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 September 30, 2010





or





 ̈
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
transition period from ________ to ________.





Commission
File Number 000-51200





Yongye
International, Inc.


(Exact
name of registrant as specified in its charter)





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





6th
Floor, Suite 608, Xue Yuan International Tower,


No. 1
Zhichun Road, Haidian District Beijing, PRC


(Address
of principal executive offices)





(Former
name, former address and former fiscal year, if changed since last
report)





+86 10
8232 8866


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes     x
    No     ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). * Yes o o No o *The registrant has not
yet been phased into the interactive data requirements.




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer x
        (Do
      not check if a smaller reporting company)
            Smaller reporting company 
       ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈    No x





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










TABLE OF
CONTENTS





PagePART
      I. FINANCIAL INFORMATION
            
            1ITEM
      1.
            
            FINANCIAL
      STATEMENTS
            
            1ITEM
      2.
            
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
      CONDITIONS.
            
            17ITEM
      3.
            
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            25ITEM
      4.
            
            CONTROLS
      AND PROCEDURES
            
            25PART
      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







ii





PART
I.





FINANCIAL
INFORMATION




ITEM
      1.
              Financial
      Statements
  YONGYE INTERNATIONAL, INC. AND
SUBSIDIARIES


UNAUDITED CONSOLIDATED BALANCE
SHEETS
 
 Note
              
              September 30, 2010
              
              
              December 31, 2009Current
    assetsCash
              
              
              $
              24,967,963
              
              
              $
              65,518,181Restricted
    cash
              
              
              
              40,000
              
              
              
              -Accounts receivable, net of
      allowance for doubtful accounts
              3
              
              
              75,643,791
              
              
              
              6,161,796Inventories
              4
              
              
              39,932,889
              
              
              
              42,033,261Prepayments
              5
              
              
              9,453,220
              
              
              
              6,211,896Prepaid
      expenses
              
              
              
              843,515
              
              
              
              112,879Other
      receivables
              
              
              
              232,627
              
              
              
              383,841Total Current
      Assets
              
              
              
              151,114,005
              
              
              
              120,421,854Property, plant and equipment,
      net
              6
              
              
              16,977,565
              
              
              
              9,156,915Intangible assets,
      net
              7
              
              
              23,980,305
              
              
              
              85,058Land use right,
      net
              8
              
              
              4,186,126
              
              
              
              4,166,987Prepayment for mining
      project
              9
              
              
              29,381,466
              
              
              
              -Other
assets
              10
              
              
              7,553,159
              
              
              
              2,029,012Goodwill
              
              
              
              10,152,408
              
              
              
              9,945,862Total
Assets
              
              
              $
              243,345,034
              
              
              $
              145,805,688Current
      liabilitiesShort-term bank
      loan
              11
              
              $
              -
              
              
              $
              2,925,174Long-term loans and payables -
      current portion
              12
              
              
              462,178
              
              
              
              331,693Accounts payable - related
      party
              18
              
              
              -
              
              
              
              880,026Accounts payable - third
      parties
              
              
              
              725,074
              
              
              
              344,774Income tax
      payable
              15
              
              
              7,875,660
              
              
              
              4,082,424Advance from
      customers
              
              
              
              1,446,210
              
              
              
              29,157Accrued
      expenses
              
              
              
              10,947,119
              
              
              
              479,609Due to a related
      party
              18
              
              
              -
              
              
              
              1,663,191Other
    payables
              7
              
              
              5,113,861
              
              
              
              553,286Derivative liabilities–fair value of
      warrants
              13
              
              
              837,663
              
              
              
              1,380,205Total Current
      Liabilities
              
              
              
              27,407,765
              
              
              
              12,669,539Long-term loans and
      payables
              12
              
              
              443,808
              
              
              
              545,327Total
      Liabilities
              
              
              
              27,851,573
              
              
              
              13,214,866EquityCommon stock: par value $.001;
      75,000,000 shares authorized; 48,187,044 shares issued and outstanding at
      September 30, 2010 and 44,532,241 shares issued and outstanding at
      December 31, 2009
              13
              
              
              48,187
              
              
              
              44,532Additional paid-in
      capital
              13
              
              
              140,289,199
              
              
              
              118,583,308Subscription
      receivable
              13
              
              
              -
              
              
              
              (8,550,000
              )Retained
      earnings
              
              
              
              61,701,706
              
              
              
              15,506,445Accumulated other comprehensive
      income
              
              
              
              4,083,848
              
              
              
              329,139Total equity attributable to
      Yongye International, Inc.
              
              
              
              206,122,940
              
              
              
              125,913,424Noncontrolling
      interest
              
              
              
              9,370,521
              
              
              
              6,677,398Total
Equity
              
              
              
              215,493,461
              
              
              
              132,590,822Total Liabilities and
      Equity
              
              
              $
              243,345,034
              
              
              $
              145,805,688
  The accompanying notes are an integral
part of these consolidated financial statements.
  1
  YONGYE INTERNATIONAL, INC. AND
SUBSIDIARIES
 UNAUDITED CONSOLIDATED STATEMENTS OF
INCOME
 
 For the Three Months Ended
              
              
              For the Nine Months EndedNote
              
              September 30, 2010
              
              
              September 30, 2009
              
              
              September 30, 2010
              
              
              September 30, 2009Sales
              
              
              $
              71,752,069
              
              
              $
              29,279,473
              
              
              $
              186,101,173
              
              
              $
              87,986,792Cost of
    sales
              
              
              
              29,639,662
              
              
              
              13,435,326
              
              
              
              80,095,965
              
              
              
              41,274,810Gross
profit
              
              
              
              42,112,407
              
              
              
              15,844,147
              
              
              
              106,005,208
              
              
              
              46,711,982Selling
      expenses
              
              
              
              15,574,981
              
              
              
              2,644,715
              
              
              
              38,206,314
              
              
              
              11,715,707Research and development
      expenses
              
              
              
              2,170,951
              
              
              
              69,871
              
              
              
              4,509,847
              
              
              
              1,482,888General and administrative
      expenses
              
              
              
              3,530,638
              
              
              
              1,365,075
              
              
              
              6,996,584
              
              
              
              2,495,797Income from
      operations
              
              
              
              20,835,837
              
              
              
              11,764,486
              
              
              
              56,292,463
              
              
              
              31,017,590Other
      income/(expenses)Interest expense,
      net
              
              
              
              (6,612)
              
              
              
              (9,080)
              
              
              
              (21,341)
              
              
              
              (25,538)Government
      subsidy
              
              
              
              1,427,259
              
              
              
              185,039
              
              
              
              1,751,732
              
              
              
              237,366Other income/(expenses),
      net
              
              
              
              2,067
              
              
              
              (10,446
              )
              
              
              (84,294)
              
              
              
              (50,036)Change in fair value of derivative
      liabilities
              13
              
              
              (12,077
              )
              
              
              (15,836,189
              )
              
              
              157,393
              
              
              
              (20,905,136
              )Total other income/ (expenses),
      net
              
              
              
              1,410,637
              
              
              
              (15,670,676
              )
              
              
              1,803,490
              
              
              
              (20,743,344
              )Earnings /(losses) before income
      tax expense
              
              
              
              22,246,474
              
              
              
              (3,906,190
              )
              
              
              58,095,953
              
              
              
              10,274,246Income tax
      expense
              15
              
              
              3,705,985
              
              
              
              3,089,047
              
              
              
              9,389,307
              
              
              
              7,836,270Net
      income/(loss)
              
              
              
              18,540,489
              
              
              
              (6,995,237
              )
              
              
              48,706,646
              
              
              
              2,437,976Less: Net income attributable to
      the noncontrolling interest
              
              
              
              962,222
              
              
              
              46,028
              
              
              
              2,511,385
              
              
              
              128,284Net income/(loss) attributable to
      Yongye International, Inc.
              
              
              $
              17,578,267
              
              
              $
              (7,041,265
              )
              
              $
              46,195,261
              
              
              $
              2,309,692Earnings per
      share:Basic
              19
              
              $
              0.37
              
              
              $
              (0.22
              )
              
              $
              1.02
              
              
              $
              0.08Diluted
              19
              
              $
              0.37
              
              
              $
              (0.22
              )
              
              $
              1.01
              
              
              $
              0.08Weighted average shares used in
      computation:Basic
              19
              
              
              47,130,522
              
              
              
              32,730,054
              
              
              
              45,423,109
              
              
              
              29,926,052Diluted
              19
              
              
              47,248,570
              
              
              
              32,730,054
              
              
              
              45,541,985
              
              
              
              29,926,052
 
 The accompanying notes are an integral
part of these consolidated financial statements.
  2
   YONGYE INTERNATIONAL, INC. ANDSUBSIDIARIES
 UNAUDITED CONSOLIDATED STATEMENT OF
EQUITY AND COMPREHENSIVE INCOME
 FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2010
 
 Common StockNote
              
              Shares of
                Common
                Stock
              
              
              Common
                Stock
                Amount
              
              
              Additional
                Paid-in
                Capital
              
              
              Subscription
                Receivable
              
              
              Retained
                Earnings
              
              
              Accumulated
                Other
                Comprehensive
                Income
              
              
              Equity
                attributable to
                Yongye
                International,
                Inc.
              
