UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-Q
  (Mark
One)
  x           Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
  For the quarterly period ended March
31, 2010
  or
   ̈           Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
  For the
transition period from to .
 
 Commission
      File Number 000-51200
                    
                    Yongye
      International, Inc.
                    (Exact
      name of registrant as specified in its charter)Nevada
                    (State
      or other jurisdiction of
                    incorporation
      or organization
                  
                  
                  
                  20-8051010
                    (I.R.S.
      Employer
                    Identification
      No.)6
      th Floor, Suite 608, Xue Yuan International Tower,
                    No.
      1 Zhichun Road, Haidian District Beijing, PRC
                    (Address
      of principal executive offices)(Former
      name, former address and former fiscal year, if
                    changed
      since last report)
                    
                    +86
      10 8232 8866
                    (Registrant’s
      telephone number, including area code)
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes       x  No      ̈
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). * Yes  ̈ No  ̈ *The registrant has not
yet been phased into the interactive data requirements.
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer x 
      (Do
      not check if a smaller reporting company)
              Smaller reporting company  ̈
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈ No  ̈
 
 As of May
10, 2010, there were 44,532,241 shares of common stock, par value $.001 per
share, issued and outstanding.
  
  TABLE OF CONTENTS
  PagePART
      I. FINANCIAL INFORMATION
                      1ITEM
      1.
                      FINANCIAL
      STATEMENTS
                      1ITEM
      2.
                      MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
      CONDITIONS.
                      19ITEM
      3.
                      QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                      26ITEM
      4.
                      CONTROLS
      AND PROCEDURES
                      26PART
      II. OTHER INFORMATION
                      27ITEM
      1.
                      LEGAL
      PROCEEDINGS
                      27ITEM
      1A.
                      RISK
      FACTORS
                      27ITEM
      2.
                      UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                      27ITEM
      3.
                      DEFAULTS
      UPON SENIOR SECURITIES
                      27ITEM
      4.
                      (REMOVED
      AND RESERVED)
                      27ITEM
      5.
                      OTHER
      INFORMATION
                      27ITEM
      6.
                      EXHIBITS
                      28
  i
  PART
I.
  Financial
Information
  ITEM
      1.
              Financial
      Statements
 
 YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
  UNAUDITED
CONSOLIDATED BALANCE SHEETS
 
 Note
                          
                          March
      31, 2010
                          
                          
                          December 31, 2009Current
      assetsCash
                          
                          
                          $
                          50,989,166
                          
                          
                          $
                          65,518,181Accounts
      receivable, net of allowance for doubtful accounts
                          3
                          
                          
                          8,774,317
                          
                          
                          
                          6,161,796Inventories
                          4
                          
                          
                          46,174,371
                          
                          
                          
                          42,033,261Prepayments
                          5
                          
                          
                          6,023,486
                          
                          
                          
                          6,211,896Prepaid
      expenses
                          
                          
                          
                          343,106
                          
                          
                          
                          112,879Other
      receivables
                          
                          
                          
                          323,532
                          
                          
                          
                          383,841Total
      Current Assets
                          
                          
                          
                          112,627,978
                          
                          
                          
                          120,421,854Property,
      plant and, equipment, net
                          6
                          
                          
                          9,048,876
                          
                          
                          
                          9,156,915Intangible
      asset, net
                          7
                          
                          
                          82,414
                          
                          
                          
                          85,058Land
      use right, net
                          8
                          
                          
                          4,145,645
                          
                          
                          
                          4,166,987Deposits
      for assets acquisition
                          9
                          
                          
                          20,019,163
                          
                          
                          
                          -Other
      assets
                          10
                          
                          
                          4,426,209
                          
                          
                          
                          2,029,012Goodwill
                          11
                          
                          
                          9,947,462
                          
                          
                          
                          9,945,862Total
      Assets
                          
                          
                          $
                          160,297,747
                          
                          
                          $
                          145,805,688Current
      liabilitiesShort-term
      bank loan
                          12
                          
                          $
                          -
                          
                          
                          $
                          2,925,174Long-term
      loans and payables - current portion
                          13
                          
                          
                          431,041
                          
                          
                          
                          331,693Accounts
      payable - related party
                          19
                          
                          
                          880,167
                          
                          
                          
                          880,026Accounts
      payable - third parties
                          
                          
                          
                          4,033,650
                          
                          
                          
                          344,774Income
      tax payable
                          16
                          
                          
                          4,901,251
                          
                          
                          
                          4,082,424Advance
      from customers
                          
                          
                          
                          31,311
                          
                          
                          
                          29,157Accrued
      expenses
                          
                          
                          
                          894,985
                          
                          
                          
                          479,609Due
      to a related party
                          19
                          
                          
                          785,765
                          
                          
                          
                          1,663,191Other
      payables
                          
                          
                          
                          411,182
                          
                          
                          
                          553,286Derivative
      liabilities – fair value of warrants
                          14
                          
                          
                          1,367,671
                          
                          
                          
                          1,380,205Total
      Current Liabilities
                          
                          
                          
                          13,737,023
                          
                          
                          
                          12,669,539Long-term
      loans and payables
                          13
                          
                          
                          769,737
                          
                          
                          
                          545,327Total
      Liabilities
                          
                          
                          
                          14,506,760
                          
                          
                          
                          13,214,866EquityYongye
      International, Inc. shareholders’ equity:Common
      stock: par value $.001; 75,000,000 shares authorized; 44,532,241 shares
      issued and outstanding at March 31, 2010 and December 31,
    2009
                          14
                          
                          
                          44,532
                          
                          
                          
                          44,532Additional
      paid-in capital
                          14
                          
                          
                          118,583,308
                          
                          
                          
                          118,583,308Subscription
      receivable
                          14
                          
                          
                          -
                          
                          
                          
                          (8,550,000
                          )Retained
      earnings
                          
                          
                          
                          19,877,738
                          
                          
                          
                          15,506,445Accumulated
      other comprehensive income
                          
                          
                          
                          349,491
                          
                          
                          
                          329,139Total
      Yongye International, Inc. shareholders’ equity
                          
                          
                          
                          138,855,069
                          
                          
                          
                          125,913,424Noncontrolling
      interest
                          
                          
                          
                          6,935,918
                          
                          
                          
                          6,677,398Total
      Equity
                          
                          
                          
                          145,790,987
                          
                          
                          
                          132,590,822Total
      Liabilities and Equity
                          
                          
                          $
                          160,297,747
                          
                          
                          $
                          145,805,688
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  1
  YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
  UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME
  For the ThreeMonths EndedNote
                      
                      
                      March 31, 2010
                      
                      
                      March 31, 2009Sales
                      
                      
                      
                      
                      $
                      24,934,716
                      
                      
                      $
                      12,435,775Cost
      of sales
                      
                      
                      
                      
                      
                      11,077,957
                      
                      
                      
                      5,902,607Gross
      profit
                      
                      
                      
                      
                      
                      13,856,759
                      
                      
                      
                      6,533,168Selling
      expenses
                      
                      
                      
                      
                      
                      6,288,003
                      
                      
                      
                      2,620,298Research
      & development expenses
                      
                      
                      
                      
                      
                      100,565
                      
                      
                      
                      288,572General
      and administrative expenses
                      
                      
                      
                      
                      
                      1,851,254
                      
                      
                      
                      345,157Income
      from operations
                      
                      
                      
                      
                      
                      5,616,937
                      
                      
                      
                      3,279,141Other
      expenses/(income)Interest
      expense, net
                      
                      
                      
                      
                      
                      7,458
                      
                      
                      
                      5,958Other
      expenses, net
                      
                      
                      
                      
                      
                      48,783
                      
                      
                      
                      441Decrease
      in fair value of derivative liabilities
                      
                      14
                      
                      
                      
                      (12,534
                      )
                      
                      
                      (208,011
                      )Total
      other expenses/(income), net
                      
                      
                      
                      
                      
                      43,707
                      
                      
                      
                      (201,612
                      )Earnings
      before income tax expense
                      
                      
                      
                      
                      
                      5,573,230
                      
                      
                      
                      3,480,753Income
      tax expense
                      
                      16
                      
                      
                      
                      944,488
                      
                      
                      
                      155,447Net
      income
                      
                      
                      
                      
                      
                      4,628,742
                      
                      
                      
                      3,325,306Less:
      Net income attributable to the noncontrolling interest
                      
                      
                      
                      
                      
                      257,449
                      
                      
                      
                      18,522Net
      income attributable to Yongye International, Inc.
                      
