ | 28,616,994 | $ | 9,350,957 | ||||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$ | 0.54 | $ | 0.20 | $ | 0.64 | $ | 0.33 | ||||||||
Diluted
|
$ | 0.54 | $ | 0.20 | $ | 0.64 | $ | 0.33 | ||||||||
Weighted
average shares used in computation:
|
||||||||||||||||
Basic
|
44,578,011 | 30,222,243 | 44,555,252 | 28,500,814 | ||||||||||||
Diluted
|
44,696,725 | 30,222,243 | 44,674,545 | 28,500,814 |
22
THREE
MONTHS ENDED JUNE 30, 2010 COMPARED WITH THREE MONTHS ENDED JUNE 30,
2009
Net
Sales
Sales of
$89,414,388 in the second quarter of 2010 was an increase of $43,142,844 from
$46,271,544 in the same period of 2009, which was an overall increase of
93%.
This
increase was driven by higher demand throughout our market area, including
an increase in the number of branded stores and the growth of several new
markets, which resulted in almost all of such growth being due to an
increase in the quantity of product sold while our prices remained relatively
stable.
Gross
profit in the second quarter of 2010 increased 106%, from $24,334,667 to
$50,036,042, or $25,701,375, over the three months ended June 30,
2009.
Gross
margin increased between the two periods from 53% to 56%, or an overall 3%
increase in margin. The increase in gross profit ratio was mainly due to the
lower self-production cost as compared to the purchase of finished goods from
Inner Mongolia Yongye, as well as benefits from economies of scale. Upon
obtaining the fertilizer license on June 1, 2009, we started producing our
nutrients ourselves.
Cost
of Goods Sold
Cost of
goods sold for the three months ended June 30, 2010 was $39,378,346 which is 44%
of revenues. This is an increase of $17,441,469 over the previous period of
$21,936,877 and represents an 80% 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 second quarter of 2010 was mainly due to the lower
self-production cost as compared to the purchase of finished goods from
Inner Mongolia Yongye, as well as benefits from economies of scale. Upon
obtaining the fertilizer license on June 1, 2009, we started producing our
nutrients ourselves.
Sales
by Product Line
In the
three months ended June 30, 2010, we sold approximately 8,342 tons of plant
product, which represented 99.9% of revenue at $89,344,146. We also sold
approximately 12 tons of our animal product. This represented 0.1% of our total
revenue or $70,242. The revenue of our plant product increased to $89,344,146
from $46,178,850 or 93% in the three months ended June 30, 2010 as compared to
the same period in 2009 and the revenue of our animal product decreased to
$70,242 from $92,694, or 24%, in the three months ended June 30, 2010 compared
to the same period in 2009.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses increased by $10,721,763 to
$17,958,022 in the three months ended June 30, 2010 from $7,236,259 in the
corresponding period in 2009. As a percentage of sales for the three months
ended June 30, 2010, SG&A increased by 4% to 20% as compared to 16% of net
sales in the three months ended June 30, 2009, due in part to an increase of
$8,962,568 in advertising expenses that resulted from promotional activities
commenced in 2010, as we entered into more geographic markets and conducted
several nation-wide joint programs with China Central Television Station (CCTV),
as well as an increase in freight expenses of $435,288 that resulted from the
increase in revenue.
Research and
Development
Additionally,
we incurred $2,238,331 of research and development fees in the three
months ended June 30, 2010 as compared to $1,124,445 in the three months
ended June 30, 2009. Because we expanded our marketing places for new provinces
in 2010, the Research and Development (“R&D”) department set up the field
tests in related provinces. This increase in expenses is mainly the result of
more field test areas in the three months ended June 30, 2010 compared to the
same period in 2009.
Loss/gain
on change in fair value of warrants
The
warrants issued in our private financings in 2008 and 2009 are accounted for as
derivative liabilities and measured at fair value at each reporting date. The
decrease in fair value during the three months ended June 30, 2010 resulted in a
gain of $156,936. The decrease in fair value of the warrants was primarily
due to the decrease in our stock price from $8.08 per share at March 31, 2010 to
$6.89 at June 30, 2010. The change in fair value of the warrants for the
three months ended June 30, 2009 resulted in a loss of
$5,276,958.
23
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 June 30, 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.
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
issued 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 15.65% and 42.92% for the
three months ended June 30, 2010 and 2009, respectively. The higher effective
income tax rate in 2009 is primarily due to the impact of fair value changes of
derivative warrants.