              
              Noncontrolling
                Interest
              
              
              Total
                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
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              46,195,261
              
              
              
              -
              
              
              
              46,195,261
              
              
              
              2,511,385
              
              
              
              48,706,646Foreign currency exchange
      translation adjustment, net of nil income
      taxes
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,754,709
              
              
              
              3,754,709
              
              
              
              181,738
              
              
              
              3,936,447Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              49,949,970
              
              
              
              2,693,123
              
              
              
              52,643,093Subscription
      received
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,550,000
              
              
              
              -
              
              
              
              -
              
              
              
              8,550,000
              
              
              
              -
              
              
              
              8,550,000Stock issued to acquire assets
      July 1, 2010
              13
              
              
              3,600,000
              
              
              
              3,600
              
              
              
              21,236,400
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              21,240,000
              
              
              
              -
              
              
              
              21,240,000Warrants
      exercised
              13
              
              
              54,803
              
              
              
              55
              
              
              
              469,491
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              469,546
              
              
              
              -
              
              
              
              469,546Balance as of September 30,
      2010
              
              
              
              48,187,044
              
              
              
              48,187
              
              
              
              140,289,199
              
              
              
              -
              
              
              
              61,701,706
              
              
              
              4,083,848
              
              
              
              206,122,940
              
              
              
              9,370,521
              
              
              
              215,493,461
 
 The accompanying notes are an integral
part of these consolidated financial statements.
  3
  YONGYE INTERNATIONAL, INC. AND
SUBSIDIARIES
 UNAUDITED CONSOLIDATED STATEMENTS OF
CASH FLOWS
 
 For the Nine Months EndedSeptember 30, 2010
              
              
              September 30, 2009CASH FLOWS FROM OPERATING
      ACTIVITIESNet income
              
              $
              48,706,646
              
              
              $
              2,437,976Adjustments to reconcile net
      income to net cash used in operating activities:Depreciation and
      amortization
              
              
              2,249,302
              
              
              
              385,337Reversal of bad debt
      provision
              
              
              -
              
              
              
              (305,338
              )Change in fair value of derivative
      liabilities
              
              
              (157,393
              )
              
              
              20,905,136Changes in operating assets and
      liabilities:Accounts receivable-related
      party
              
              
              -
              
              
              
              23Accounts receivable-third
      parties
              
              
              (68,136,061
              )
              
              
              (40,270,694
              )Inventories
              
              
              2,932,733
              
              
              
              (10,190,333
              )Prepayments
              
              
              (3,102,063
              )
              
              
              (116,740
              )Prepaid
      expenses
              
              
              (719,328
              )
              
              
              65,754Other
      receivables
              
              
              156,678
              
              
              
              366,797Other
assets
              
              
              (5,954,038
              )
              
              
              -Accounts payable-related
      party
              
              
              (880,505
              )
              
              
              5,569,674Accounts payable-third
      parties
              
              
              352,970
              
              
              
              6,625,498Income tax
      payable
              
              
              3,626,988
              
              
              
              7,065,369Advance from
      customers
              
              
              1,391,839
              
              
              
              (1,733,928
              )Accrued
      expenses
              
              
              10,250,425
              
              
              
              2,223,070Other
    payables
              
              
              (59,319
              )
              
              
              130,644Net Cash Used in Operating
      Activities
              
              
              (9,341,126
              )
              
              
              (6,841,755
              )CASH FLOWS FROM INVESTINGACTIVITIESChange in restricted
      cash
              
              
              (40,000
              )
              
              
              -Prepayment for mining
      project
              
              
              (28,866,259
              )
              
              
              -Proceeds from sale of property,
      plant and equipment
              
              
              92,629
              
              
              
              -Purchase of property, plant and
      equipment
              
              
              (6,464,728
              )
              
              
              (2,655,816
              )Purchase of property, plant and
      equipment-related party
              
              
              (1,663,769
              )
              
              
              -Net Cash Used in Investing
      Activities
              
              
              (36,942,127
              )
              
              
              (2,655,816
              )CASH FLOWS FROM FINANCING
      ACTIVITIESProceeds from bank
      loans
              
              
              -
              
              
              
              276,331Repayment of long-term loans and
      payables
              
              
              (447,800
              )
              
              
              (121,877
              )Repayment of short-term
      loans
              
              
              (2,925,675
              )
              
              
              -Proceeds from common stock
      issued
              
              
              8,550,000
              
              
              
              9,222,157Proceeds from warrants
      exercised
              
              
              84,397
              
              
              
              -Payment for common stock issuance
      costs
              
              
              -
              
              
              
              (836,456
              )Net Cash Provided by Financing
      Activities
              
              
              5,260,922
              
              
              
              8,540,155EFFECT OF FOREIGN EXCHANGE RATE
      CHANGES ONCASH
              
              
              472,113
              
              
              
              (11,653
              )NET DECREASE IN
      CASH
              
              
              (40,550,218
              )
              
              
              (969,069
              )Cash and cash equivalent at
      beginning of period
              
              
              65,518,181
              
              
              
              4,477,477Cash and cash equivalent at end of
      period
              
              $
              24,967,963
              
              
              $
              3,508,408Supplemental cash flow
      information:Cash paid for income
      taxes
              
              $
              5,765,758
              
              
              $
              770,652Cash paid for interest
      expense
              
              $
              70,960
              
              
              $
              33,236
 
 The accompanying notes are an integral
part of these consolidated financialstatements.
 
 4
  YONGYE INTERNATIONAL, INC. AND
SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2010
 
 NOTE 1 -ORGANIZATION AND DESCRIPTION OF
BUSINESS
 
 Yongye International, Inc. (the
“Company”,formerly known as “Golden Tan, Inc.”or “Yongye Biotechnology International,
Inc.”) was incorporated in
the State of Nevada on December 12, 2006. On April 17, 2008, the Company and the
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 all of their shares to the
Company in exchange for 11,444,755 shares of the Company’s common shares (the “Share Exchange”). As a result of the Share Exchange,
Fullmax becamea 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 interestsin 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 equity
interest in Inner Mongolia Yongye.
 
 In connection with the September
Offering (See Note 13), the Company entered into agreements to acquire the
productive assets of Shengmingsu manufacturing business from Inner Mongolia
Yongye (the “Acquisition”). In October 2009, the Company completed the Acquisition. The
reason for the Acquisition was to expand the Company’s manufacturing
business.
 
 On July
20, 2010, Yongye Nongfeng set up a wholly-owned subsidiary, Inner Mongolia
Yongye Fumin Biotechnology Co., Ltd. (“Yongye Fumin”), with an initial
investment cost of $2,946,376 (equivalent to RMB 20 million). Yongye Fumin is to
be engaged in the manufacturing
and sale of fulvic acid based liquid and powder nutrient compounds. As of
September 30, 2010, the production plant of Yongye Fumin was in final stage of construction
and has not started official operation.
 
 NOTE 2 -SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
 
 A. BASIS OF
PRESENTATION
 
 The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S.GAAP”). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been condensed or omittedas permitted by rules and regulations of
the U.S. Securities and Exchange Commission (“SEC”). The December 31, 2009 condensed
consolidated balance sheet was derived from the audited consolidated financial
statements of the Company. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the December 31, 2009 audited
consolidated financial statements of the Company included in the
Company’s annual report on Form 10-K for the
year ended December 31, 2009.
 
 Inthe opinion of management, all
adjustments (which include normal recurring adjustments) necessary to present a
fair statement of the financial position as of September 30, 2010, and the
results of operations for the three and nine months ended September
30, 2009 and 2010, and cash flows for the
nine months ended September 30, 2009 and 2010, have been
made.
 