                      
                      
                      
                      $
                      4,371,293
                      
                      
                      $
                      3,306,784Earnings
      per share:Basic
                      
                      20
                      
                      
                      $
                      0.10
                      
                      
                      $
                      0.12Diluted
                      
                      20
                      
                      
                      $
                      0.10
                      
                      
                      $
                      0.12Weighted
      average shares used in computation:Basic
                      
                      20
                      
                      
                      
                      44,532,241
                      
                      
                      
                      26,760,258Diluted
                      
                      20
                      
                      
                      
                      44,696,427
                      
                      
                      
                      26,760,258
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  2
  YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
  UNAUDITED
CONSOLIDATED STATEMENT OF EQUITY AND COMPREHENSIVE INCOME
 
 For
      the Three Months ended March 31, 2010Common StockNote
                                                              
                                                              Shares of
                                                                Common
                                                                Stock
                                                              
                                                              Common
                                                                Stock
                                                                Amount
                                                              
                                                              Additional
                                                                Paid-in
                                                                Capital
                                                              
                                                              Subscription
                                                                Receivable
                                                              
                                                              Retained
                                                                Earnings
                                                              
                                                              Accumulated
                                                                Other
                                                                Comprehensive
                                                                Income
                                                              
                                                              Yongye
                                                                International,
      Inc.
                                                                Shareholders’
      Equity
                                                              
                                                              Noncontrolling
                                                                Interest
                                                              
                                                              Total
                                                                EquityBalance
      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
                                                              
                                                              132,590,822Net
      income
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              -
                                                              
                                                              
                                                              4,371,293
                                                              
                                                              -
                                                              
                                                              
                                                              4,371,293
                                                              
                                                              257,449
                                                              
                                                              4,628,742Foreign
      currency exchange translation adjustment, net of nil income
      taxes
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              20,352
                                                              
                                                              
                                                              20,352
                                                              
                                                              1,071
                                                              
                                                              21,423Comprehensive
      income
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              4,391,645
                                                              
                                                              258,520
                                                              
                                                              4,650,165Subscription
      received
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              8,550,000
                                                              
                                                              
                                                              -
                                                              
                                                              -
                                                              
                                                              
                                                              8,550,000
                                                              
                                                              -
                                                              
                                                              8,550,000Balance
      as of March 31, 2010
                                                              
                                                              
                                                              
                                                              44,532,241
                                                              
                                                              44,532
                                                              
                                                              
                                                              118,583,308
                                                              
                                                              -
                                                              
                                                              
                                                              19,877,738
                                                              
                                                              349,491
                                                              
                                                              
                                                              138,855,069
                                                              
                                                              6,935,918
                                                              
                                                              145,790,987
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
  YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
 
 UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the Three
      Months EndedMarch 31, 2010
                                
                                
                                March 31, 2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                                
                                $
                                4,628,742
                                
                                
                                $
                                3,325,306Adjustments
      to reconcile net income to net cash provided by / (used in) operating
      activities:Depreciation
      and amortization
                                
                                
                                357,170
                                
                                
                                
                                107,236Reversal
      of bad debt provision
                                
                                
                                -
                                
                                
                                
                                (73,701
                                )Decrease
      in fair value of derivative liabilities
                                
                                
                                (12,534
                                )
                                
                                
                                (208,011
                                )Changes
      in operating assets and liabilities:Accounts
      receivable
                                
                                
                                (2,611,556
                                )
                                
                                
                                (3,302,662
                                )Inventories
                                
                                
                                (4,134,389
                                )
                                
                                
                                (1,466,830
                                )Prepayments
                                
                                
                                132,734
                                
                                
                                
                                (18,828
                                )Due
      from a related party
                                
                                
                                -
                                
                                
                                
                                (72,763
                                )Prepaid
      expenses
                                
                                
                                (230,217
                                )
                                
                                
                                97,734Other
      receivables
                                
                                
                                60,371
                                
                                
                                
                                424,992Other
      assets
                                
                                
                                (2,563,580
                                )
                                
                                
                                -Accounts
      payable- related party
                                
                                
                                -
                                
                                
                                
                                43,366Accounts
      payable- third parties
                                
                                
                                3,688,858
                                
                                
                                
                                -Income
      tax payable
                                
                                
                                818,179
                                
                                
                                
                                140,799Advance
      from customers
                                
                                
                                2,149
                                
                                
                                
                                (1,789,453
                                )Accrued
      expenses
                                
                                
                                415,120
                                
                                
                                
                                1,051,410Other
      payables
                                
                                
                                (38,885
                                )
                                
                                
                                70,298Net
      Cash Provided by / (Used in) Operating Activities
                                
                                
                                512,162
                                
                                
                                
                                (1,671,107
                                )CASH
      FLOWS FROM INVESTING ACTIVITIESDeposits
      made for assets acquisition
                                
                                
                                (20,019,368
                                )
                                
                                
                                -Proceeds
      from sale of property, plant and equipment
                                
                                
                                92,629
                                
                                
                                
                                -Purchase
      of property, plant and equipment
                                
                                
                                (1,068,030
                                )
                                
                                
                                (1,446,782
                                )Net
      Cash Used in Investing Activities
                                
                                
                                (20,994,769
                                )
                                
                                
                                (1,446,782
                                )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from long-term loans and payables
                                
                                
                                400,280
                                
                                
                                
                                89,534Repayment
      of long-term loans and payables
                                
                                
                                (81,665
                                )
                                
                                
                                (29,870
                                )Repayment
      of short-term loans
                                
                                
                                (2,925,675
                                )
                                
                                
                                -Proceeds
      from common stock issued
                                
                                
                                8,550,000
                                
                                
                                
                                -Net
      Cash Provided by Financing Activities
                                
                                
                                5,942,940
                                
                                
                                
                                59,664EFFECT
      OF FOREIGN EXCHANGE RATE CHANGES ON CASH
                                
                                
                                10,652
                                
                                
                                
                                5,016NET
      DECREASE IN CASH
                                
                                
                                (14,529,015
                                )
                                
                                
                                (3,053,209
                                )Cash
      and cash equivalent at beginning of year
                                
                                
                                65,518,181
                                
                                
                                
                                4,477,477Cash
      and cash equivalent at end of year
                                
                                $
                                50,989,166
                                
                                
                                $
                                1,424,268Supplemental
      cash flow information:Cash
      paid for income taxes
                                
                                
                                126,310
                                
                                
                                
                                22,464Cash
      paid for interest expense
                                
                                
                                34,962
                                
                                
                                
                                9,833
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
  NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE
THREE MONTHS ENDED MARCH 31, 2010
 
