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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT OF 1934 RULE 13A-14(A) OR 15D-14(A) - Yasheng Groupexhibit_31-1.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Yasheng Groupexhibit_32-2.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT OF 1934 RULE 13A-14(A) OR 15D-14(A) - Yasheng Groupexhibit_31-2.htm
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EX-99.1 - SUMMARY OF YASHENG LABOR CONTRACT - Yasheng Groupexhibit_99-1.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Yasheng Groupexhibit_32-1.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 

 
o  TRANSITION REPORT PURSUANT TO SECITON 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ___________________
 
Commission File Number:
 
YaSheng Group

 (Exact name of registrant as specified in its charter)
 
 
California
 
33-0788293
(State or Other Jurisdiction of  Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

805 Veterans Blvd., Suite 228, Redwood City, CA
94063
(Address of Principal Executive Offices)
(Zip Code)
 
(650) 363-8345
(Registrant's telephone number, including area code)
 
 
 
 
 
 

 

 
1

 

 
Indicate by check mark whether the Registrant (l) 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.
 
x Yes o No

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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).
 
x  Yes o No
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer 
o
 
Accelerated filer 
o
         
Non-accelerated filer 
o
(Do not check if smaller reporting company)
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
o Yes x No
 

State issuer’s revenues for its most recent fiscal year (12/31/11).$949,131,434
 
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified dated within the past 60 days. We are a smaller reporting company as determined pursuant to Rule 12b-2 of the Securities and Exchange Act of 1934 and Regulation S-K thereunder because the public float of our common stock is less than $75 million.

 
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
o  Yes o No

 
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date, 155,097,355 (9-30-12).

 


 
2

 

 


YASHENG GROUP
TABLE OF CONTENTS
 

PART I
FINANCIAL INFORMATION
 
       
Item 1
Condensed Consolidated Financial Statements (unaudited)
4
       
   
Auditor Review Report
4
       
   
Condensed Consolidated Balance Sheets
5
       
   
Condensed Consolidated Statements of Income
6
       
   
Condensed Consolidated Statements of Cash Flows
7
       
   
Notes to Condensed Consolidated Financial Statements
8
       
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
       
Item 3
Quantitative and Qualitative Disclosures about Market Risk
19
       
Item 4
Controls and Procedures
20
       
PART II
OTHER INFORMATION
 
       
Item 1
Legal Proceedings
22
       
Item 1A
Risk Factors
22
       
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
22
       
Item 3
Defaults Upon Senior Securities
22
       
Item 4
Submission of Matters to a Vote of Security Holders
22
       
Item 5
Other Information
22
       
Item 6
Exhibits
22
       
Signatures
   
23









 
 

 
3

 

 
PART I   FINANCIAL INFORMATION


Item 1.Financial Statements 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders Yasheng Group
Redwood City, California
 
We have reviewed the accompanying condensed consolidated balance sheet of Yasheng Group and subsidiaries (the “Corporation”) as of September 30, 2012, and the related condensed consolidated statements of income, stockholders’ equity, and cash flows for the three month periods ended September 30, 2012 and 2011. These interim financial statements are the responsibility of the Corporation’s management.
 
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Yasheng Group and subsidiaries as of December 31, 2011, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended and in our report dated March 25, 2012 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


 
/S/ Gansu Hongxin Certified Public Accountants Co., Ltd.
 
Lanzou, China
November 5, 2012
 
 
 
 
 
 
 
 
4

 
  
 
YASHENG GROUP
 
Condensed Consolidated Balance Sheets (unaudited)
 
(In US Dollars)
 
             
    As of  
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
   
(audited)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
    10,870,801       10,714,391  
Accounts receivable, net
    83,339,335       80,435,935  
Inventories
    199,149,593       140,493,163  
Prepaid and other current assets
    3,884,093       4,276,757  
                 
Total current assets
    297,243,821       235,920,245  
                 
Equity and other investments
    202,591       203,880  
                 
Property, plant and equipment, net
    769,849,458       762,293,032  
Construction in progress
    7,271,855       7,296,943  
Intangible assets, net
    1,035,526,918       1,051,789,820  
                 
Total assets
    2,110,094,643       2,057,503,921  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
    37,334,278       41,030,878  
Short term loans
    10,723,861       13,014,014  
VAT Tax payable
    849,362       962,005  
Current portion of long term debt
    5,394,011       6,400,318  
Other current liabilities
    737,590       779,448  
                 
Total current liabilities
    55,039,102       62,186,663  
                 
Long term debt
            2,283,845  
Long term payable
    30,141,314       33,970,092  
                 
Total liabilities
    85,180,417       98,440,600  
                 
Stockholders’ equity:
               