For the
three months ended June 30, 2010, the Company’s income tax expense was
$4,738,834 as compared to $4,591,776 for the three months ended June 30,
2009.
Net
Income
Net
income for the three months ended June 30, 2010 increased by $19,429,508 to
$25,537,415 from $6,107,907 in the same period ended June 30, 2009, which was a
318% increase. This also represented net profit margin increased from 13% to 29%
over the three months ended June 30, 2010 and 2009. The increase in our net
profit margin is primarily due to the impact of the fair value changes of
derivative warrants in the three months ended June 30, 2010 as compared to the
corresponding period in 2009.
SIX
MONTHS ENDED JUNE 30, 2010 COMPARED WITH SIX MONTHS ENDED JUNE 30,
2009
Net
Sales
Sales of
$114,349,104 in the six months ended June 30, 2010 was an increase of
$55,641,785 from $58,707,319 in the same period in 2009, which was an overall
increase of 95% in revenue. This increase was driven by an increase in end-user
demand throughout our market area, which was is in large part created by an
increase in branded stores developed by our distributors, the large-scale
advertising campaign which creates pull from the branded stores through our
distribution channels and through our major distributors who are our customers,
which resulted in almost all of such growth being due to an increase in the
quantity of product sold while our prices remained relatively
stable.
Gross
Profit
Gross
profit for the six months ended June 30, 2010 also increased by 107%, which was
an increase from $30,867,835 to $63,892,801, or $33,024,966, over the six months
ended June 30, 2009. Our gross margin for the six months ended June 30, 2010
increased from 53% to 56%. The increase in gross profit ratio was mainly due to
the lower self-production cost as compared to the purchase of finished goods
from Inner Mongolia Yongye, as well as benefits from economies of
scale.
Cost
of Goods Sold
Cost of
goods sold for the six months ended June 30, 2010 was $50,456,303, which is 44%
of total revenues. This is an increase of $22,616,819, or 81%, over the
corresponding period in 2009. As a percent of revenue, this represented an
decrease of 3% when compared with the corresponding period between 2010 and
2009. This decrease was due to the lower self-production cost as compared to the
purchase of finished goods from Inner Mongolia Yongye, as well as benefits from
economies of scale. Upon obtaining the fertilizer license on June 1, 2009, we
started producing our nutrients ourselves.
Sales by Product
Line
The
revenue of our plant product increased by 97% and the revenue of our animal
product increased by 25% in the six months ended June 30, 2010 compared to the
same period in 2009.
24
Selling,
General and Administrative Expenses
SG&A
expenses increased by $15,895,565 to $26,097,279 in the six months ended June
30, 2010 from $10,201,714 in the same period in 2009, which was a 156% increase.
As a percentage of sales for the six months ended June 30, 2010, SG&A
increased by 6% to 23% of net sales as compared to 17% in the six months ended
June 30, 2009. This increase was due primarily to additional costs brought on by
increased expenses in the areas of advertising of $11,122,458, salaries of
$542,314, professional fees of $762,785, travel expenses of $542,154 and freight
expense of $626,078, as we entered into more geographic markets and conducted
several nation-wide joint programs with China Central Television Station
(CCTV).
Research
and Development
Additionally,
we incurred $2,338,896 of research and development fees in the six months ended
June 30, 2010 as compared to $1,413,017 in the six months ended June 30,
2009. Because we expanded our marketing places for new provinces in 2010,
the R&D department set up the test fields in related provinces. This
increase in expenses is mainly the result of more test field area in the first
two quarters of 2010 compared to the same period in 2009.
Loss/gain
on change in fair value of warrants
The
warrants issued in April Offering and September Offering are accounted for as
derivative liabilities and measured at fair value at each reporting date. The
decrease in fair value during the six months ended June 30, 2010 resulted in a
gain of $169,470. The fluctuation 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 $6.89 at June 30, 2010. The change in fair value of
the warrants for the six months ended June 30, 2009 resulted in a loss of
$5,068,947.
Income
Tax
The
Company did not carry on any business and did not maintain any branch office in
the United States during the six months ended June 30, 2010 and 2009. Therefore,
no provision for withholding or U.S. federal income taxes or tax benefits on the
undistributed earnings and/or losses of the Company has been made.
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
issued 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 15.85% and 33.48% for the six months
ended June 30, 2010 and 2009, respectively. For the six months ended June 30,
2010, the Company’s income tax expense was $5,683,322 and income tax payable as
of June 30, 2010 was $8,732,681 as compared to income tax expense of $4,747,223
for the six months ended June 30, 2009, and income tax payable of
$4,771,415 as of June 30, 2009.