 NOTE 1
-ORGANIZATION AND DESCRIPTION OF BUSINESS
 
 Yongye
International, Inc. (the “Company”, formerly known as “Golden Tan, Inc.” or
“Yongye Biotechnology International, Inc.”) was incorporated in the State of
Nevada on December 12, 2006. On April 17, 2008, the Company and the Company’s
principal shareholder entered into a share exchange agreement (the “Exchange
Agreement”) with Fullmax Pacific Limited (“Fullmax”), a privately held
investment holding company organized on May 23, 2007 under the laws of the
British Virgin Islands and all the shareholders of Fullmax (the “Fullmax
Shareholders”). Pursuant to the terms of the Exchange Agreement, the Fullmax
Shareholders transferred to the Company all of their shares in exchange for
11,444,755 shares of the Company’s common shares (the “Share Exchange”). As a
result of the Share Exchange, Fullmax became a wholly-owned subsidiary of the
Company and the Fullmax Shareholders received approximately 84.7% of the
Company’s issued and outstanding common shares. Immediately prior to the date of
the Share Exchange, the Company was a publicly listed shell entity with no
operations and a nominal amount of cash and, Fullmax, through its wholly-owned
subsidiary, Asia Standard Oil Limited (“ASO”) and indirect subsidiary, Yongye
Nongfeng Biotechnology (“Yongye Nongfeng”), was engaged in the sale of fulvic
acid based liquid and powder nutrient compounds. The Share Exchange was
accounted for as a reverse recapitalization, equivalent to the issuance of stock
by Fullmax for the net monetary assets of the Company accompanied by a
recapitalization.
 
 In
November 2007, ASO entered into a Sino-Foreign cooperative joint venture
contract with Inner Mongolia Yongye Biotechnology Co., Ltd. (“Inner Mongolia
Yongye”) to form Yongye Nongfeng, pursuant to which, Inner Mongolia Yongye and
ASO were to own 10% and 90% of the equity interests in Yongye Nongfeng,
respectively. Inner Mongolia Yongye was formed on September 16, 2003 in the
People’s Republic of China (the “PRC”). Mr. Zishen Wu, Chief Executive Officer,
President and Chairman of the Company, owns a controlling 91.67% of the equity
interest in Inner Mongolia Yongye. Inner Mongolia Yongye is engaged in the
research, manufacturing, and sale of biochemical products for use in plants and
animal growth and is located in the City of Hohhot, Inner Mongolia Autonomous
Region PRC.
 
 On
January 4, 2008, the incorporation and establishment of Yongye Nongfeng was
approved by the Inner Mongolia Department of Commerce and the Inner Mongolia
Administration for Industry and Commerce. The scope of business of Yongye
Nongfeng is the research and development, manufacturing, distribution and sale
of fulvic acid based liquid and powder nutrient compounds. The period of the
cooperative joint venture is ten years and may be extended by a written
application submitted to the relevant government authority for approval no less
than six months prior to the expiration of the cooperative joint venture. Prior
to the legal establishment of Yongye Nongfeng, both Fullmax and ASO were
non-substantive holding companies with no assets and operations and were
primarily designed and used as legal vehicles to facilitate foreign
participation in the business conducted by Inner Mongolia Yongye.
 
 In May 2008, upon the agreement among
Inner Mongolia Yongye, ASO and Yongye Nongfeng, the ownership of Yongye Nongfeng
was revised, pursuant to which Inner Mongolia Yongye and ASO became 0.5% and
99.5% equity interest owner of Yongye Nongfeng,
respectively.
 
 In
October 2009, the Company completed the acquisition of the productive assets of
Shengmingsu manufacturing business from Inner Mongolia Yongye
(“Acquisition”). The consideration paid for the Acquisition consisted of
cash of $4.7 million and 4.5% equity interests in Yongye Nongfeng. Upon
completion of the Acquisition, Inner Mongolia Yongye and ASO became 5% and 95%
equity interest owner of Yongye Nongfeng, respectively.
  5
  NOTE 2
-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 A. BASIS
OF PRESENTATION
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted as permitted by rules and
regulations of the U.S. Securities and Exchange Commission (“SEC”). The
December 31, 2009 condensed consolidated balance sheet was derived from the
audited consolidated financial statements of the Company. The accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the December 31, 2009 audited consolidated financial
statements of the Company included in the annual report on Form
10-K.
  In the
opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present a fair statement of the financial position as
of March 31, 2010, and the results of operations and cash flows for the
three-month periods ended March 31, 2009 and 2010, have been
made.
 
 The
Company's business is subject to seasonal variations; thus, the results of
operations for the three months ended March 31, 2010 are not necessarily
indicative of the results for the full fiscal year ending December 31, 2010.
Generally, the second and third quarters are peak sales periods, and first and
fourth quarters are low sales periods for the Company.
 
 B.
EARNINGS PER SHARE
 
 Basic
earnings per share is computed by dividing net income attributable to the
Company by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that would
occur upon the exercise of outstanding warrants. Common share equivalents are
excluded from the computation of the diluted earnings per share when their
effect would be anti-dilutive.
  C.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
 In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition(Topic
605): Multiple-Deliverable
Revenue Arrangements(EITF Issue No. 08-1,Revenue Arrangements with Multiple
Deliverables). ASU 2009-13 amends ASC 605-25 to eliminate the requirement
that all undelivered elements have vendor specific objective evidence of selling
price (“VSOE”) or third party evidence of selling price (“TPE”) before an entity
can recognize the portion of an overall arrangement fee that is attributable to
items that already have been delivered. In the absence of VSOE or TPE for one or
more delivered or undelivered elements in a multiple-element arrangement,
entities will be required to estimate the selling prices of those elements. The
overall arrangement fee will be allocated to each element (both delivered and
undelivered items) based on their relative selling prices, regardless of whether
those selling prices are evidenced by VSOE or TPE or are based on the entity’s
estimated selling price. Application of the “residual method” of allocating an
overall arrangement fee between delivered and undelivered elements will no
longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance
will require entities to disclose more information about their multiple-element
revenue arrangements. ASU 2009-13 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. Management is currently
evaluating the potential impact, if any, of adopting ASU 2009-13 on the
Company’s financial position and results of operations.
 
 NOTE 3 –
ACCOUNTS RECEIVABLE
 
 Accounts
receivable at March 31, 2010 and December 31, 2009 consisted of the
following:
 
 March 31, 2010
                  
                  December 31, 2009Accounts
      receivable
                  
                  $
                  8,774,317
                  
                  
                  $
                  6,161,796Less:
      allowance for doubtful accounts
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  8,774,317
                  
                  
                  $
                  6,161,796
  An
allowance for doubtful accounts of $73,701 was reversed for the three months
ended March 31, 2009. No provision for allowance for doubtful accounts was
recorded during the three months ended March 31, 2010 as management believes no
accounts are uncollectible as of March 31, 2010.
  6
  NOTE 4 –
INVENTORIES
 
 Inventories
at March 31, 2010 and December 31, 2009 consisted of the following:
  March 31, 2010
                  
                  
                  December 31, 2009Finished
      goods
                  
                  $
                  39,059,951
                  
                  
                  $
                  31,734,252Work
      in progress
                  
                  
                  6,825,238
                  
                  
                  
                  6,024,323Raw
      materials
                  
                  
                  119,179
                  
                  
                  
                  3,771,366Consumables
      and packing supplies
                  
                  
                  170,003
                  
                  
                  
                  503,320Total
                  
                  $
                  46,174,371
                  
                  
                  $
                  42,033,261
  NOTE 5 –
PREPAYMENTS
 
 In order
to secure stock supplies of raw materials, the Company makes prepayments to
certain suppliers. As of March 31, 2010 and December 31, 2009, the prepayments
to suppliers amounted to $5,933,906 and $6,070,458, respectively.
 