Common stock, US$1.00 par value
               
800,000,000 shares authorized
               
155,097,355 shares issued and outstanding
    155,097,355       155,097,355  
Accumulated other comprehensive income
    370,525,248       383,117,150  
Retained earnings
    1,499,291,624       1,420,848,816  
                 
Total stockholders’ equity
    2,024,914,227       1,959,063,321  
                 
Total liabilities & stockholders' equity
    2,110,094,643       2,057,503,921  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
5

 
 
 
YASHENG GROUP
 
Condensed Consolidated Statements of Operations (unaudited)
 
(In US Dollars)
 
                         
   
For The Three Months Ended September 30,
   
For The Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net sales
    299,716,420       277,816,897       692,251,867       653,529,949  
                                 
Cost of goods sold
    254,672,361       237,332,784       603,018,952       571,708,096  
                                 
Gross profit
    45,044,059       40,484,114       89,232,915       81,821,853  
                                 
Operating expenses:
                               
Sales and marketing
    522,638       501,943       1,236,785       1,182,004  
General and administrative
    1,236,931       1,114,223       2,957,753       2,759,041  
Total operating expenses
    1,759,569       1,616,166       4,194,538       3,941,045  
                                 
Operating profit
    43,284,490       38,867,948       85,038,377       77,880,808  
                                 
Interest expense
    39,817       568,067       1,084,519       1,839,125  
                                 
Other income (expense
    23,501       -184,616       862,419       690,415  
                                 
Income before income tax expense
    43,268,175       38,115,265       84,816,277       76,732,098  
Income tax expense
                               
                                 
Net income
    43,268,175       38,115,265       84,816,277       76,732,098  
                                 
Basic earnings per share
    0.28       0.25       0.55       0.49  
Weighted average number of shares
    155,097,355       155,097,355       155,097,355       155,097,355  
                                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
6

 
 
 
YASHENG GROUP
 
Condensed Consolidated Statements of Cash Flows (unaudited)
 
(In US Dollars)
 
             
   
For The Nine Months Ended September 30,
 
   
2012
   
2011
 
             
Cash flows from operating activities:
           
Net income
    84,816,277       76,732,098  
Adjustments to reconcile net income to net cash provided by operating activities:
         
     Depreciation and amortization
    7,680,440       6,918,603  
     Allowance for doubtful accounts
    179,205       12,954  
Changes in assets and liabilities:
               
     Accounts receivable
    -3,591,276       -259,591  
     Inventories
    -59,544,898       -12,821,920  
     Prepaid and other current assets
    365,618       369,617  
     Accounts payable
    -3,428,356       -5,349,758  
     Tax payables
    -106,559       -73,021  
     Accrued expenses and other current liabilities
    -45,697       -63,878  
Net cash provided by operating activities
    26,324,754       65,465,105  
                 
Cash flows from investing activities:
               
     Purchase of assets
    -10,838,251       -59,623,227  
     Investments
               
Net cash used in investing activities
    -10,838,251       -59,623,227  
                 
Cash flows from financing activities:
               
     Issuance of common stock
               
     Dividens paid
               
     Payment on land lease
    -3,613,953       -4,588,211  
     Increase (decrease) in debt
    -5,443,087       -3,892,991  
Net cash provided by financing activities
    -9,057,041       -8,481,202  
                 
Effect of exchange rate change on cash and cash equivalents
    -273,053       3,113,805  
                 
     Net increase (decrease) in cash and cash equivalents
    6,156,409       474,481  
                 
Cash and cash equivalents at beginning of period
    10,714,391       10,116,750  
Cash and cash equivalents at end of period
    16,870,801       10,591,231  
                 
Supplemental Disclosures:
               
Cash paid for interest
    1,084,519       1,839,125  
Cash paid for income taxes
               
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 


 
 
7

 


YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Basis of Presentation, Organization and Business

         The accompanying unaudited condensed consolidated financial statement (“statements”) have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for the period are not necessarily indicative of the results that may be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Yasheng Group's Form 10-K. The statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

Yasheng Group (“The Company”) is a California corporation with primary operations in China. The Company produces and markets high-quality farming and sideline products including livestock and poultry. It also designs, develops and markets new technologies related to agriculture.
 
Product offerings include 30+ major agriculture goods under 6 major product categories which include: field crops: cotton, corns, barley, wheat, flax, alfalfa; vegetables: onions, potatoes, beet, and peas; fruit trees: apples, pears, apricots; specialty crops: hops, wolfberries, cumin, liquorices; seeds: black melon seeds, sunflower seeds, corn seeds, flax seeds; poultry: eggs. 