 The Company's business is subject to
seasonal variations; thus, the results of operations for the three and nine
months ended September 30, 2010 is notnecessarily 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 ofoutstanding warrants. Common share
equivalents are excluded from the computation of the diluted earnings per share
when their effect would be anti-dilutive.
  5
  C. RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
 
 In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13,
Revenue Recognition (Topic 605):  Multiple-Deliverable Revenue
Arrangements (EITF Issue No. 08-1, Revenue Arrangements with Multiple
Deliverables ). ASU 2009-13 amends ASC 605-25 to eliminate the requirement that
all undelivered elements have vendor specific objective evidence of selling
price (“VSOE”) or third party evidence of selling price (“TPE”) before an entity
can recognize the portion of an overall arrangement fee that is attributable to
items that already have been delivered. In the absence of VSOE or TPE for one or
more delivered or undelivered elements in a multiple-element arrangement,
entities will be required to estimate the selling prices of those elements. The
overall arrangement fee will be allocated to each element (both delivered and
undelivered items) based on their relative selling prices, regardless of whether
those selling prices are evidenced by VSOE or TPE or are based on the entity’s
estimated selling price. Application of the “residual method” of allocating an
overall arrangement fee between delivered and undelivered elements will no
longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance
will require entities to disclose more information about their multiple-element
revenue arrangements. ASU 2009-13 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. Management is currently
evaluating the potential impact, if any, of adopting ASU 2009-13 on the
Company’s financial position and results of operations.
 
 NOTE 3–ACCOUNTS RECEIVABLE
 
 Accounts receivable at September 30,
2010 and December 31, 2009 consisted of the following:
 
 September 30, 2010
              
              December 31, 2009Accounts
      receivable
              
              $
              75,643,791
              
              
              $
              6,161,796Less: allowance for doubtful
      accounts
              
              
              -
              
              
              
              -Total
              
              $
              75,643,791
              
              
              $
              6,161,796
 
 An allowance for doubtful accounts of $0
and $305,338 was reversed for the three and nine monthsended September 30, 2009, respectively.
No provision for allowance for doubtful accounts was recorded during the three
and nine months ended September 30, 2010 as management believes no accounts are
uncollectible as of September 30, 2010.
  6
  NOTE 4–INVENTORIES
 
 Inventories at September 30, 2010 and
December 31, 2009 consisted of the following:
  September 30, 2010
              
              
              December 31, 2009Finished
    goods
              
              $
              36,989,474
              
              
              $
              31,734,252Work in
      progress
              
              
              2,486,869
              
              
              
              6,024,323Raw
    materials
              
              
              355,533
              
              
              
              3,771,366Consumables and packing
      supplies
              
              
              101,013
              
              
              
              503,320Total
              
              $
              39,932,889
              
              
              $
              42,033,261
 
 NOTE 5–PREPAYMENTS
 
 In order to secure inventory supplies of
raw materials, the Company makesprepayments to certain suppliers. As of
September 30, 2010 and December 31, 2009, the prepayments to suppliers amounted
to $9,317,065 and $6,070,458, respectively.
 
 NOTE 6–PROPERTY, PLANT AND EQUIPMENT,
NET
 
 Property, plant and equipment at
September 30,2010 and
December 31, 2009 consisted of the following:
 
 September 30, 2010
              
              
              December 31, 2009Buildings
              
              $
              10,117,355
              
              
              $
              5,644,213Machinery and
      equipment
              
              
              1,743,488
              
              
              
              1,535,189Office equipment and
      furniture
              
              
              429,535
              
              
              
              356,560Vehicles
              
              
              2,082,890
              
              
              
              2,037,130Software
              
              
              18,900
              
              
              
              17,199Leasehold
      improvements
              
              
              223,944
              
              
              
              219,388Construction-in-process
              
              
              3,562,951
              
              
              
              -18,179,063
              
              
              
              9,809,679Less: Accumulated
      depreciation
              
              
              1,201,498
              
              
              
              652,764Total
              
              $
              16,977,565
              
              
              $
              9,156,915
 
 Depreciation expense for the three
months ended September 30, 2010 and 2009 was $189,548 and $137,875, respectively. Depreciationexpense for the nine months
ended September 30, 2010 and 2009 was $539,793 and $377,369, respectively.
 
 As of September 30, 2010, vehicles with
a carrying amount of $1,050,619 were pledged as security for the long-term loans
of $372,418 (See Note 12).
 
 Asof December 31, 2009, vehicles with a
carrying amount of $1,122,845 were pledged as security for the long-term loans
of $532,425 (See Note 12). As of December 31, 2009, an apartment with a carrying
value of $102,551 was pledged as security for a long-termloan of $71,618 (See Note
12).
 
 As of December 31, 2009, buildings with
an original carrying amount of $2,718,269 were pledged as security for the
short-term bank loan of $2,925,174 (See Note 11).  The short-term bank
loan was repaid in February 2010.
 
 7
  NOTE 7–INTANGIBLE ASSETS,
NET
 
 Intangible assets at September 30, 2010
and December 31, 2009 consisted of the following:
 
 September 30, 2010
              
              
              December 31, 2009Patent
              
              $
              108,531
              
              
              $
              106,323Customer
    List
              
              
              24,584,523
              
              
              
              -24,693,054
              
              
              
              106,323Less: Accumulated
      amortization
              
              
              712,749
              
              
              
              21,265Total
              
              $
              23,980,305
              
              
              $
              85,058
 
 Amortization expense for the three
months ended September 30, 2010 and 2009 was $677,302 and $2,657, respectively.
Amortizationexpense for
the nine months ended September 30, 2010 and 2009 was $682,630 and $7,968,
respectively. The estimated annual amortization expense for intangible assets in
each of the next five years is $2,709,208.
 
 On July
1, 2010, Yongye Nongfeng entered into an agreement with its provincial level
distributor in Hebei Province, the PRC (“Seller”) to purchase the customer list
from Seller (“Customer List”). The acquisition of the Customer List will allow
Yongye Nongfeng to sell its products to sub-provincial level distributors in
Hebei Province directly. The consideration of the Customer List was 3,600,000
shares of common stock of the Company which was issued in July 2010 and $3
million cash (payable on or before March 1, 2011). The Customer List is
amortized over its estimated useful life for 9 years with nil residual value. A
straight-line amortization method is used, as management believes that the
pattern of economic benefits of the Customer List cannot be reliably
determined.
 
 NOTE 8–LAND USE RIGHT, NET
 
 As of September 30, 2010 and December
31, 2009, land use right represented:
 
 September 30, 2010
              
              
              December 31, 2009Land use
    right
              
              $
              4,275,989
              
              
              $
              4,188,995Less: Accumulated
      amortization
              
              
              89,863
              
              
              
              22,008Total
              
              $
              4,186,126
              
              
              $
              4,166,987
 
 As of December 31, 2009, the land use
right was pledged as security for the short-term bank loan of $2,925,174 (See
Note 11).  The loan was repaid in February 2010.
 
 NOTE 9 - PREPAYMENT FORMINING PROJECT
 
 On March 1, 2010, Yongye Nongfeng
entered into an agreement with Wuchuan Shuntong Humic Acid Company Ltd
(“Wuchuan
Shuntong”) to acquire from
Wuchuan Shuntong the right to develop certain lignite coal resources in Wuchuan
area for a cash consideration of approximately $35
million. As of September 30, 2010, Yongye Nongfeng has made prepayment of
$29,381,466 to Wuchuan Shuntong. As of September 30, 2010, the legal procedures
for the transfer of the right to develop have not yet been completed.
 
 NOTE 10–OTHER ASSETS
 
 The Company has entered into agreements
with certain distributors, including sub-distributors (the “Distribution Agreement”), pursuant to which the Company
provided the distributor a free vehicle in exchange for the distributoragreeing to comply with
certain sales conditions during the term of the agreement of five
years.  The sales conditions included (1) meeting the annual sales
target set by the Company; (2) not selling the products at a price lower
than the price stipulatedby 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.
 
 8
  NOTE 11–SHORT-TERM BANK
LOAN
 
 On October 9, 2009, Yongye Nongfeng
obtained a short-term bank loan of $2,925,174 from China Citic Bank thatbears a fixed annual
interest rate of 5.31% and is due on September 26, 2010. The short-term loan was
pledged by the land use right and buildings with carrying amount of $4,166,987
and $2,718,269, respectively as of December 31, 2009. On February 4,
2010,Yongye Nongfeng repaid the short-term
bank loan, and the pledge of the buildings and land use right was
released.
 
 The interest expense for the three and
nine months ended September 30, 2010 was $0 and $14,737,
respectively.
 