 NOTE 6 –
PROPERTY, PLANT AND EQUIPMENT
  Property,
plant and equipment at March 31, 2010 and December 31, 2009 consisted of the
following:
 
 March 31, 2010
                  
                  
                  December 31, 2009Buildings
                  
                  $
                  5,619,029
                  
                  
                  $
                  5,644,213Machinery
      and equipment
                  
                  
                  1,667,008
                  
                  
                  
                  1,535,189Office
      equipment and furniture
                  
                  
                  389,105
                  
                  
                  
                  356,560Vehicles
                  
                  
                  1,943,997
                  
                  
                  
                  2,037,130Software
                  
                  
                  17,202
                  
                  
                  
                  17,199Leasehold
      improvements
                  
                  
                  219,423
                  
                  
                  
                  219,3889,855,764
                  
                  
                  
                  9,809,679Less:
      Accumulated depreciation
                  
                  
                  806,888
                  
                  
                  
                  652,764Total
                  
                  $
                  9,048,876
                  
                  
                  $
                  9,156,915
  Depreciation
expense for the three months ended March 31, 2010 and 2009 was $165,813 and
$104,582, respectively.
 
 As of
March 31, 2010, vehicles with a carrying amount of $1,013,251 were pledged as
security for the long-term loans of $439,137 (See Note 13).
 
 As of
December 31, 2009, vehicles with a carrying amount of $1,122,845 were pledged as
security for the long-term loans of $532,425 (See Note 13). As of December 31,
2009, an apartment with a carrying value of $102,551 was pledged as security for
a long-term loan of $71,618 (See Note 13).
 
 As of
December 31, 2009, buildings with an original carrying amount of $2,718,269 were
pledged as security for the short-term bank loan of $2,925,174 (See Note
12).  Such loan was repaid in February 2010.
  7
  NOTE 7 –
INTANGIBLE ASSET
 
 Intangible
asset at March 31, 2010 and December 31, 2009 represented a patent as
follows:
 
 March 31, 2010
                  
                  
                  December 31, 2009Patent
                  
                  $
                  106,340
                  
                  
                  $
                  106,323Less:
      Accumulated amortization
                  
                  
                  23,926
                  
                  
                  
                  21,265Total
                  
                  $
                  82,414
                  
                  
                  $
                  85,058
 
 Amortization
expense for the three months ended March 31, 2010 and 2009 was $2,659 and
$2,654, respectively. The estimated annual amortization expense for intangible
asset in each of the next five years is $10,634.
 
 NOTE 8 –
LAND USE RIGHT
 
 As of
March 31, 2010 and December 31, 2009, land use right represented:
 
 March 31, 2010
                  
                  
                  December 31, 2009Land
      use right
                  
                  $
                  4,189,670
                  
                  
                  $
                  4,188,995Less:
      Accumulated amortization
                  
                  
                  44,025
                  
                  
                  
                  22,008Total
                  
                  $
                  4,145,645
                  
                  
                  $
                  4,166,987
 
 As of
December 31, 2009, the land use right was pledged as security for the short-term
bank loan of $2,925,174 (See Note 12).  Such loan was repaid in
February 2010.
  8
  NOTE 9 -
DEPOSITS FOR ASSETS ACQUISITION
 
 On March
1, 2010, Yongye Nongfeng entered into an asset purchase agreement with Wuchuan
Shuntong to acquire from Wuchuan Shuntong the right to develop certain lignite
coal resources in Wuchuan area for a cash consideration of approximately
$35 million. As of March 31, 2010, Yongye Nongfeng has paid deposit of
$19,309,255 to Wuchuan Shuntong, and the legal procedures for the transfer of
the right to develop have not yet been completed. Management believes that the
legal procedures, including obtaining all necessary approvals and licenses from
the PRC government, will be completed before December 31, 2010.
 
 As of
March 31, 2010, Yongye Nongfeng also made $709,908 deposits to suppliers for
equipment to be used and developers of the plant to be built for the lignite
coal mine. According to the contracts signed with these suppliers and
developers, the Company would pay $2,000,000 by September 2010 upon the delivery
of the equipment and completion of the construction.
 
 NOTE 10 –
OTHER ASSETS
 
 During
the three months ended March 31, 2010 and December 31, 2009, the Company entered
into agreements with certain distributors, including sub-distributors (the
“Distribution Agreement”), pursuant to which the Company provided the
distributor a free vehicle in exchange for the distributor agreeing to comply
with certain sale conditions during the term of the agreement of five
years.  The sales conditions included (1) meeting the annual sales
target set by the Company; (2) not selling the products at a price lower than
the price stipulated by the Company; and (3) selling the products only in
Company’s approved territories.  To the extent the distributor fails
any one of these conditions during the term of the agreement, the Company has
the right to have the vehicles return back to the Company.
 
 The cost
of these vehicles has been recorded as “Other assets” which is expensed over a
five years period.
 
 NOTE 11 –
GOODWILL
 
 The
goodwill as of March 31, 2010 and December 31, 2009 represents the excess of the
consideration paid by the Company over the fair value of the net identifiable
assets acquired in the Acquisition.
 
 NOTE 12 –
SHORT-TERM BANK LOAN
 
 On
October 9, 2009, Yongye Nongfeng obtained a short-term bank loan of $2,925,174
from China Citic Bank that bears a fixed annual interest rate of 5.31% and is
due on September 26, 2010. The short-term loan was pledged by the land use right
and buildings with acarrying amount of $4,188,995 and $2,718,269, respectively.
On February 4, 2010, Yongye Nongfeng repaid the short-term bank loan to China
Citic Bank, and therefore, the pledge of the buildings and land use right was
released.
 
 The
interest expense for the three months ended March 31, 2010 was
$14,737.
 
 NOTE 13 –
LONG-TERM LOANS AND PAYABLES
 
 As of
March 31, 2010 and December 31, 2009, the long-term loans and payables consisted
of the followings:
 
 March31,2010
                  
                  
                  December 31, 2009Vehicle-employees
                  
                  $
                  439,137
                  
                  
                  $
                  532,425Mortgage
      loan
                  
                  
                  -
                  
                  
                  
                  71,618Vehicle-distributors
                  
                  
                  611,810
                  
                  
                  
                  272,977Other
      loan
                  
                  
                  149,831
                  
                  
                  
                  -Total
                  
                  $
                  1,200,778
                  
                  
                  $
                  877,020
  9
  As of
March 31, 2010, vehicle loans of $439,137 were secured by twenty-four vehicles
with initial carrying amount of $1,133,792. The vehicle loans have three to
five years terms and are paid in monthly installments. Interest rates on the
loans range from 5.45% to 14.54% annually, and are subject to the change of the
base interest rate prescribed by People’s Bank of China. These loans were
obtained by individual employees of the Company after the Company made the
initial down payment of the purchase price of the vehicles. The Company and the
individual employees entered into trust agreements pursuant to which (i)
the vehicles are legally registered under the individuals’ name, (ii) the
Company has the rights of official use and (iii) the Company has the rights to
retain the legal title of the vehicles at the time of termination of the
employment relationship with the individual. In addition, under the trust
agreements, the Company assumes the risk of loss, damage, penalty and other
obligations related to the operation and ownership of the vehicle, including
repairs and maintenance and, and is required to repay the loans in full. The
individuals have no right to sell, lease, lend or pledge the vehicles to any
other person or entity. Consequently, the Company has recognized the cost of the
vehicles as assets and the loans as liabilities in its consolidated balance
sheet.
 
 Vehicle
loans-distributors represent loans that were initially obtained by the
distributors from banks and financial institutions.  In connection
with entering into the Distribution Agreement (See note 9), the Company and the
distributors entered into agreements, pursuant to which the Company would assume
repayment of the full amount of payables on behalf of these distributors.
Accordingly, the Company recorded the long-term payables in the accompanying
consolidated balance sheets. These payables have three years terms and are paid
in monthly installments. Interest rates on the loans range from 5.40% to 13.00%
annually, subject to the change of the base interest rate prescribed by People’s
Bank of China.
 