Yasheng sells its products through an extensive nationwide sales and distribution network covering 18 provinces and over 100 cities in China. Products are also sold directly to food processors as well as processed internally by the company and then resold to supermarkets or other distributors, or further processed for retail food distribution. The Company also sells many of its products fresh within Gansu province as well as nationally to food processors and distributors, or directly to supermarkets. Customers are based primarily in China and include national and international leading companies. Products are also sold as feed for livestock, ingredients for Chinese traditional medicines as well as other important ingredients in the food industry.
 
2.
Summary of Significant Accounting Policies

(a)
Accounting standards

The consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of operations of the Company in accordance with accounting principles generally accepted in the United States of America.
 
(b)
Fiscal year

The Company’s fiscal year ends on the 31st of December of each calendar year.
 
(c)
Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated.
 
 
 

 
 

 
8

 

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued
 
(d)
Use of estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
(e)
Revenue recognition
 
We mainly sell food products.  We recognize revenue when title and risk of loss are transferred to our customers.  This generally happens upon delivery of our products.
 
(f)
Shipping and handling costs

The Company records outward freight, purchasing and receiving costs in selling expenses; inspection costs and warehousing costs are recorded as general and administrative expenses.
 
(g)
Cash and cash equivalents

Cash and cash equivalents include cash on hand, demand deposits held by banks, and securities with maturities of three months or less. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are composed primarily of investments in money market accounts stated at cost, which approximates fair value.
 

 
 

 
9

 

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued
 
(h)
Inventories

Inventories are recorded using the weighted average method and are valued at the lower of cost or market.
 
(i)
Accounts receivable, net

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, the Company considers many factors in estimating its general allowance, including aging analysis, historical bad debt records, customer credit analysis and any specific known troubled accounts.
 
(j)
Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is calculated on a straight-line basis over the life of the asset or the term of the lease, whichever is shorter. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to property and equipment used in production is reported in cost of sales. Property and equipment are depreciated over their estimated useful lives as follows:
 
Buildings and improvements 
20 - 40 years
 
Farming facilities 
10 years
 
Machinery and equipment 
7 years
 
Transportation and other facilities 
3 - 15 years
 
Long-term assets of the Company are reviewed annually to assess whether the carrying value has become impaired, according to the guidelines established in Statement of Accounting Standards (SFAS) No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." The Company also evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. No impairment of assets was recorded in the periods reported.

   
09/30/2012
   
12/31/2011
 
             
Buildings and improvements
 
$
99,195,352
   
$
97,190,568
 
Farming facilities
   
90,524,800
     
88,529,584
 
Machinery and equipment
   
11,520,796
     
11,241,317
 
Transportation
   
287,789,435
     
281,784,651
 
Windbreak and Sand-break Trees
   
363,588,349
     
355,598,387
 
Total
   
852,619,203
     
834,344,508
 
Less: Accumulated Depreciation and amortization
   
82,769,745
     
72,529,158
 
Net
 
$
769,849,458
   
$
762,293,032
 

(k)
Intangible assets

Intangible assets consist of land use rights and are recorded at cost. Under PRC’s current property rights regime, use rights for specified periods (e.g., 40 to 70 years) can be obtained from the state through the up-front payment of land use fees. The fees are determined by the location, type and density of the proposed development. This separation of land ownership and use rights allows the trading of land use rights while maintaining state ownership of land. The Company has over 250,000 acres of agriculture land that are utilized for grazing, cultivation, and reclamation, of which 50,000 acres are under cultivation using the latest scientific technologies to produce a wide variety of agricultural products.

 

 
10

 

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued
 
(l)
Impairment of long-lived assets

The carrying amounts of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

(m)
Investments

Investments consist primarily of less than 20% equity positions in non-marketable securities and are recorded at lower of cost or market.

(n)
Foreign currency translation

The accompanying financial statements are presented in United States (US) dollars. The functional currency is the Renminbi (“RMB”). The financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighed average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

Gains and losses resulting from foreign currency translation are recorded in a separate component of shareholders’ equity. Foreign currency translation adjustments are included in accumulated other comprehensive income in the consolidated statements of shareholders’ equity for the years presented.

RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.
 
(o)
Income taxes

As an agricultural enterprise, the Company and all of its agricultural subsidiaries are exempted from enterprise income taxes with approval from the Gansu Provincial Bureau of Local Taxation. The only non-agricultural subsidiary, Baiyin Cement Plant, has suffered net loss for the years shown and therefore has no applicable taxable income. Because of the uncertainty of future profits, no deferred tax assets have been set up at this time.