 NOTE 12–LONG-TERM LOANS ANDPAYABLES
 
 As of September 30, 2010 and December
31, 2009, the long-term loans and payables consisted of the
following:
 
 September 30, 2010
              
              
              December 31, 2009Vehicle-employees
              
              $
              372,418
              
              
              $
              532,425Mortgage
    loan
              
              
              -
              
              
              
              71,618Vehicle-distributors
              
              
              533,568
              
              
              
              272,977Total
              
              $
              905,986
              
              
              $
              877,020
 
 As of September 30, 2010,
vehicle-employees loans of $372,418 were secured by twenty-five vehicles with
initial carrying amount of $1,231,501. The vehicle loansare payable in monthly installments
over three to five years. Interest rates on the loans range from 5.4% to 14.54%
annually, and are subject to the change of the base interest rate prescribed by
People’s Bank of China. The vehicle loans were
obtained byindividual employees of the Company
after the Company made the initial down payment of the purchase price of the
vehicles. The Company and the individual employees entered into trust
agreements that stipulate that (i) the vehicles are legally registered
under the individuals’name, (ii) the Company has the rights
of official use, (iii) the Company has the rights to the legal title of the
vehicles at the time of termination of the employment relationship with the
individual, (iv) the Company assumes the riskof loss, damage, penalty and other
obligations related to the operation and ownership of the vehicle, including
repairs and maintenance, (v) the individuals have no right to sell, lease, lend
or pledge the vehicles to any other person or entity, and (vi)the Company is required to repay the
loans in full. Consequently, the Company has recognized the cost of the vehicles
as assets and the loans as liabilities in its consolidated balance
sheet.
 
 Vehicle loans-distributors represent
loans that were initiallyobtained by the distributors from banks
and financial institutions. The Company and the distributors entered into
agreements, pursuant to which the Company would assume the full repayment of the
loans on behalf of these distributors in exchange for the distributors agreeing to comply with
certain sales conditions (See Note 10). The loans have two or three years terms
and are payable in monthly installments. Interest rates on the loans range from
5.40% to 13.20% annually, subject to the change of the base interest rate prescribed by
People’s Bank of China.
  9
  NOTE 13 - CAPITAL
STOCK
 
 Capital
stock
 
 Concurrent with the Share Exchange, the
Company entered into a securities purchase agreement on April 17, 2008 with
certain investors (the “April Investors”) forthe 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 toapproximately $9,350,000 (the
“September
Offering”).
 
 On May 8, 2009, the Company entered into
a securities purchase agreement with certain investors (the “May Investors”), for the sale in a private placement
of an aggregate of 5,834,083 shares of the Company common stock, par value
$0.001 per share (the“May Shares”) for aggregate gross proceeds equal to
$8,984,595 (the “May
Offering”).
 
 On September26, 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 discountsof $450,000, were received on January 4,
2010.
 
 In
connection with the acquisition of Customer List (See note 7), the Company
issued 3,600,000 shares of common stock of the Company in July 2010 to the
Seller as part of the consideration.
 
 Warrants
 
 Concurrent with the April Investor Shares, the
Company issued 1,623,905 warrants to purchase 1,623,905 shares of the
Company’s common stock (the “April Warrants”) to the April Investors. The warrants
issued have a five years exercise period with an initial exercise price of $1.848. In addition,
649,562 warrants were issued to Roth as the placement agent with terms and
exercise price identical to the warrants issued to the April
Investors.
 
 Concurrent with the September Investor
Shares, the Company issued 1,518,253 warrants to purchase 1,518,253 shares
of the Company’s common stock (the “September Warrants”) to the September Investors. The
warrants issued have a five years exercise period with an initial exercise price
of $1.848. In addition, 607,301 warrants wereissued 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
354,987shares 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 offeringof 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 cashlessexercise of all the “May Warrants”. The Company issued 198,247 shares of
common stock of the Company in exchange for the surrender of all the May
Warrants.
 
 During the three and nine months ended
September 30, 2010, nil and 54,803 “April Warrants”and “September Warrants”were exercised by April Investors and
September Investors. In connection with the exercise, the Company issued 54,803
shares of common stock and received $84,397 from warrant
holders.
 
 10
 
 According to the terms of these
warrants, the Company could
be required to pay cash to the warrant holders under certain events that are not
within the control of the Company.Specifically, upon the occurrence of
certain “fundamental
transactions”as defined,
the warrant holders (but not the shareholders of the 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 commonstock at a price of $1.54 per share and
accordingly, the exercise price of the April Warrants and the September Warrants
was reduced to $1.54 per share. As of September 30, 2010, there were 148,172
warrants outstanding, of which 48,714 and 99,458 warrantswill expire if unexercised by April 2013
and September 2013, respectively.
  The potential cash payments and the
down-round provision preclude the classification of these warrants as equity.
Accordingly, the warrants are accounted for as a liability and adjusted to fair value through earnings at
each reporting date. The loss resulting from the increase in fair value of
warrants was $12,077 for the three months ended September 30, 2010. The gain
resulting from the decrease in fair value of warrants was $157,393 for the nine months ended September
30, 2010. The loss resulting from the increase in fair value of warrants was
$15,836,189 and $20,905,136 for the three and nine months ended September 30,
2009, respectively.
 
 The estimated fair values of the
warrants issued to April
Investors and September Investors were determined at September 30, 2010 and
December 31, 2009 using Binominal Option Pricing Model with Level 2
inputs. The following table sets forth, by level within the fair value
hierarchy, the Company’s financial liabilities that were
measured at fair value on a recurring basis as of September 30, 2010 and
December 31, 2009.
 
 Fair Value Measurements Using:Quoted Prices in
                Active Markets for
                Identical Financial
                Assets andLiabilities
              
              
              Significant Other
                Observable Inputs
              
              
              Significant
                Unobservable InputsSeptember,
    2010
              
              Total
              
              
              Level 1
              
              
              Level 2
              
              
              Level 3Liabilities at fair
      value:Derivative liabilities—warrants
              
              $
              837,663
              
              
              
              -
              
              
              $
              837,663
              
              
              
              -
  Fair Value Measurements Using:Quoted Prices in
                Active Markets for
                Identical Financial
                Assets and Liabilities
              
              
              Significant Other
                Observable Inputs
              
              
              Significant
                Unobservable 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
              
              
              $
              6.81September 30,
      2010
              
              $
              5.64
              
              
              $
              5.66
 
 11
  The fair values of the warrants
outstanding as of September 30, 2010 and December 31, 2009 were determined based
on the Binominal option pricing model, using the following key
assumptions:
 
 September 30,
                2010
              
              
              December 31,
                2009April
                Warrants
              
              
              September
                Warrants
              
              
              April
                Warrants
              
              
              September
                WarrantsExpected
      volatility
              
              
              57.3
              %
              
              
              57.0
              %
              
              
              61.0
              %
              
              
              60.0
              %Expected dividends
      yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Time to
      maturity
              
              2.6 years
              
              
              3.0 years
              
              
              3.3 years
              
              
              3.7 yearsRisk-free interest rate per
      annum
              
              
              1.764
              %
              
              
              1.764
              %
              
              
              2.218
              %
              
              
              2.218
              %Fair value of underlying common
      shares (per share)
              
              $
              7.06
              
              
              $
              7.06
              
              
              $
              8.13
              
              
              $
              8.13
 
 Escrow
shares
 
 In connection with the September
Offering, the Company entered into anescrow agreement with Roth, the escrow
agent and Full Alliance (the “September Escrow Agreement”), pursuant to which 4,000,000 shares of
the Company issued to Full Alliance in the Share Exchange (the “September Escrow Shares”) were delivered to the
escrowagent. Of the September Escrow Shares,
2,000,000 shares (the “Make
Good Escrow Shares”) were
held and to be released back to Full Alliance upon the Company’s achievement of both 2008 and 2009
financial targets, as defined in the September Escrow Agreement.The remaining 2,000,000 escrow shares
were held and to be released back to Full Alliance upon the Company obtaining
the approval from Ministry of Agriculture of Inner Mongolia in relation to the
transfer of fertilizer license to Yongye Nongfeng from InnerMongolia Yongye and the completion of
Yongye Nongfeng’s restructuring (the “Restructuring Make Good
Shares”). In June
2010, both Make Good Escrow Shares and Restructuring Make Good Shares were
released to Full Alliance.
 