 The
following table sets out the remaining contractual maturities at the balance
sheet date of long-term loans and payables, which are based on contractual
undiscounted cash flows (including interest payments computed using contractual
rates or, if floating, based on prevailing rates current at the balance sheet
date) and the earliest date the Company would be required to repay:
  2010
                    
                    $
                    375,2382011
                    
                    
                    456,1202012
                    
                    
                    424,5982013
                    
                    
                    49,4042014
      and thereafter
                    
                    
                    16,864Total
                    
                    
                    1,322,224Less:
      Amount representing interest
                    
                    
                    (121,446
                    )Total
      at present value
                    
                    $
                    1,050,947
 
 NOTE 14 -
CAPITAL STOCK
 
 Capital
stock
 
 Concurrent
with the Share Exchange, the Company entered into a securities purchase
agreement on April 17, 2008 with certain investors (the “April Investors”) for
the sale in a private placement of an aggregate of 6,495,619 shares of the
Company’s common stock, par value $0.001 per share (the “April Investor Shares”)
and 1,623,905 warrants (See below) for aggregate gross proceeds equal to
$10,000,651 (the “April Offering”).
 
 On
September 5, 2008, the Company entered into a securities purchase agreement with
certain investors (the “September Investors”), for the sale in a private
placement of an aggregate of 6,073,006 shares of the Company’s common
stock, par value $0.001 per share (the “September Investor Shares”) and
1,518,253 warrants (See below) for aggregate gross proceeds equal
to approximately $9,350,000 (the “September Offering”).
 
 On May 8,
2009, the Company entered into a securities purchase agreement with certain
investors (the “May Investors”), for the sale in a private placement of an
aggregate of 5,834,083 shares of the Company common stock, par value $0.001 per
share (the “May Shares”) for aggregate gross proceeds equal to $8,984,595
(the “May Offering”).
  10
  On
September 26, 2009, the Company entered into an underwriting agreement with
Roth Capital Partner, LLC (“Roth”) and Oppenheimer and Company Inc. (the
“Underwriters”), pursuant to which the Company agreed to issue and sell
8,000,000 shares of common stock (the “Firm Stock”), par value $0.001 per share,
to the Underwriters at a price per share of $7.50 (the ”December Offering”). The
sale of the Firm Stock was consummated on December 17, 2009 and closed on
December 22, 2009. The aggregate proceeds from the offering were $60,000,000.
Underwriting discounts and commissions and offering expenses were $3,692,000 and
were recorded as a reduction of additional paid-in capital.
 
 The
Company also granted the Underwriters an option to purchase up to an additional
1,200,000 shares to cover over-allotments, if any, at the same price as the Firm
Stock. On December 31, 2009 the Underwriters agreed to purchase the
over-allotment for gross proceeds of $9,000,000, which after net of commissions
and underwriting discounts of $450,000, was received on January 4, 2010. The
subscription receivable of $8,550,000 was recorded as a contra equity item
within stockholders’ equity as of December 31, 2009.
 
 Warrants
 
 Concurrent
with the April Investor Shares, the Company issued 1,623,905 warrants to
purchase 1,623,905 shares of the Company’s common stock (the “April Warrants”)
to the April Investors as an inducement to the April Offering. The warrants
issued have a five years exercise period with an initial exercise price of
$1.848. In addition, 649,562 warrants were issued to Roth as the placement agent
with terms and exercise price identical to the warrants issued to the April
Investors.
 
 Concurrent
with the September Investor Shares, the Company issued 1,518,253 warrants to
purchase 1,518,253 shares of the Company’s common stock (the “September
Warrants”) to the September Investors as an inducement to the September
Offering. The warrants issued have a five years exercise period with an initial
exercise price of $1.848. In addition, 607,301 warrants were issued to Roth as
the placement agent with terms and exercise price identical to the warrants
issued to the September Investors.
 
 On
September 12, 2008, Roth executed an irrevocable cashless exercise of its
warrants. In exchange for the issuance of 354,987 shares of the Company, Roth
surrendered 649,562 warrants received in the April Offering; and in exchange for
the issuance of 331,891 shares of the Company, Roth surrendered 607,301 warrants
received in the September Offering.
 
 Concurrent
with the offering of the “May Shares”, the Company issued to Roth as the
placement agent, 246,224 warrants (“May Warrants”).  The warrants have
a five years exercise period and an initial exercise price of $1.848. On
November 9, 2009, Roth executed an irrevocable cashless exercise of all the “May
Warrants”. The Company issued 198,247 shares of common stock of the Company in
exchange for the surrender of all the May Warrants.
 
 During
the year ended December 31, 2009, 2,939,183 “April Warrants” and “September
Warrants” were exercised by several “April Investors” and “September
Investors”. In connection with the exercises, the Company issued 2,539,653
shares of common stock and received $526,611 from warrant
holders.
 
 According
to the terms of these warrants, the Company could be required to pay cash to the
warrant holders under certain events that are not within the control of the
Company.  Specifically, upon the occurrence of certain “fundamental
transactions” as defined, the warrant holders (but not the shareholders of the
Company’s common stock) are entitled to receive cash equal to the value of the
warrants to be determined based on an option pricing model and certain specified
assumptions set forth in the warrant agreement.  In addition, the
terms of the warrants include a “down-round” provision under which the exercise
price could be affected by future equity offerings undertaken by the
Company.  If the Company issues any common stock or common stock
equivalents, as defined, at any time the warrants are outstanding, at an
effective price less than the then warrant exercise price, the exercise price of
warrants will be reduced to the effective price of newly issued common stock or
common stock equivalents.  In the “May Offering”, the Company issued
new common stock at a price of $1.54 per share and accordingly, the exercise
price of the April Warrants and the September Warrants was reduced to $1.54 per
share.  The exercise price of the May Warrants ($1.848) was not
affected but is also subject to potential down-round adjustments in future
periods. As of March 31, 2010 and December 31, 2009, there were 202,975 warrants
outstanding, of which 81,190 and 121,785 warrants will expire if unexercised by
April 2013 and September 2013, respectively.
  11
  The
potential cash payments and the down-round provision preclude the classification
of these warrants as equity classification.  Accordingly, the warrants
are accounted for as a liability and adjusted to fair value through earnings at
each reporting date. The gain resulting from the decrease in fair value of
warrants was $12,534 and $208,011 for the three months ended March 31, 2010 and
2009, respectively.
 
 The
estimated fair values of the warrants issued to April Investor and September
Investor were determined at March 31, 2010 and December 31, 2009 using
Binominal Option Pricing Model with Level 2 inputs. The following table
sets forth, by level within the fair value hierarchy, the Company’s financial
liabilities that were measured at fair value on a recurring basis as of March
31, 2010 and December 31, 2009.
  12
 
 Fair Value Measurements Using:Quoted Prices in
                    Active Markets for
                    Identical Financial
                    Assets and Liabilities
                  
                  
                  Significant Other
                    Observable Inputs
                  
                  
                  Significant
                    Unobservable InputsMarch
      31, 2010
                  
                  Total
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Liabilities
      at fair value:Derivative
      liabilities—warrants
                  
                  $
                  1,367,671
                  
                  
                  
                  —
                  
                  
                  $
                  1,367,671
                  
                  
                  
                  —
  Fair Value Measurements Using:Quoted Prices in
                    Active Markets for
                    Identical Financial
                    Assets and Liabilities
                  
                  
                  Significant Other
                    Observable Inputs
                  
                  
                  Significant
                    Unobservable InputsDecember 31, 2009
                  
                  Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Liabilities
      at fair value:Derivative
      liabilities—warrants
                  