(p)
Earnings per share

Basic earnings per share are computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed using the weighted average number of common and, if dilutive, potential common shares outstanding during the year. The Company has no potentially dilutive shares for the periods shown.

(q)
Economic and Political Risks

The Company faces a number of risks and challenges as a result of having primary operations and markets in the PRC. Changing political climates in the PRC could have a significant effect on the Company's business.
 
(r)
Advertising expense

The Company records advertising expenses in the period incurred.
 
 

 

 
11

 

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued
 
(s)
Comprehensive income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income, as presented on the accompanying consolidated balance sheets, consists of mainly the cumulative foreign currency translation adjustment.

(t)
Recently issued accounting standards

Recently Adopted Accounting Guidance
 
On July 1, 2011, we adopted guidance issued by the Financial Accounting Standards Board (“FASB”) on disclosure requirements related to fair value measurements. The guidance requires the disclosure of roll-forward activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). Adoption of this new guidance did not have a material impact on our financial statements.
 
On January 1, 2012, we adopted guidance issued by the FASB on accounting and disclosure requirements related to fair value measurements. The guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. Adoption of this new guidance did not have a material impact on our financial statements.
 
Recent Accounting Guidance Not Yet Adopted
 
In December 2011, the FASB issued guidance enhancing disclosure requirements about the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. The new guidance will be effective for us beginning July 1, 2013. Other than requiring additional disclosures, we do not anticipate material impacts on our financial statements upon adoption.
 
In September 2011, the FASB issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. The new guidance will be effective for us beginning July 1, 2012.
 
In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. This portion of the guidance will be effective for us beginning July 1, 2012 and will require financial statement presentation changes only. The new guidance also required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, in December 2011, the FASB issued guidance which indefinitely defers the guidance related to the presentation of reclassification adjustments.
 
 

 

 
12

 

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued

(u)
Value added tax (VAT)

Value added tax is a consumption tax levied on value added. While the standard VAT rate in PRC is 17%, the Company's agricultural subsidiaries enjoy a reduced VAT rate of 4%.

3.
Inventories

The major classes of inventory: raw materials, packaging materials, products in process, finished goods, stocks, low-value consumable goods, materials in transit as well as others.
 
The following is a breakdown of the major categories of inventories.

Inventory Breakdown
As of 9/30/2012
As of 12/31/2011
Raw material
 
    40,465,951 
27,582,045 
Finished goods
 
   104,428,704 
74,191,560 
Low value consumable goods
 
    26,952,673 
19,158,243 
Packaging material
 
    17,961,457 
12,818,223 
Maintenance material
 
      9,340,807 
6,743,092 
Total
 
   199,149,592 
140,493,163 

4.
China contribution plan

The Company’s subsidiaries in China participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company’s subsidiaries to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond its monthly contribution.

5.
Profit appropriation

Pursuant to the laws applicable to China’s Foreign Investment Enterprises, each of the Company’s subsidiaries in China allow make appropriations from its after-tax profit to non-distributable reserve funds as determined by the Board of Directors. These reserve funds include a (i) general reserve, (ii) enterprise expansion fund and (iii) staff bonus and welfare fund. The general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP) until these reserves equal 50% of the amount of paid-in capital; the other fund appropriations are at the Company’s discretion. Payment to the statutory general reserve fund is at the Company discretion. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends.

6.
Concentration of risks

The operations of the Company are substantially located in the PRC and accordingly, investing in the shares of the Company is subject to among others, the PRC’s political, economic and legal risks.
 

 

 
13

 

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
7.
Income taxes

The Company and all of its agricultural subsidiaries are exempt from income taxes in the PRC. The Company has not filed an income tax return in the US.

8.
Debt
 
The Company obtains secured lending from the banks using two types of arrangements, collateral and guarantee. Collateral are loans secured against the assets of the Yasheng Group, while guarantee are loans provided with the guarantee from a third party.
  
9.
Employee benefit plans

The Company provides the following benefits for all employees:

A. Employee Welfare Fund: An amount equal to 14% of payroll is set aside by the Company for standard employee benefits. This fund is managed and controlled by the Company. All required payments current.

B. Open Policy Pension: The Company pays to national and community insurance agents an amount equal to 20% of payroll. This insurance continues to cover the employee subsequent to retirement.

C. Unemployment Insurance: The Company pays to the national employment administrative entities an amount equal to 1% of payroll. Any dismissed employee thereby receives a specified amount of family-support funds for a designated period.

D. Housing Surplus Reserve: The Company pays to the national housing fund administrative entities an amount equal to 10% of payroll for deposit into the employees' future housing allowance accounts.
 