 NOTE 14–STATUTORY RESERVE
 
 Yongye Nongfeng is required to allocate at
least 10% of its after tax profits as determined under generally accepted
accounting principal in the PRC to a statutory surplus reserve until the reserve
balance reaches 50% of its registered capital. For the nine months ended September 30, 2010 and 2009,
Yongye Nongfeng made appropriations to this statutory reserve of $5,051,225 and
$2,328,546, respectively.
The accumulated balance of the statutory reserve of Yongye Nongfeng as of
September 30, 2010 and December 31, 2009 was $9,116,795 and $4,065,570,
respectively.
 
  In accordance with the PRC laws and
regulations, Yongye Nongfeng is restricted in its ability to transfer a portion
of its net assets to the Company in the form of dividends, which amounted to
$8,660,955,representing
the amount of accumulated balance of statutory reserve of Yongye Nongfeng
attributable to the Company, as of September 30, 2010.
 
 NOTE 15–INCOME TAXES
 
 The Company and its subsidiaries file
separate income tax returns.
 
 The United States ofAmerica
 
 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 HongKong withholding
tax.
  12
  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 16.66%
and 16.16% for the three months and ninemonths ended September 30, 2010,
respectively. The difference between effective tax rate and statutory tax rate
primarily represented the tax effects on non-taxable income and non-deductible
expenses.
 
 The Company had deferred tax assets of
approximately $389,318 as
of September 30, 2010 that consisted of tax loss carryforwards. The Company had
no other temporary differences as of September 30, 2010. The ultimate
realization of deferred tax assets depends on the generation of future taxable
income during the periods in which those tax loss
carryforwards are available. The Company considers projected future taxable
income and tax planning strategies in making its assessment. At present, the
Company does not have a sufficient operation in the United States toconclude that it is more-likely-than-not
that the Company will be able to realize all of its tax benefits in the near
future and therefore a valuation allowance was established for the full value of
the deferred tax asset as of September 30, 2010.
 
 NOTE 16–FAIR VALUE
MEASUREMENTS
 
 September
      30, 2010
              
              
              December 31, 2009Carrying
              
              
              
              
              
              Carryingamount
              
              
              Fair value
              
              
              amount
              
              
              Fair valueFinancial
      assets:Cash
              
              $
              24,967,963
              
              
              $
              24,967,963
              
              
              $
              65,518,181
              
              
              $
              65,518,181Restricted
    cash
              
              
              40,000
              
              
              
              40,000
              
              
              
              -
              
              
              
              -Accounts
      receivable
              
              
              75,643,791
              
              
              
              75,643,791
              
              
              
              6,161,796
              
              
              
              6,161,796Other
      receivables
              
              $
              232,627
              
              
              $
              232,627
              
              
              $
              383,841
              
              
              $
              383,841Financial
      liabilities:Short-term bank
      loan
              
              $
              -
              
              
              $
              -
              
              
              $
              2,925,174
              
              
              $
              2,925,174Long-term loans and payables -
      current portion
              
              
              462,178
              
              
              
              462,178
              
              
              
              331,693
              
              
              
              331,693Accounts payable - related
      party
              
              
              -
              
              
              
              -
              
              
              
              880,026
              
              
              
              880,026Accounts payable - third
      parties
              
              
              725,074
              
              
              
              725,074
              
              
              
              344,774
              
              
              
              344,774Accrued
      expenses
              
              
              10,947,119
              
              
              
              10,947,119
              
              
              
              479,609
              
              
              
              479,609Due to a related
      party
              
              
              -
              
              
              
              -
              
              
              
              1,663,191
              
              
              
              1,663,191Other
    payables
              
              
              5,113,861
              
              
              
              5,113,861
              
              
              
              553,286
              
              
              
              553,286Derivative
      liabilities
              
              
              837,663
              
              
              
              837,663
              
              
              
              1,380,205
              
              
              
              1,380,205Long-term loans and
      payables
              
              $
              443,808
              
              
              $
              443,808
              
              
              $
              545,327
              
              
              $
              545,327
  The fair values of the financial
instruments shown in the abovetable as of September 30, 2010 and
December 31, 2009 represent the estimated amounts that would be received to sell
those assets or that would be paid to transfer those liabilities in an orderly
transaction between market participants at that date. Thosefair 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 aboutthe assumptions that market participants
would use in pricing the asset or liability. Those judgments are developed by
the Company based on the best information available in the circumstances,
including expected cash flows and appropriately risk-adjusted discount rates, available observable and
unobservable inputs.
 
 The following methods and assumptions
were used to estimate the fair value of each class of financial
instruments:
 
 Cash, accounts receivable, other
receivables, short-term bank loan, long-term loans and payables–current portion, accounts payables,
accrued expenses, due to a related party and other payables: The carrying
amounts approximate fair value because of the short maturity of these
instruments.
 
 Derivative liabilities: The method and
assumptions used to
estimate the fair value of derivative liabilities are set out in Note
13.
 
 Long-term loans and payables: The fair
value of the Company’s long-term loans and payables is
estimated by discounting future cash flows using current market
interest rates offered to
the Company and its subsidiaries for debts with substantially the same
characteristics and maturities.
  13
  NOTE 17–LEASE COMMITMENTS
 
 The Company entered into an operating
lease for an office space in Beijing, PRC for the period from January 1, 2008 to December 31, 2010.
The lease expense for the Beijing office was $58,428 and $57,909 for the three
months ended September 30, 2010 and 2009, respectively. The lease expense for
the Beijing office was $174,354 and $165,448for the nine months ended September 30, 2010 and 2009,
respectively. As of September 30, 2010, future minimum lease payments under this
non-cancellable operating lease agreement for the next twelve months are
$59,145.
 
 NOTE 18–RELATED PARTY TRANSACTIONS AND
BALANCES
 
 Forthe three and nine months ended
September 30, 2009, Yongye Nongfeng, purchased inventories from Inner Mongolia
Yongye amounting to $0 and $37,923,422, respectively. In January 2008, upon
receiving governmental approval of its establishment, Yongye
Nongfengentered 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 120per case for fulvic acid based animal
products.  The term of the Agreement was for the period from January
15, 2008 to January 14, 2013. Pursuant to the Agreement, the Company could
terminate the Agreement by giving one month notice to Inner Mongolia
Yongye. Upon Yongye Nongfeng obtaining its
own fertilizer license, the Agreement was terminated in July
2009.
 
 As of December 31, 2009, accounts
payable to related party was $880,026, and represented the payable for the
purchase of inventories from Inner Mongolia Yongye. The accounts payable was
repaid in the nine months ended September 30, 2010.
 
 As of December 31, 2009, the amount due
to a related party was $1,663,191, which mainly represented the payable for the
Acquisition from Inner Mongolia Yongye. The amount due to a related party was repaid
in the nine months ended September 30, 2010.
 
 During the nine months ended September
30, 2010, the Company sold three vehicles with net book value of $135,191 and an
apartment with net book value of $102,263 to InnerMongolia Yongye. In addition, the
long-term loans of $144,513 that were secured by these assets were assumed by
Inner Mongolia Yongye. Upon disposal, no gain or loss was recorded and the
Company received cash of $92,941.
 
 Yongye Nongfeng and Inner
MongoliaYongye 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 theresults of operations for
the three and nine months ended September 30, 2009 and therefore have not been
included.
 
 14
 
 NOTE 19 - EARNINGS PER
SHARE
  The following table sets forth the
computation of basic and diluted income per share for the periods
indicated:
  For the Three Months Ended
              
              
              For the Nine Months EndedSeptember
      30, 2010
              
              
              September
      30, 2009
              
              
              September
      30, 2010
              
              
              September
      30, 2009Numerator used in basic net income
      per share:Net income/(loss) attributable to
      Yongye International, Inc.
              
              $
              17,578,267
              
              
              $
              (7,041,265)
              
              
              $
              46,195,261
              
              
              $
              2,309,692Change in fair value of derivative
      liabilities
              
              
              12,077
              
              
              
              -
              
              
              
              (157,393)
              
              
              
              -Numerator used in diluted net
      income per share
              
              
              17,590,344
              
              
              
              (7,041,265)
              
              
              
              46,037,868
              
              
              
              2,309,692Shares(denominator):Weighted average ordinary shares
      outstanding-basic
              
              
              47,130,522
              
              
              
              32,730,054
              
              
              
              45,423,109
              
              
              
              29,926,052Plus: weighted average incremental
      shares from assumed exercise ofwarrants
              
              
              118,048
              
              
              
              -
              
              
              
              118,876
              
              
              
              -Weighted average ordinary
      shares outstanding used in computing diluted net income per
      ordinary share
              
              
              47,248,570
              
              
              
              32,730,054
              
              
              
              45,541,985
              
              
              
              29,926,052Net income per ordinary
      share-basic
              
              $
              0.37
              
              
              $
              (0.22)
              
              
              $
              1.02
              
              
              $
              0.08Net income per ordinary
      share-diluted
              
              $
              0.37
              
              
              $
              (0.22)
              
              
              $
              1.01
              
              
              $
              0.08
 
 As of September 30, 2009, the Company
had3,161,051warrants
outstanding that was excluded in the computation of diluted earnings per share
as their effect would have
been anti-dilutive.
 