                  $
                  1,380,205
                  
                  
                  
                  —
                  
                  
                  $
                  1,380,205
                  
                  
                  
                  —
  The fair
values of the warrants are summarized as follows:
 
 April Warrants
                  
                  
                  September WarrantsFair value of Warrant per share (US$) at:Date
      of issuance
                  
                  $
                  1.07
                  
                  
                  $
                  2.08December
      31, 2009
                  
                  $
                  6.78
                  
                  
                  $
                  6.81March
      31, 2010
                  
                  $
                  6.72
                  
                  
                  $
                  6.75
  The fair
values of the warrants outstanding as of March 31, 2010 and December 31, 2009
were determined based on the Binominal option pricing model, using the following
key assumptions:
 
 March31,
                    2010
                  
                  
                  December31,
                    2009April
                    Warrants
                  
                  
                  September
                    Warrants
                  
                  
                  April
                    Warrants
                  
                  
                  September
                    WarrantsExpected
      volatility
                  
                  
                  62.5
                  %
                  
                  
                  61.5
                  %
                  
                  
                  61.0
                  %
                  
                  
                  60.0
                  %Expected
      dividends yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %Time
      to maturity
                  
                  3.05
      years
                  
                  
                  3.44
      years
                  
                  
                  3.30
      years
                  
                  
                  3.72
      yearsRisk-free
      interest rate per annum
                  
                  
                  2.218
                  %
                  
                  
                  2.218
                  %
                  
                  
                  2.218
                  %
                  
                  
                  2.218
                  %Fair
      value of underlying common shares (per share)
                  
                  $
                  8.08
                  
                  
                  $
                  8.08
                  
                  
                  $
                  8.13
                  
                  
                  $
                  8.13
 
 NOTE 15 –
STATUTORY RESERVE
 
 Yongye
Nongfeng is required to allocate at least 10% of its after tax profits as
determined under generally accepted accounting principal in the PRC to a
statutory surplus reserve until the reserve balance reaches 50% of its
registered capital. For the three months ended March 31, 2010 and 2009, Yongye
Nongfeng made appropriations to this statutory reserve of $514,899 and $281,369,
respectively. The accumulated balance of the statutory reserve of Yongye
Nongfeng as of March 31, 2010 and December 31, 2009 was $4,580,469 and
$4,065,570, respectively.
  13
  In
accordance with the PRC laws and regulations, Yongye Nongfeng is restricted in
its ability to transfer a portion of its net assets to the Company in the form
of dividends, which amounted to $4,351,446, representing the amount of
accumulated balance of statutory reserve of Yongye Nongfeng attributable to the
Company, as of March 31, 2010.
 
 NOTE 16 –
INCOME TAXES
 
 The
Company and its subsidiaries file separate income tax returns.
 
 The
United States of America
 
 Yongye
International, Inc. is incorporated in the State of Nevada in the U.S., and
is subject to a gradual U.S. federal corporate income tax of 15% to 35%. The
State of Nevada does not impose any corporate state income tax.
 
 British
Virgin Islands
 
 Fullmax
is incorporated in the British Virgin Islands. Under the current laws of the
British Virgin Islands, Fullmax is not subject to tax on income or capital
gains. In addition, upon payments of dividends by Fullmax, no British Virgin
Islands withholding tax is imposed.
 
 Hong
Kong
 
 ASO is
incorporated in Hong Kong. ASO did not earn any income that was derived in Hong
Kong and therefore was not subject to Hong Kong Profits Tax. The payments of
dividends by Hong Kong companies are not subject to any Hong Kong withholding
tax.
 
 PRC
 
 Effective
from January 1, 2008, the PRC’s statutory income tax rate is 25%. According to
an approval from the Inner Mongolia Autonomous Region National Tax Authority on
December 11, 2009, Yongye Nongfeng, being a foreign investment enterprise
located in the Western Region of the PRC, is entitled to a preferential income
tax rate of 15% for the years ended December 31, 2009 and 2010.
 
 The
Company’s effective income tax rate was 16.95% and 4.47% for the three-month
periods ended March 31, 2010 and 2009, respectively. The difference between
effective tax rate and statutory tax rate primarily represented the tax effects
on the non-taxable income and non-deductible expenses.
 
 The
Company had deferred tax assets of approximately $389,315 as of March 31, 2010
that consisted of tax loss carryforwards. The Company had no other temporary
differences as of March 31, 2010. The ultimate realization of deferred tax
assets depends on the generation of future taxable income during the periods in
which those tax loss carryforwards are available. The Company considers
projected future taxable income and tax planning strategies in making its
assessment. At present, the Company does not have a sufficient operation in the
United States to conclude that it is more-likely-than-not that the Company will
be able to realize all of its tax benefits in the near future and therefore a
valuation allowance was established for the full value of the deferred tax asset
as of March 31, 2010.
  14
  NOTE 17 –
FAIR VALUE MEASUREMENTS
 
 March31,2010
                  
                  
                  December31,2009Carrying
                  
                  
                  
                  
                  
                  Carryingamount
                  
                  
                  Fair value
                  
                  
                  amount
                  
                  
                  Fair valueFinancial
      assets:Cash
                  
                  $
                  50,989,166
                  
                  
                  $
                  50,989,166
                  
                  
                  $
                  65,518,181
                  
                  
                  $
                  65,518,181Accounts
      receivable
                  
                  
                  8,774,317
                  
                  
                  
                  8,774,317
                  
                  
                  
                  6,161,796
                  
                  
                  
                  6,161,796Other
      receivables
                  
                  
                  323,532
                  
                  
                  
                  323,532
                  
                  
                  
                  383,841
                  
                  
                  
                  383,841Financial
      liabilities:Short-term
      bank loan
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,925,174
                  
                  
                  $
                  2,925,174Long-term
      loans and payables - current portion
                  
                  
                  431,041
                  
                  
                  
                  431,041
                  
                  
                  
                  331,693
                  
                  
                  
                  331,693Accounts
      payable - related party
                  
                  
                  880,167
                  
                  
                  
                  880,167
                  
                  
                  
                  880,026
                  
                  
                  
                  880,026Accounts
      payable - third parties
                  
                  
                  4,033,650
                  
                  
                  
                  4,033,650
                  
                  
                  
                  344,774
                  
                  
                  
                  344,774Accrued
      expenses
                  
                  
                  894,985
                  
                  
                  
                  894,985
                  
                  
                  
                  479,609
                  
                  
                  
                  479,609Due
      to a related party
                  
                  
                  785,765
                  
                  
                  
                  785,765
                  
                  
                  
                  1,663,191
                  
                  
                  
                  1,663,191Other
      payables
                  
                  
                  411,182
                  
                  
                  
                  411,182
                  
                  
                  
                  553,286
                  
                  
                  
                  553,286Derivative
      liabilities
                  
                  
                  1,367,671
                  
                  
                  
                  1,367,671
                  
                  
                  
                  1,380,205
                  
                  
                  
                  1,380,205Long-term
      loans and payables
                  
                  
                  769,737
                  
                  
                  
                  751,419
                  
                  
                  
                  545,327
                  
                  
                  
                  545,327
  The fair
values of the financial instruments shown in the above table as of March 31,
2010 and December 31, 2009 represent the estimated amounts that would be
received to sell those assets or that would be paid to transfer those
liabilities in an orderly transaction between market participants at that date.
Those fair value measurements maximize the use of observable inputs. However, in
situations where there is little, if any, market activity for the asset or
liability at the measurement date, the fair value measurement reflects the
Company’s own judgments about the assumptions that market participants would use
in pricing the asset or liability. Those judgments are developed by the Company
based on the best information available in the circumstances, including expected
cash flows and appropriately risk-adjusted discount rates, available observable
and unobservable inputs.
 