The aforesaid items are for employee's benefits and should be accounted for as the Company's expenses.

10.
Operating leases
 
The Company has no operating leases for the periods shown.
 
 
 
 
 
 

 
14

 

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
11. 
Segments
 
In its operation of the business, management, including upper management and the board of director’s, reviews certain information as it relates to the Company as a whole.  The information most used and useful is the profitability by subsidiary.  Accordingly, these are the segments which are presented in the table below.
 
Breakdown by Subsidiary    Unit: US Dollar
 
   
Net Sales
   
Net Sales
   
Cost of Sales
   
Cost of Sales
   
Gross Profit
   
Gross Profit
 
Subsidiaries
 
ended
   
ended
   
ended
   
ended
   
ended
   
ended
 
   
9/30/2012
   
9/30/2011
   
9/30/2012
   
9/30/2011
   
9/30/2012
   
9/30/2011
 
Gansu Tiaoshan Agricultural-Industrial-Commercial Group Co., Ltd
  $ 334,657,608     $ 270,664,963     $ 296,119,516     $ 238,657,539     $ 39,538,092     $ 32,007,424  
Gansu Hongtai Agricultural Technology Co., Ltd. 
    88,913,465       105,984,780       79,697,137       94,211,069       11,216,328       11,773,711  
Gansu Xiaheqing Industrial Co., Ltd.
    15,823,996       15,939,451       12,199,306       14,105,813       3,624,690       1,833,638  
Gansu Jinta Hengsheng Agricultural Development Co., Ltd.
    79,425,815       85,317,549       69,131,650       77,619,160       10,294,165       7,698,389  
Gansu Jinta Xingsheng Industrial Co., Ltd.
    88,221,303       86,883,377       74,035,665       75,003,577       11,185,638       11,879,800  
Gansu Jinta Yongsheng Agricultural Development Company.
    82,293,816       87,837,714       71,117,797       71,340,846       13,176,019       16,496,868  
Gansu Jinta Yuantai Commercial Trading Co., Ltd.  
    915,864       902,115       717,881       770,092       197,983       132,023  
Totals for Quarter
  $ 692,251,867     $ 653,529,949     $ 603,018,952     $ 571,708,096     $ 89,232,915     $ 81,821,853  

Other segments that assist management in its analysis of the company's performance are the segments by product group, namely, agriculture, livestock and biotechnology.  The following table contains that breakout of gross profit by product group.
 
3 months ended 9-30-2012 
 
   
Sales
   
Sales
   
Cost of Sales
   
Cost of Sales
   
Gross Profit
   
Gross Profit
   
Gross Profit %
   
Gross Profit %
 
   
ended
   
ended
   
ended
   
ended
   
ended
   
ended
   
ended
   
ended
 
   
9/30/2012
   
9/30/2011
   
9/30/2012
   
9/30/2011
   
9/30/2012
   
9/30/2011
   
9/30/2012
   
9/30/2011
 
Agriculture
    686,565,195       648,306,036       597,525,799       566,813,498       89,039,396       81,492,538       12.4953       12.5701  
Livestock
    1,237,617       1,211,610       1,110,102       1,089,417       127,515       122,193       10.3033       10.0852  
Biotechnology
    4,449,055       4,012,303       4,383,051       3,805,181       66,004       207,122       1.4836       5.1622  
Total for Quarter
  $ 692,251,867     $ 653,529,949     $ 603,018,952     $ 571,708,096     $ 89,232,915     $ 81,821,853       11.26       12.5200  

 
 

 
 
 

 
15

 
 
 
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following is a discussion of our financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with our audited financial statements and the notes thereto included elsewhere in this Form 10-Q and with our annual report for the year ended December 31, 2011.

Some of the statements under "Description of Business," "Risk Factors," "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this Report and in the Company's periodic filings with the Securities and Exchange Commission constitute forward-looking statements. These statements involve known and unknown risks, significant uncertainties and other factors what may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this Report.

In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "intends," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology.

The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions that the Company will obtain or have access to adequate financing for each successive phase of its growth, that there will be no material adverse competitive or technological change in condition of the Company's business, that the Company's President and other significant employees will remain employed as such by the Company, and that there will be no material adverse change in the Company's operations, business or governmental regulation affecting the Company. The foregoing assumptions are based on judgments with respect to, among other things, further economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company's control.

Although management believes that the expectations reflected in the forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither management nor any other persons assumes responsibility for the accuracy and completeness of such statements.

GENERAL

Yasheng Group (“The Company”) is a California corporation with primary operations in China. The Company designs, develops, manufactures and markets high-quality farming and sideline products including livestock and poultry. It also designs, develops and markets new technologies related to agriculture and genetic biology.