 NOTE 20 - CONCENTRATIONS AND CREDIT
RISKS
 
 At September 30, 2010 and December 31,
2009, the Company held cash in banks of approximately $25,007,963 and
$65,518,181, respectively that is uninsured by the government authority. To limit exposure to credit risk
relating to deposits, the Company primarily places cash deposits only with large
financial institution in the PRC with acceptable credit
rating.
 
 Five major customers accounted for 55%
and one major customer accounted for 21% of the Company’s revenue for the three months ended
September 30, 2010. Five major customers accounted for 59% and one major
customer accounted for 17% of the Company’s revenue for the nine months ended
September 30, 2010. Five major customers accounted for 92% and one major customer
accounted for 51% of the Company’s revenue for the three months ended
September 30, 2009. Five major customers accounted for 83% and one major
customer accounted for 31% of the Company’s revenue for the nine months
ended September 30, 2009. The
Company’s total sales to five major customers
were $39,197,220 and $112,111,180 for the three and nine months ended September
30, 2010, respectively. The Company’s total sales to five major customers
were $26,724,973 and $73,451,769 for the three and nine months ended
September 30, 2009, respectively. All these major customers are distributors in
the PRC agriculture industry.
 
 15
 
 For the three months ended September
      30, 2010
              
              For the nine months ended September
      30, 2010Largest
                Customers
              
              Amount of
                Sales
              
              
              % Total
                Sales
              
              Largest
                Customers
              
              Amount of
                Sales
              
              
              % Total
                SalesCustomer A
              
              $
              15,313,847
              
              
              
              21
              %
              Customer F
              
              $
              32,370,197
              
              
              
              17
              %Customer B
              
              
              7,214,600
              
              
              
              10
              %
              Customer G
              
              
              28,093,886
              
              
              
              15
              %Customer C
              
              
              6,888,311
              
              
              
              10
              %
              Customer C
              
              
              19,139,975
              
              
              
              10
              %Customer D
              
              
              5,060,233
              
              
              
              7
              %
              Customer H
              
              
              17,193,243
              
              
              
              9
              %Customer E
              
              
              4,720,229
              
              
              
              7
              %
              Customer A
              
              
              15,313,847
              
              
              
              8
              %Total
              
              $
              39,197,220
              
              
              
              55
              %
              Total
              
              $
              112,111,180
              
              
              
              59
              %
 
 
 For the three months ended
      September 30, 2009
              
              For the nine months ended September
      30, 2009Largest
                Customers
              
              Amount of
                Sales
              
              
              %Total
                Sales
              
              Largest
                Customers
              
              Amount of
                Sales
              
              
              % Total
                SalesCustomer G
              
              $
              14,840,002
              
              
              
              51
              %
              Customer F
              
              $
              27,230,124
              
              
              
              31
              %Customer H
              
              
              4,614,438
              
              
              
              16
              %
              Customer H
              
              
              15,902,407
              
              
              
              18
              %Customer F
              
              
              3,672,634
              
              
              
              13
              %
              Customer G
              
              
              14,840,002
              
              
              
              17
              %Customer I
              
              
              1,900,374
              
              
              
              6
              %
              Customer J
              
              
              9,775,088
              
              
              
              11
              %Customer C
              
              
              1,697,525
              
              
              
              6
              %
              Customer K
              
              
              5,704,148
              
              
              
              6
              %Total
              
              $
              26,724,973
              
              
              
              92
              %
              Total
              
              $
              73,451,769
              
              
              
              83
              %
 
 Three major suppliers accounted for 86%
($26,529,521) and one major supplier accounted for 64% ($19,771,633) of the
Company’s inventory purchase for the three months ended September
30, 2010. Three major suppliers accounted for 87% ($73,219,730) and one major
supplier accounted for 69% ($57,856,688) of the Company’s inventory purchase for the nine months
ended September 30, 2010.Inner Mongolia Yongyesupplied 0% ($0) and 67% ($37,923,422)
of the Company’s inventories for the third quarter of
2009 and nine months ended September 30, 2009, respectively. If these suppliers
terminate their supply relationship withthe 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 influencedby the political, economic and legal
environments in the PRC such as changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things.
 
 NOTE 21–SUBSEQUENT EVENT
 
 In
October 2010, the Company granted 1,183,667 restricted shares to management and
independent directors of the Company in accordance with Yongye International,
Inc. 2010 Omnibus Securities and Incentive Plan, as an incentive to such
individuals to promote the success of the Company’s business. Shares vest on the
six month anniversary of the date of grant. Management was granted shares of
1,137,000 on October 8, 2010, and the independent directors were granted shares
of 46,667 on October 15, 2010.




16




ITEM
      2.
              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. 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 growour operations; and (d) whether we are
able to successfully fulfill our primary requirements for cash which are
explained below under “Liquidity and Capital
Resources”. Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.




Company Overview




In April 2008, we entered into a share
exchange transaction (the
“Share
Exchange”) prior to which
we were a public “shell”company with nominal
assets.  Following the Share Exchange, we changed our name to Yongye
International, Inc. and through our Cooperative Joint Venture subsidiary, Yongye
Nongfeng BiotechnologyCo. Ltd. (“Yongye Nongfeng”), are engaged in the research and
development, manufacturing, distribution and sales of fulvic acid based liquid
and powder nutrient compounds used in the agriculture
industry.




Our headquarters is in Beijing, China
and additional
administrative offices and our manufacturing unit are located in Hohhot, Inner
Mongolia, China. Currently, we sell two lines of products, both based on our
fulvic acid compound base: a plant nutrition liquid compound and animal
nutrition powder whichis a feed additive. Our products start
with our proprietary fulvic acid base which is extracted from humic acid, and to
which we add other natural substances to customize the base for use in our plant
and animal product lines. Our plant products add naturally occurring macro and micro nutrients
such as nitrogen, phosphorus, potassium, boron and zinc. Our animal products add
natural herbs which help to reduce bacterial inflammation (mastitis) in cows. It
also assists various animals digest food more completely and thus be more healthy. Based on
industry research and government testing, we believe our proprietary technology
for fulvic acid extraction creates some of the purest and most effective fulvic
acid base on the market in China today. We believe our fulvic acid has a very light weight
molecular composition, which may improve the overall permeability of cell walls,
thus it allowing more complete transport of nutrients across plant membranes,
and effectively strengthening the overall health of plants. We believe our patented processes for mixing
our plant nutrient and animal nutrient are key differentiators in the market. We
believe this will help us ensure that we have a high quality product that we can
control from procurement of raw materials to final production. We believe this also ensures
our products provide reliable results from season to season.




In the three months ended September 30,
2010, we sold approximately 6,352 tons of plant product, which represented 99.9%
of our total revenue or $71,647,884. We also sold approximately 18 tons of
our animal product, which represented 0.1% of our total revenue or
$104,185.




Recent Developments




In March 2010, Yongye Nongfeng signed a
preliminary agreement with a local supplier of humic acid to purchase anundeveloped lignite coal
resources project in Inner Mongolia, PRC. Consummation of the acquisition
requires the satisfaction of certain customary closing conditions, including
receipt of governmental approval.  The preliminary agreement with
Wuchuan Shuntong Humic Acid Trading Company Limited
("Shuntong") provides for the acquisition of Shuntong's development rights to a
currently undeveloped lignite coal resource project located in Wuchuan County, a
suburb located outside the city of Hohhot, Inner Mongolia, where the Company's major operations
reside in the PRC. According to a third party valuation report, the project area
is estimated to contain over 40 million cubic meters of surface level lignite
coal which can supply the Company's long-term needs. According to the agreement, Nongfeng will pay
Shuntong RMB240 million ($35.1 million) to acquire the development rights for
this project. This acquisition will not be completed until Nongfeng makes full
payment to Shuntong and receives in return the full, unencumbered title to the development rights.
Nongfeng is still in the process of obtaining the related
titles.