 The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
 
 Cash,
accounts receivable, due from a related party, other receivables, short-term
bank loan, long-term loans – current portion, accounts payables, accrued
expenses, due to a related party and other payables: The carrying amounts
approximate fair value because of the short maturity of these
instruments.
 
 Derivative
liabilities: The method and assumptions used to estimate the fair value of
derivative liabilities are set out in Note 15.
 
 Long-term
loans: The fair value of the Company’s long-term loans and payables is estimated
by discounting future cash flows using current market interest rates offered to
the Company and its subsidiaries for debts with substantially the same
characteristics and maturities.
 
 NOTE 18 –
LEASE COMMITMENTS
 
 The
Company entered into an operating lease for an office space in Beijing, PRC for
the period from January 1, 2008 to December 31, 2010. The lease expense for
the Beijing office was $57,952 and $62,262 for the three months ended March 31,
2010 and 2009, respectively. As of March 31, 2010, future minimum lease payments
under this non-cancellable operating lease agreement for the next twelve months
are $173,854.
 
 NOTE 19 –
RELATED PARTY TRANSACTIONS AND BALANCES
  For the
three months ended March 31, 2009, Yongye Nongfeng, purchased inventories from
Inner Mongolia Yongye amounting to $7,363,768 (100%). In January 2008, upon
receiving governmental approval of its establishment, Yongye Nongfeng
entered into an agreement (the “Agreement”) with Inner Mongolia Yongye, pursuant
to which Yongye Nongfeng agreed to purchase finished products from Inner
Mongolia Yongye at a fixed price of RMB 350 per case for fulvic acid based plant
products and RMB 120 per case for fulvic acid based animal
products.  The term of the Agreement was for the period from January
15, 2008 to January 14, 2013. Pursuant to the Agreement, the Company could
terminate the Agreement by giving one month notice to Inner Mongolia Yongye.
Upon Yongye Nongfeng obtaining its own fertilizer license, the Agreement was
terminated in July 2009.
 
 As of
March 31, 2010 and December 31, 2009, accounts payable to related party
were $880,167 and $880,026, respectively, and represented the payable for the
purchase of inventories from Inner Mongolia Yongye.
  15
  As of
March 31, 2010 and December 31, 2009, the amount due to a related party was
$785,765 and $1,663,191, respectively, which mainly represented the payable for
the Acquisition from Inner Mongolia Yongye. The Company expects to repay the
amount during the year ending December 31, 2010.
 
 During
the three months ended March 31, 2010, the Company disposed of and sold three
vehicles with net book value of $135,191 and an apartment with net book value of
$102,263 to Inner Mongolia Yongye. In addition, the long-term loans of $144,513
that were secured by these assets were assumed by Inner Mongolia Yongye. No gain
or loss was recorded upon disposal and sale and the Company received cash of
$92,941.
 
 Yongye
Nongfeng and Inner Mongolia Yongye entered a series of lease arrangements to
lease land, buildings and equipment to and from each other as
follows:
 
 ·
              On June 1, 2008, a land lease
      agreement was entered into in which Yongye Nongfeng would lease land of
      74,153 square meters from Inner Mongolia Yongye from June 1, 2008 to May
      31, 2009. On June 1, 2009, upon the expiry of this agreement, Yongye
      Nongfeng and Inner Mongolia Yongye entered into another lease agreement in
      which Yongye Nongfeng would lease a land of 79,920 square meters and a
      production building from Inner Mongolia Yongye from June 1, 2009 to
      October 10, 2009.
 
 ·
              On September 28, 2008, a building
      lease agreement and an equipment lease agreement were entered into in
      which Inner Mongolia Yongye would lease a building and certain equipment
      from Yongye Nongfeng from September 28, 2008 to September 27, 2009. The
      agreements were terminated on June 1, 2009 upon Yongye Nongfeng
      obtaining the fertilizer license from Ministry of
      Agriculture.
 
 ·
              On March 15, 2009, an equipment
      lease agreement was entered into in which Inner Mongolia Yongye would
      lease a set of production equipment from Yongye Nongfeng from March 15,
      2009 to May 31, 2009. The equipment lease agreement was not renewed
      upon expiration.
  Pursuant
to these agreements, both Yongye Nongfeng and Inner Mongolia Yongye did not
charge any rental to each other for the lease.  Additionally, the
estimated rental income to be received and the rental expense to be paid by the
Yongye Nongfeng are not material to the Company’s March 31, 2009 results of
operations and therefore have not been included.
 
 NOTE 20 -
EARNINGS PER SHARE
  The
following table sets forth the computation of basic and diluted income per share
for the periods indicated:
 
 For the Three Months EndedMarch 31, 2010
                  
                  
                  March 31, 2009Numerator
      used in basic net income per share:Net
      income attributable to Yongye International, Inc.
                  
                  $
                  4,371,293
                  
                  
                  $
                  3,306,784Decrease
      in fair value of derivative liabilities
                  
                  
                  (12,534
                  )
                  
                  
                  -Numerator
      used in diluted net income per share
                  
                  
                  4,358,759
                  
                  
                  
                  3,306,784Shares
      (denominator):Weighted
      average ordinary shares outstanding-basic
                  
                  
                  44,532,241
                  
                  
                  
                  26,760,258Plus:
      weighted average incremental shares from assumed exercise of
      warrants
                  
                  
                  164,186
                  
                  
                  
                  -Weighted
      average ordinary shares outstanding used in computing
      diluted net income per ordinary share
                  
                  
                  44,696,427
                  
                  
                  
                  26,760,258Net
      income per ordinary share-basic
                  
                  $
                  0.10
                  
                  
                  $
                  0.12Net
      income per ordinary share-diluted
                  
                  $
                  0.10
                  
                  
                  $
                  0.12
  16


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





NOTE 21 -
CONCENTRATIONS AND CREDIT RISKS





At March
31, 2010 and December 31, 2009, the Company held cash in banks of approximately
$50,989,166 and $65,518,181, respectively that is uninsured by the government
authority. To limit exposure to credit risk relating to deposits, the Company
primarily places cash deposits only with large financial institution in the PRC
with acceptable credit rating.





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





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


17


Three
major suppliers accounted for 88% ($15,563,940) and one major supplier accounted
for 79% ($13,975,816) of the Company’s inventory purchase for the three months
ended March 31, 2010. Inner Mongolia Yongye supplied 100% ($7,363,768)
of the Company’s finished goods for the three months ended March 31,
2009. If these suppliers terminate their supply relationship with the
Company, the Company may be unable to purchase sufficient raw material on
acceptable terms, and finally the Company’s financial results may be adversely
affected.





The
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC such as
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.


18


ITEM
2.         Management’s Discussion
and Analysis of Operations and Financial Conditions.





The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. Except as otherwise indicated or as the context may otherwise
require, all references to “we”, “the Company”, “us” and “our” refer to Yongye
International, Inc. (formerly known as Yongye Biotechnology International, Inc.)
and its consolidated subsidiaries. The following discussion contains
forward-looking statements. The words or phrases “would be,” “will allow,”
“expect to”, “intends to,” “will likely result,” “are expected to,” “will
continue,” “is anticipated,” “estimate,” or similar expressions are intended to
identify forward-looking statements. Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities; (c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; and (d) whether
we are able to successfully fulfill our primary requirements for cash which are
explained below under “Liquidity and Capital Resources”. Unless otherwise
required by applicable law, we do not undertake, and we specifically disclaim
any obligation, to update any forward-looking statements to reflect occurrences,
developments, unanticipated events or circumstances after the date of such
statement.