RESULTS OF OPERATIONS

(unaudited)
 
   
Three Months Ended
September 30, 2012
   
Three Months Ended
September 30, 2011
 
   
Dollars
(000's)
   
% of Sales
   
Dollars
(000's)
   
% of Sales
 
Net Sales
 
$
   299,716
     
100
%
 
$
      277,816
     
100
%
Costs of Goods Sold
   
254,672
     
85.0
%
   
      237,332
     
85.4
%
Gross profit
   
45,044
     
14.1
%
   
       40,484
     
14.6
%
Sales and marketing expenses
   
522
     
0.2
%
   
          501
     
0.2
%
General and administrative expenses
   
1,236
     
0.4
%
   
        1,114
     
0.4
%
Interest expense
   
39
     
0.0
%
   
          568
     
0.2
%
Other income
   
23
     
0.0
%
   
         -184
     
-0.1
%
Net income
 
$
43,268
     
14.4
%
 
$
      38,115
     
13.4
%
 
 
 
 

 
16

 
 
 
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
The functional currency for the Company is the RMB which is translated into US Dollars for financial reporting purposes. The average exchange rates for the periods presented were 6.3223 RMB to 1 USD for the nine months ended September 30, 2012 and 6.4473 RMB to 1 USD for the nine months ended September 30, 2011.
 
Net Sales. Sales are generated primarily from our farming operations and related side line products in China. Net sales for the nine months ended September 30, 2012 increased by $39 million, or 6% to $692 million as compared to $653 million for the nine months ended September 30, 2011. The overall increase in net sales was primarily a result of the rising prices of agricultural products attributable to increasing demand in China. We also benefited from our expanded marketing network which covers more provinces, with more distributors and direct clients.
 
Factors of increased sales this Spring:

 
1)
Food production prices on the global market were impacted by extreme weather, as the drought of 2012 spread throughout the world including France, Germany, China and the United States, with prices rising internationally.  9 counties in Gansu province sudden showers of hail weather in Aug this year, Yasheng fraction of farms affected by this year ice storm weather.
 
Geographically, Yasheng is located in the mountain areas of Gansu, Zhangye, Jiuquan and other regions, with large areas of drip irrigation equipment and systems which rely on snowfall water from the Qilian Mountains, making the sub-areas of agricultural land unaffected by the drought, while the autumn harvest of grain, fruits, vegetable, etc. sales price increased.

 
2)
Depreciation of the dollar. Food, oil and other raw materials in the international market are priced in U.S. dollars. The average exchange rates for the periods presented were 6.3223 RMB to 1 USD for the nine months ended September 30, 2012 and 6.4473 RMB to 1 USD for the Nine months ended September 30, 2011; .
     
  3)
International momentum of recent skyrocketing food prices, international corn prices soared 50% has raised to record highs, soybean and wheat prices also rose about 30% that since June of this year the data show.
 
Cost of Goods Sold. Our cost of goods sold consists of the direct production costs such as raw materials, direct labor, overhead and miscellaneous other supplies. Costs were in line with sales due to continued heightened focus on cost control exercised throughout production, the increase in cost is mainly due to the growth in the net sales.  
 
Gross Profit and Gross Margin. Our gross profit for the nine months ended September 30, 2012 increased by $7.4 million or 9.1% to $89.2 million from $81.8 million for the nine months ended September 30, 2011. The improved margin was primarily a result of the growth in the net sales.
 
Sales and Marketing Expenses. Our sales and marketing expenses for the nine months ended September 30, 2012 increased by $54,781 or 5.0% to $1.24 million as compared to $1.18 million in the nine months ended September 30, 2011.
 
General and Administrative Expenses. Our general and administrative expenses for the nine months ended September 30, 2012 increased by $198,712 or 7.2% to $2.96 million from $2.76 million for the nine months ended September 30, 2011. 
 
 
 
 

 
17

 

 
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Interest Expenses and Other Income. Our interest expense for the nine months ended September 30, 2012 decreased by $754,606 or 41% to $1.08 million as compared to $1.8 million in the prior nine months ended September 30, 2011. Our other income for the nine months ended September 30, 2012 increased by $172,004 or 25% to $862,419 as compared to $690,415 in the prior nine months ended September 30, 2011. 

Liquidity and Capital Resources

As of September 30, 2012, we had cash and cash equivalents of $10.71 million and working capital of $242 million. This compared to cash and cash equivalents of $10.12 million and working capital of $152 million as of September 30, 2011. The following table provides information about our net cash flows for the operating results presented in this report (amounts in thousands of USD).
 