17




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





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





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





Factors affecting our operating
results





Demand for Our
Products





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





According to the Asian Development Bank statistics,
well over 60% of the nation’s total population of 1.3 billion people
is comprised of low-income, rural farmers. According to the NESDP (2006-2010),
raising the level of rural income is a top economic and social goalfor 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 ofproducing 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 ourfinished goods from our
main supplier, Inner Mongolia Yongye and then sold them through our distribution
system. Upon obtaining the fertilizer license on June 1, 2009, we commenced the
manufacturing of our product.





Seasonality





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




18




Agriculture Sector





Agriculture continues to be a heavily
invested sector in China. Brand name investors continue to invest into
China’s agriculture space because theyhave 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
onstable 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 oilseedoutput this year, Sun said. To ensure
next year’s crops, officials must “stabilize”area planted in winter wheat and use
idle land in the off season to grow rapeseed, Sun said.





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





New Land Reform
Policy





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




19




RESULTS OF
OPERATIONS




Summary Statement of Income
Data





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





20





THREE MONTHS ENDED SEPTEMBER 30, 2010
COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2009





Net Sales





Sales of $71,752,069 in the third
quarter of 2010 was an
increase of $42,472,596 from $29,279,473 in the same period of 2009, which was
an overall increase of 145%.





This increase was driven by higher
demand throughout our market area, including an increase in the number of
branded stores developed by our distributors, and the growth of several
new markets, which resulted in almost all of such growth being due to an
increase in the quantity of product sold while our prices remained relatively
stable. Additionally,after the acquisition of Hebei customer list, we
are selling at a higher price directly to lower level distributors in Hebei,
which is Yongye's largest regional
market in China, representing approximately 30% of the our revenues in the third
quarter of 2010.





Gross profit in the third quarter of
2010 increased 166%, from
$15,844,147 to $42,112,407, or $26,268,260, over the three months ended
September 30, 2009.





Gross margin increased between the two
periods from 54% to 59%, or an overall 5% increase in margin. The increase in
gross profit was mainlydue
to the benefits from economics of scale. Moreover,after the acquisition
of Hebei customer list,our margin for the sales
made in Hebei province increased to 63% from 56%, which also resulted in the
increase of gross profit ratio.





Cost of Goods Sold





Cost of goods sold for the three months
ended September 30, 2010 was $29,639,662 which is 41% of revenues. This is an
increase of $16,204,336 over the previous period of $13,435,326 and represents
an 121% increase overall. As a percent of revenue, this represented a decrease of 5% when compared
with the corresponding period in 2009, which was 46%. The decrease in cost of
goods sold as a percentage of revenue for the third quarter of 2010 was mainly
due to the benefits from economics of scale, as well as the acquisition of the customer
list.





Sales by Product
Line





In the three months ended September 30,
2010, we sold approximately 6,352 tons of plant product, which represented 99.9%
of our total revenue or $71,647,884. We also sold approximately 18 tons ofour animal product. This
represented 0.1% of our total revenue or $104,185. The revenue of our plant
product increased to $71,647,884 from $29,276,377 or 145% in the three months
ended September 30, 2010 as compared to the same period in 2009 and the
revenue of our animal product increased to
$104,185 from $3,096, or 3265%, in the three months ended September 30, 2010
compared to the same period in 2009.





Selling, General and Administrative
Expenses





Selling, general and administrative
(“SG&A”) expenses increased by $15,095,829 to $19,105,619 in
the three months ended September 30, 2010 from $4,009,790 in the corresponding
period in 2009. As a percentage of sales for the three months ended September
30, 2010, SG&A increased by 13% to 27% as compared to 14%of net sales in the three months ended
September 30, 2009, due to an increase of $6,457,053 in advertising expenses
mainly resulted from more promotional activities in 2010, as we entered into
more geographic markets and conducted several nation-wide jointprograms with China Central Television
Station (CCTV). Also an increase in amortization expenses of $1,111,617 that
mainly resulted from the amortization of customer list, as well as the increase
in training expenses of $4,738,743 for various levels of distributors and staff
education.




21




Research and
Development





We incurred $2,170,951 of research and
development expenses in the three months ended September 30, 2010 as
compared to $69,871 in the three months ended September 30, 2009. While we
expanded our geographic
coverage to several new provinces in 2010, the Research and Development
(“R&D”) expenses
consist of expenses related to making investments in future new products and
conducting various field tests in the Company’s new sales territories.This increase in
expenses is mainly the result of more field test areas for different
product to both our plant and animal productsin the three months ended September 30,
2010 compared to the same period in 2009.





Loss/gain on change infair value of
warrants





The warrants issued in our private
financings in 2008 and 2009 are accounted for as derivative liabilities and
measured at fair value at each reporting date. The increase in fair value during
the three months ended September 30, 2010 resulted in a loss of
$12,077. The increase in fair value of the warrants was primarily due to
the increase in our stock price from $6.89 per share at June 30, 2010 to $7.06
at September 30, 2010. The change in fair value of the warrants for the
threemonths ended September 30, 2009 resulted
in a loss of $15,836,189.




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 September30, 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
benefitshas been made.





Effective from January 1, 2008, the
PRC’s statutory income tax rate is 25%.
According to an approval from the Inner Mongolia Autonomous Region National Tax
Authority issued on December 11, 2009, Yongye Nongfeng, being a foreign
investmententerprise
located in the Western Region of the PRC, is entitled to a preferential income
tax rate of 15% for the year ended December 31, 2009 and year ended December 31,
2010. The Company’s effective income tax rate was 16.66%
and 16.16% for the three months and nine months ended September 30,
2010, respectively. The difference between effective tax rate and statutory tax
rate primarily represented the tax effects of certain non-taxable income and
non-deductible expenses.





For the three months ended
September 30, 2010, the
Company’s income tax expense was $3,705,985 as
compared to $3,089,047 for the three months ended September 30,
2009.





Net Income





Net income for the three months ended
September 30, 2010 was $18,540,489 (representing a net profit margin
of 26%) compared to a net
loss of $6,995,237 in the same period ended September 30, 2009. The increase in
our net profit margin is primarily due to the impact of the fair value changes
of derivative warrants as well as the increase in sales in the three
months ended September 30, 2010 as compared
to the corresponding period in 2009.





NINE MONTHS ENDED SEPTEMBER 30, 2010
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2009




Net Sales





Sales of $186,101,173 in the nine months
ended September 30, 2010 was an increase of $98,114,381 from $87,986,792 in
the same period in 2009, which was an overall increase of 112% in revenue. This
increase was driven by higher demand throughout our market area, including
an increase in the number of branded stores developed by ourdistributors, and the growth of several
new markets, which resulted in almost all of such growth being due to an
increase in the quantity of product sold while our prices remained relatively
stable. Additionally,after the acquisition of Hebei customer list, we
are selling at a higher price directly to lower level distributors in Hebei,
which is Yongye's largest regional
market in China.




Gross Profit





Gross profit for the nine months ended
September 30, 2010 also increased by 127%, which was an increasefrom $46,711,982 to $106,005,208, or
$59,293,226, over the nine months ended September 30, 2009. Our gross margin for
the nine months ended September 30, 2010 increased from 53% to 57%. The increase
in gross profit ratio was mainly due to the lower production cost as compared to the purchase of
finished goods from Inner Mongolia Yongye, as well as benefits from economies of
scale. Moreover,after the acquisition of Hebei customer list, our margin
for the sales made in Hebei province increased to 63% from 56%, which also
resulted in the increase of gross profit ratio.




22




Cost of Goods Sold





Cost of goods sold for the nine months
ended September 30, 2010 was $80,095,965, which is 43% of total revenues. This
is an increase of $38,821,155, or 94%, over the corresponding period in 2009. As a percent of
revenue, this represented a decrease of 4% when compared with the corresponding
period between 2010 and 2009. This decrease was due to the lower production cost
as compared to the purchase of finished goods from InnerMongolia Yongye, as well as benefits
from economies of scale. Upon obtaining the fertilizer license on June 1, 2009,
we started producing our nutrients ourselves. Moreover,after the
acquisition of Hebei customer list, the cost of goods sold as a
percentage of
revenue in Hebei province decreased to 37% from 44%, which also resulted
in the cost of goods sold as a
percentage of revenue to decrease.





Sales by Product
Line





The revenue of our plant product
increased by 113% and the revenue of our animal product increased by
30% in the nine months ended September 30, 2010 compared to the same period in
2009.