Net
income
Net
income increased by $20,732,944, from $9,433,213 to $30,166,157 over the six
months ended June 30, 2010 & 2009, which was a 220% increase. Also, this
represented an increase in net profit margin from 16% to 26% in the related
period of 2010 and 2009. This increase is primarily due to the fact that
the gain from the decrease in the fair value of warrants amounted to $169,470 in
the six months ended June 30, 2010, but in the same period of 2009 there was a
loss from the change in fair value of warrants of $5,068,947.
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-month 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:
25
Net cash
used in operating activities in the six months ended June 30, 2010 increased by
$3,482,088 to $9,189,985 from $5,707,897 for the period ended June 30, 2009. The
change was mainly due to higher demand of working capital, resulting from the
expansion our business.
Net cash
used in investing activities increased by $21,571,304, or 1027%, to $23,671,570
in the six months ended June 30, 2010, compared to $2,100,266 the same period in
2009. The increase was due to deposits of $19,309,188 paid 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.
Net cash
provided by financing activities decreased by $2,833,094, or 35%, to $5,374,047
in the six months ended June 30, 2010, compared to $8,207,141 the same period in
2009. This was due to the increase in repayment of loans and payables of
$3,189,759 during the six months ended June 30, 2010.
Net
current assets at June 30, 2010 increased by $12,176,347 to $119,928,662 from
$107,752,315, or 11%, over December 31, 2009.
Summary
consolidated balance sheet data:
|
Yongye
|
Yongye
|
||||||||||
|
International, Inc.
|
International, Inc.
|
||||||||||
|
June 30, 2010
|
December 31, 2009
|
Changes in %
|
|||||||||
Cash
|
$
|
38,165,514
|
65,518,181
|
-42%
|
||||||||
Accounts
receivable, net of allowance for doubtful accounts
|
$
|
54,318,725
|
6,161,796
|
782%
|
||||||||
Property,
plant and equipment, net
|
$
|
11,194,461
|
9,156,915
|
22%
|
||||||||
Total
assets
|
$
|
197,988,676
|
145,805,688
|
36%
|
||||||||
Short-term
bank loan
|
$
|
-
|
2,925,174
|
-100%
|
||||||||
Long-term
loans and payables - current portion
|
$
|
462,224
|
331,693
|
39%
|
||||||||
Income
tax payable
|
$
|
8,732,681
|
4,082,424
|
114%
|
||||||||
Accrued
expenses
|
$
|
10,876,590
|
479,609
|
2168%
|
||||||||
Total
current liabilities
|
$
|
24,994,637
|
12,669,539
|
97%
|
||||||||
Long-term
loans and payables
|
$
|
541,713
|
545,327
|
-1%
|
||||||||
Total
equity attributable to Yongye International, Inc.
|
$
|
164,191,973
|
125,913,424
|
30%
|
||||||||
Total
equity
|
$
|
172,452,326
|
132,590,822
|
30%
|
Total
current liabilities increased by $12,325,098 to $24,994,637 at June 30, 2010
from $12,669,539 at December 31, 2009, which was largely due to an increase
in accrued expenses of $10,396,981 and income taxes payable of $4,650,257,
primarily due to the significant growth of business, and increase in our net
income before income tax. We repaid the short-term bank loan during the six
months ended June 30, 2010, which decreased current liabilities by
$2,925,174.
Total
equity increased by $39,861,504 to $172,452,326 at the end of June 30, 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 $469,491, which was mainly
from the warrants exercised during the six months ended June 30, 2010,
collection of subscription receivable of $8,550,000 that was received during the
six months ended June 30, 2010, and increase in retained earnings of $28,616,994
due to the net income attributable to Yongye International, Inc. during the
period.
Days
sales outstanding is defined as average accounts receivable for the period
divided by net sales for the period and decreased by 10 days to 32 days for the
three months ended June 30, 2010 from 42 days in the same period ended 2009, as
result of increased efforts in cash collection.
26
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 arrangements
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
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable.
ITEM
4.
|
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 and Accounting Officer, as
appropriate, to allow for timely decisions regarding required disclosure. Our
Principal Executive Officer and Principal Financial and Accounting 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 and Accounting Officer concluded that the Company’s
disclosure controls and procedures were effective.
27
Although
the management of our Company, including the Principal Executive Officer and the
Principal Financial and Accounting 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.
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.
|
28
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
|
||
August
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