   
Nine Months Ended
September 30th
 
   
2012
   
2011
 
Net cash provided by operating activities
     26,324,754        65,465,105  
Net cash used in investing activities
     -10,838,251       59,623,227  
Net cash used in financing activities
     -9,057,041        -8,481,202  
Effect of foreign currency translation on cash and cash equivalents
    -273,053       3,113,805  
Cash and cash equivalents at beginning of the period
    10,714,391       10,116,750  
Cash and cash equivalents at end of period
    16,870,801       10,591,231  
 
Net cash provided by operating activities was $26 million for the nine months ended September 30, 2012 as compared to $65 million for the nine months ended September 30, 2011. Net cash used in investing activities was $11 million for the nine months ended September 30, 2012 as compared to $60 million for the nine months ended September 30, 2011. Net cash used in financing activities was $9 million for the nine months ended September 30, 2012 compared with $8.48 million for the nine months ended September 30, 2011.
 
We believe our cash on hand and cash flows from operations will meet our expected capital expenditures and working capital needs for the next 12 months. In addition, we may, in the future, require additional cash resources due to changed business conditions, implementation of our strategy to expand our production capacity or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
 
Off-Balance Sheet Arrangements
 
As of September 30, 2012 and for the three months then ended, we were not party to transactions, obligations or relationships that could be considered off-balance sheet arrangements and we do not have off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.
 
Segments

See Notes to financial statements for details on the segments.
 
 
 

 
18

 

 
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements. The additional discussion below addresses our more significant judgments.
 
Impairment of long-lived assets. Long-lived assets, except goodwill and indefinite-lived intangible assets, are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows estimated by our management to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are recorded as held for sale at the lower of carrying value or estimated net realizable value.
 
All land in the PRC is owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specific period of time. Thus, all of our land purchases in the PRC are considered to be leasehold land and are stated at cost less accumulated amortization and any recognized impairment loss.
 
Property, plant and equipment, net. Property, plant and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. The principal estimated useful lives generally are: buildings – 20 years; leasehold improvement – 10 years; machinery - 10 years; furniture, fixtures and office equipment – 5 years; motor vehicle – 5 years. During the idle period of the plant, depreciation is treated as current-period charges, which is charged directly to general and administrative expense.
 
New Accounting Standards

See Note 1 to the Consolidated Financial Statements for information regarding other new accounting standards that could affect us.

 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk

Our international sales accounted for very little of our net sales in the first quarter of 2012.  As a result, we have exposure to foreign exchange risk with respect to a minor portion of our sales.  Fluctuations in exchange rates, particularly in the U.S. dollar to Chinese yuan (RMB) exchange rate, do not affect materially affect our gross and net profit margins even though they could result in foreign exchange and operating losses.

Our primary foreign currency exposures are transaction, cash flow and translation:
 
Transaction Exposure:   We have certain asset and liabilities, primarily receivables, investments and accounts payable that are denominated in currencies other than the relevant entity's functional currency.  In certain circumstances, changes in the functional currency value of these assets and liabilities create fluctuations in our reported consolidated financial position, results of operations and cash flows.  We may enter into foreign exchange forward contracts or other instruments to minimize the short-term foreign currency fluctuations on such assets and liabilities.  The gains and losses on the foreign forward contracts offset the transaction gains and losses on certain foreign currency receivables, investments and payables recognized in earnings.

Cash Flow Exposure:   We have forecasted future cash flows, including revenues and expenses, denominated in currencies other than the relevant entity's functional currency.  Our primary cash flow exposures include future customer collections and vendor payments.

Earnings Translation Exposure:   Fluctuations in foreign currency exchange rates do not create volatility in our reported results of operations because we are required to consolidate the financial statement of all of our subsidiaries and most of our sales are in China.  We decide to purchase forward exchange contracts or other instruments to offset the impact of currency fluctuations.  Such contracts would be marked-to-market on a monthly basis and any unrealized gain or loss would be reported in interest and other income, net.  We do not edge translation exposure at this time but may do so in the future.
 
 
 

 
19

 

 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk - continued
  
Interest Rate Risk

We are exposed to interest rate risk because some of our distributors and other vendees depend on debt financing to purchase our products and some of our subsidiaries depend on debt financing to construct facilities and to improve the farms.  Although the useful life of our farm products is short, our distributors and vendees still have to pay the entire cost of their purchases at the time of shipment.  As a result, many of our distributors and vendees rely on debt financing to fund their up-front cash flow needs and expenditures.  An increase in interest rates could make it difficult for our distributors and vendee to secure the financings necessary to purchase, hold and resell our products, and thus lower and postpone demand for our products and reduce our net sales.
 