Selling, General and Administrative
Expenses





SG&A expenses increased by
$30,991,394 to $45,202,898 in the nine months ended September 30, 2010 from $14,211,504 in the
same period in 2009, which was a 218% increase. As a percentage of sales for the
nine months ended September 30, 2010, SG&A increased by 8% to 24% of net
sales as compared to 16% in the nine months ended September 30, 2009. This increase was due primarily
to additional costs brought on by increased expenses in the areas of advertising
of $17,578,090, as we entered into more geographic markets and conducted several
nation-wide joint programs with China Central Television Station (CCTV), various levels of
distributor’s training and staff education expenses
of $4,746,301, amortization expenses of $1,661,268, transportation fee of
$1,204,965 and salary expenses of $1,081,015.





Research and
Development





We incurred $4,509,847 of research and development expenses
in the nine months ended September 30, 2010 as compared to $1,482,888 in the
nine months ended September 30, 2009. While we expanded our geographic coverage
to several new provinces in 2010, the R&D expenses
consist of expenses related to making investments in future new products and
conducting various field tests in the Company’s new sales
territories.This
increase in expenses is mainly the result of more test field areas for
different product to both our plant and animal productsin the first three quarters of 2010
compared to the same period in 2009.





Loss/gain on change in fair value of
warrants





The warrants issued in April Offering
and September Offering are accounted for as derivative liabilities and measured at fair value
at each reporting date. The change in fair value during the nine months ended
September 30, 2010 resulted in a gain of $157,393. The fluctuation in fair
value of the warrants was primarily due to the decrease in ourstock price from $8.13 per share at
December 31, 2009 to $7.06 at September 30, 2010. The change in fair value
of the warrants for the nine months ended September 30, 2009 resulted in a loss
of $20,905,136.





Income Tax





The Company did not carry on any
business and did not
maintain any branch office in the United States during the nine months ended
September 30, 2010 and 2009. Therefore, no provision for withholding or U.S.
federal income taxes or tax benefits on the undistributed earnings and/or losses
ofthe Company has been
made.





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





The Company’s effective income tax rate was 16.16%
and 76.27% forthe nine
months ended September 30, 2010 and 2009, respectively. The difference between
the effective tax rate and statutory tax rate primarily represented the tax
effects of certain non-taxable income and non-deductible expenses, including the
loss/gainon change in fair value of warrants. For
the nine months ended September 30, 2010, the Company’s income tax expense was $9,389,307 as
compared to income tax expense of $7,836,270 for the nine months ended September
30, 2009.




23




Net income





Net income increased by $46,268,670, from $2,437,976 to
$48,706,646, over the nine months ended September 30, 2010 and 2009, which was
1898% increase. Also, this represented an increase in net profit margin from 3%
to 26% in the related period of 2010 and 2009. This increaseis primarily due to the fact that the
gain from the decrease in the fair value of warrants amounted to $157,393 in the
nine months ended September 30, 2010, while in the same period of 2009 there was
a loss from the change in fair value of warrants of $20,905,136, as well as the increase in
sales for the nine months ended September 30, 2010, as compared with nine months
ended September 30, 2009.





Liquidity and Capital
Resources





The Company has historically financed
its operations and capital expenditures principally through issuance of common
shares and bank loans. As is customary in the industry, we provide credit terms
to most of our distributors which typically exceed the terms that we receive from our suppliers.
Currently, we typically provide 6-month terms to our key provincial level
customers and ask for all others to make cash payments upfront 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 used in operating activities in
the nine months ended September 30, 2010 increased by $2,499,371 to $9,341,126
from $6,841,755for the
period ended September 30, 2009. The change was mainly due to higher demand of
working capital to finance receivables and inventories, resulting from the
expansion our business.





Net cash used in investing activities
increased by $34,286,311, or 1291%, to $36,942,127 in the nine months
ended September 30, 2010, compared to $2,655,816 the same period in 2009. The
increase was primarily due to the prepayment of $28,866,259 for the acquisition
of the right to develop certain lignite coal resources inthe Wuchuan area. Total consideration of
the development right is approximately $35 million.





Net cash provided by financing
activities decreased by $3,279,233, or 38%, to $5,260,922 in the nine months
ended September 30, 2010, compared to $8,540,155 the same period in 2009. This was due to the
increase in repayment of loans and payables of $3,373,475 during the nine months
ended September 30, 2010.





Net current assets at September 30, 2010
increased by $15,953,925 to $123,706,240 from $107,752,315, or 15%,over December 31,
2009.





Summary consolidated balance sheet
data:




Yongye
            
            
            YongyeInternational, Inc.
            
            
            International, Inc.September 30, 2010
            
            
            December 31, 2009
            
            
            Changes in %Cash and restricted
      cash
            
            $
            25,007,963
            
            
            $
            65,518,181
            
            
            
            -62%Accounts receivable, net of
      allowance for doubtful accounts
            
            
            75,643,791
            
            
            
            6,161,796
            
            
            
            1128%Inventories
            
            
            39,932,889
            
            
            
            42,033,261
            
            
            
            -5%Property, plant and equipment,
      net
            
            
            16,977,565
            
            
            
            9,156,915
            
            
            
            22%Total
assets
            
            
            243,345,034
            
            
            
            145,805,688
            
            
            
            85%Short-term bank
      loan
            
            
            -
            
            
            
            2,925,174
            
            
            
            -100%Long-term loans and payables -
      current portion
            
            
            462,178
            
            
            
            331,693
            
            
            
            39%Income tax
      payable
            
            
            7,875,660
            
            
            
            4,082,424
            
            
            
            93%Accrued
      expenses
            
            
            10,947,119
            
            
            
            479,609
            
            
            
            2183%Other
    payables
            
            
            5,113,861
            
            
            
            553,286
            
            
            
            824%Total current
      liabilities
            
            
            27,407,765
            
            
            
            12,669,539
            
            
            
            116%Long-term loans and
      payables
            
            
            443,808
            
            
            
            545,327
            
            
            
            -19%Total equity attributable to
      Yongye International, Inc.
            
            
            206,122,940
            
            
            
            125,913,424
            
            
            
            64%Total
equity
            
            
            215,493,461
            
            
            
            132,590,822
            
            
            
            63%




24




Total current liabilities increased by
$14,738,226 to $27,407,765 at September 30, 2010 from $12,669,539 at December
31, 2009, which was largely due to an increase in accrued expenses of
$10,467,510 and income
taxes payable of $3,793,236, primarily due to the significant growth of our
business, and increase in our net income before income tax. Moreover, other
payables increased by $4,450,575 mainly due to $3 million cash
consideration payable for the acquisition of Hebei customer list. We repaid the short-term bank loan
during the nine months ended September 30, 2010, which decreased current
liabilities by $2,925,174.





Total equity increased by $82,902,639 to
$215,493,461 at the end of September 30, 2010, compared to $132,590,822 at
December 31, 2009. The increase in our total equity was primarily due to
increase in common stock and additional paid in capital of $21,709,546, which
was mainly from the 3,600,000 shares issued for acquisition of customer list and warrants exercised
during the nine months ended September 30, 2010, collection of subscription
receivable of $8,550,000 that was received during the nine months ended
September 30, 2010, and increase in retained earnings of $46,195,261
dueto the net income attributable to Yongye
International, Inc. during the period.





Days sales outstanding is defined as
average accounts receivable for the period divided by net sales for the period
and decreased by 44 days to 82 days for the three months ended September 30, 2010 from 126 days in
the same period ended 2009, as result of increased efforts in cash
collection.





Foreign Currency Translation and
Transactions





The financial position and results of
operations of the Company’s subsidiaries in the PRCare 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. The income statement is 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 onmarket conditions influenced by the
overall economic conditions in China. We manage our price risks through
productivity improvements and cost-containment measures. We do not believe that
inflation risk is material to our business or our financial position, results of operations or cash flows at
this time.





Off-balance sheet
arrangements





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




ITEM
    3.
              QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
  RISK




Not applicable.




ITEM
    4.
              CONTROLS AND
      PROCEDURES




Evaluation of Disclosure Controls and
Procedures




Disclosure Controls and
Procedures




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





25




Although the management of our Company,
including the Principal Executive Officer and the Principal Financial and
Accounting Officer, believes that our disclosure controls and internal controls
currently provide reasonable assurance that our desired control objectives have been met, management
does not expect that our disclosure controls or internal controls will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurancethat 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.




26




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




On
November 15, 2010, we issued a press release regarding our financial results for
the three and nine months ended September 30, 2010.  A copy of the
press release is furnished as Exhibit 99.1 to this Quarterly Report on Form 10-Q
in order to comply with our disclosure obligation pursuant to Item 2.02 of Form
8-K under the Securities Exchange Act of 1934, as
amended.




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
      2002.99.1
              
              Press
      Release dated November 15, 2010.





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
    WuNovember 15,
      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