Company
Overview





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





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





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


19


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





Recent
Developments




On
December 22, 2009, the Company closed an offering of 8,000,000 shares of the
Company’s common stock and received net proceeds of approximately $56.3 million
from the offering, after deducting underwriting discounts and estimated offering
expenses.  Pursuant to the exercise by the Underwriters of their
over-allotment option, an additional 1,200,000 shares of common stock were
issued on December 31, 2009, bringing the total net proceeds raised in
connection with the offering (the “December Offering”) to $64.87
million.
 
 On
January 6, 2010, the Company announced that it had received government approval
regarding Yongye's sole operating entity in the PRC, Yongye Nongfeng, for a
preferential corporate income tax rate of 15% for the full years of 2009 and
2010.  Yongye Nongfeng had previously accrued its income tax expenses
for the first three quarters of 2009 based on the statutory income tax rate of
25%.  Prior to such approval, Yongye Nongfeng received the approval
from the local tax authority of Hohhot, Inner Mongolia Autonomous Region, that
Yongye Nongfeng qualified for a preferential 15% corporate income tax rate. As a
result, Yongye will pay its income tax expenses for the full 2009 tax year based
on the preferential 15% corporate income tax rate.
 
 In March
2010, Yongye Nongfeng signed a preliminary agreement with a local supplier of
humic acid to purchase an undeveloped lignite coal resources project in Inner
Mongolia, PRC. Consummation of the acquisition requires the satisfaction of
certain customary closing conditions, including receipt of governmental
approval.  The preliminary agreement with Wuchuan Shuntong Humic Acid
Trading Company Limited ("Shuntong") provides for the acquisition of Shuntong's
development rights to a currently undeveloped lignite coal resource project
located in Wuchuan County, a suburb located outside the city of Hohhot, Inner
Mongolia, where the Company's major operations reside in the PRC. According to a
third party valuation report, the project area is estimated to contain over 40
million square meters of surface level lignite coal which can supply the
Company's long term needs. According to the agreement, Nongfeng will pay
Shuntong RMB240 million ($35.1 million) to acquire the development rights for
this project. In addition to this, Nongfeng plans to build a new factory with
20,000 tons of plant nutrient product and 10,000 tons animal nutrient product
annual capacity in a nearby economic development zone located near the coal
resources project. According to government regulations, the acquisition will not
be completed until Nongfeng makes full payment to Shuntong and receives in
return the full, unencumbered title to the development rights.
  Factors affecting our operating
results





Demand
for Our Products





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


20


According
to the Asian Development Bank statistics, well over 60% of the nation’s total
population of 1.3 billion people is comprised of low-income, rural farmers.
According to the NESDP (2006-2010), raising the level of rural income is a top
economic and social goal for the country. Many government initiatives, including
removal of certain agricultural and local product taxes, have been implemented
to spur rural income development. The government expects annual rural income to
grow between 5% and 10% through 2010 (according to a study issued by the Chinese
Academy of Sciences, in April 2009). Additionally, according to the National
Population and Family Planning Commission, China’s population will reach 1.5
billion by 2030. Therefore, the country has the challenge of producing
approximately 100 million more tons of crops needed to feed the additional 200
million people, which has put pressure on the agricultural system to increase
production capacity.





Supply
of Finished Goods





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





Seasonality





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





Agriculture
Sector





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





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





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


21


New
Land Reform Policy





Farmland
in China is owned by the local government, but given to local farmers under 30
year use contracts. With the allure of higher incomes and better living
conditions in the city, farmers have abandoned the land and no others farmers
have stepped in to bring it back into production. This has created a shortage of
a key raw material in the agricultural supply chain productive land. The
government has acknowledged this issue and recently enacted a new land use
reform policy which liberalizes the exchange of land among the nation’s farmers.
This creates a new model for China’s 730 million farmers with the idea being to
create more stable farmland by shifting the country away from the single
household farm plot model to the amalgamation of larger-scale operations which
should be more productive due to technology and economies of scale. Farmers will
be able to transfer their land-use rights to others through a new market system
for rural land-use rights. Chinese authorities commented that, “Without
modernizing agriculture, China cannot modernize; without stability and
prosperity in rural areas, China cannot have stability and prosperity. These
changes are enacted to “ensure national food security and the supply of major
agricultural products, and promote increases in agricultural production, farm
incomes and rural prosperity.” (China’s Ongoing Agriculture Modernization, USDA,
April 2009)





RESULTS
OF OPERATIONS





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


22


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


MARCH
31, 2009





Net
Sales





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





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





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





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





Cost
of Goods Sold





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





Sales
by Product Line





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





Selling,
General and Administrative Expenses





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


23


Research
and Development





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





Loss/gain
on change in fair value of warrants





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





Income
Tax





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





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





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





Net
Income





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





Liquidity
and Capital Resources





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





In
summary, our cash flows were:





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


24


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





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





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





Summary
consolidated balance sheet data:




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





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





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





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


25


Foreign
Currency Translation and Transactions





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





Impact
of inflation





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





Off
balance sheet arrangement





We do not
have any significant off-balance sheet arrangements and accordingly, no such
arrangements are likely to have a current or future effect on our financial
position, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.




ITEM
      2.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Not
applicable.




ITEM
      3.
            CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Disclosure
Controls and Procedures




The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and regulations and that such information is
accumulated and communicated to our management, including its Principal
Executive Officer and Principal Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure. Our Principal Executive Officer
and Principal Financial Officer evaluated, with the participation of other
members of management, the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rule 15d-15(e)), as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on this evaluation,
our Principal Executive Officer and Principal Financial Officer concluded that
the Company’s disclosure controls and procedures were effective.




Primarily,
we have engaged an outside consulting firm to assist us in the implementation of
SOX 404 compliance controls and procedures and we have concluded the review and
testing of all the key business cycles. This has been done to provide assurance
that our unaudited consolidated financial statements included in this quarterly
report were prepared in accordance with generally accepted accounting principles
(“GAAP”) and fairly present, in all material respects, our financial position,
results of operations and cash flows for the periods presented in conformity
with GAAP. The result of the last testing process has concluded that there are
no material weakness in our internal controls over financial
reporting.




Specifically,
this project has included implementing controls over sales and receivables,
inventory, purchasing and payments, production cost accounting, financial
reporting and taxes, currency and capital management, expense management, fixed
asset management and overall management controls. We believe that the foregoing
actions, as they have been implemented, have improved our internal control over
financial reporting, as well as our disclosure controls and procedures. Our
management, with the oversight of our audit committee, will continue to identify
and take steps to remedy known material weaknesses as expeditiously as possible
and enhance the overall design and capability of our control
environment.


26




Although
the management of our Company, including the Principal Executive Officer and the
Principal  Financial Officer, believes that our disclosure controls
and internal controls currently provide reasonable assurance that our desired
control objectives have been met, management does not expect that our disclosure
controls or internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our Company have been
detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
also based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.




Changes
in Internal Controls over Financial Reporting




During
the period covered by this quarterly report on Form 10-Q, there was no change in
our internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.




PART
II.




OTHER
INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS




None.




ITEM 1A.
            RISK
      FACTORS




There
have been no material changes from the risk factors disclosed in our annual
report on Form 10-K for the year ended December 31, 2009.




ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




Not
applicable.




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES




None.




ITEM
      4.
            (REMOVED
      AND RESERVED)




Not
applicable.




ITEM
      5.
            OTHER
      INFORMATION




None.


27




ITEM
      6.
            EXHIBITS




Exhibit No.
                
                Description31.1
                
                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 WuName:
      Zishen WuMay
      11, 2010
                
                Title:
      Chief Executive Officer and President (Principal
                  Executive
      Officer)By:
                /s/
      Sam YuName:
      Sam YuTitle:
      Chief Financial Officer (Principal Financial and
                  Accounting
      Officer)


29