Commodity Risk

We are exposed to price risks associated with raw material purchases and sales into the domestic and foreign commodities markets.


Item 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including Chief Executive Officer and Principal Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), to ensure that information required to be disclosed by the company in the reports filed or submitted by us under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, or persons performing similar functions, to allow timely decisions regarding required disclosure.  
 
In our last annual report for fiscal year 2010, we concluded our disclosure controls and procedures were not effective because we did not timely file our periodic reports. However, on August 13, 2010 we completed filing our past due periodic reports. What’s more, the company took active actions to remedy its disclosure controls and procedures, including but without limitation to, allocate more management and financial personnel with U.S. GAAP experience and outside financial counsels as well as supporting staff, to maintain and reinforce our internal controls and procedures. We monitor the disclosure controls and procedures through our internal self-assessments program. As a result, our reports have been filed on a timely basis after we finished filing our past due reports. Based on their evaluation notwithstanding the improvements, our Chief Executive Officer and Principal Accounting Officer concluded that as of December 31, 2011, our disclosure controls and procedures were not effective.
 
Management’s Annual Report on Internal Control over Financial Reporting.
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on that evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2011.
 
As a Smaller Reporting Company, the Company is exempt from Section 404(b) of the Sarbanes-Oxley Act of 2002 which requires the independent auditor of a public company to issue an attestation report on the Company’s internal control over financial reporting and management’s assessment of those controls under Section 404(a).
 
 
 

 
 
20

 

 
Item 4.
Controls and Procedures. - continued

Inherent Limitations on Effectiveness of Controls
 
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our internal control over financial reporting will prevent all errors and all frauds. 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 assurances 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 a 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 also is 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; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
The Gansu Hongxin CPA, an independent registered public accounting firm, has audited the consolidated financial statements of Yasheng Group for the fiscal year ended December 31, 2010, in accordance with the auditing standards generally accepted in the United States of America and with accounting principles generally accepted in the United States of America.
 
Changes in Internal Control over Financial Reporting
 
Since the first quarter of our 2010 fiscal year, we began to implement the remedial measures described above; including but without limitations to: hiring financial professionals and supporting staff in both U.S. and China; intensifying the interaction and cooperation between our U.S. and China offices; launching special employee training sessions with a focus on internal control; enhancing the design and documentation of our internal control policies and procedures to ensure appropriate controls over our financing reporting.  This is an on-going process to improve our internal control and is not completed.
 
Excepted as described above, there were no changes in our internal control over financial reporting during our fiscal year of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Lack of PCAOB Auditor Oversight Risk and Concerns
 
As a public company, we are required by the Sarbanes-Oxley law to be audited by a PCAOB registered auditor.  Our auditor is based in China and has registered with the PCAOB.  One of the requirements of this registration is to be inspected on a periodic basis by the PCAOB.  These inspections include reviewing of the actual audit work papers prepared by our auditors as well as a review of the quality control procedures of our auditor.  The SEC and the PCAOB are endeavoring to arrive at a mutual understanding as to auditor inspections with the Chinese Government.  The Chinese government up until the filing of this quarterly report has not fully allowed the PCAOB inspectors to review the work papers of our auditor, although progress is being made.
 
(See web site www.pcaobus.eog.International/pages?IssuerClientsWithoutAccessList.aspx).
 
Regular inspections by the PCAOB of public company auditors was one of the corner stones of the Sarbanes-Oxley law.  The lack of inspections is contrary to US law and deprives the current and future shareholders of any and all benefits that would be derived by this important auditor oversight.  This lack of oversight and the associated added expenses, also puts any US based audit firm in a distinct disadvantage when competing with a Chinese based audit firm for work in China.
 
Our Accounting Personnel have limited experience with US GAAP
 
Our accounting personnel have been predominately educated and trained in PRC GAAP which is different from International GAAP and US GAAP.  This lack of experience and training could cause possible confusion in the application of US GAAP, weaknesses in internal control, and cause delays in the financial statement preparation process.
 

 
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PART II
Item 1. Legal Proceedings
 
The Company is not presently a party to any material legal actions.

 
Item 1A. Risk Factors
 
See Item 3 in part above and the Company’s 10-K for the year ended December 31, 2011.

 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
None

 
Item 3.  Defaults Upon Senior Securities
 
None

 
Item 4.  Submission of Matters to Vote of Security Holders
 
None

 
Item 5.  Other Information
 
None

 
Item 6.  Exhibits


 
 
 
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

 
November 16, 2012
 
                      YASHENG GROUP
 
By: /s/Changsheng Zhou

Changsheng Zhou, Chief Executive Office
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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