UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





ý
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended September30,
  2008ORo
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ________________ to
      ________________





Commission
file number:  000-15893





CHINA
YINGXIA INTERNATIONAL, INC.


(Exact
name of registrant as specified in its charter)





Florida
            
            65-0664961(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)Harbin
      Yingxia Industrial Co., Ltd,
              300, Xidazhi
      Street, Nangang District, Harbin, Heilongjiang, People’s Republic of
      China
            
            150001(Address
      of principal executive offices)
            
            (Zip
      Code)





86
451 86310948


(Registrant’s
telephone number, including area code)





None


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





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
[   ]No  [   ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.Large accelerated filer [   ]Accelerated
filer  [   ]Non-accelerated
filer  [   ]


Smaller
Reporting Company x


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes [   ]No  [ x
]





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.





Class
            
            Outstanding
      at November 14, 2008Common
      Stock, $0.001 par value per share
            
            _______________44,469,787
      shares







1







CHINA
YINGXIA INTERNATIONAL, INC.


FORM
10-Q





TABLE
OF CONTENTS










PART I - FINANCIAL
      INFORMATIONItem
      1. Financial Statements
            3Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            16Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk
            20Item
      4T. Controls and Procedures
            20PART
      II - OTHER INFORMATION
            21Item
      1. Legal Proceedings
            21Item
      1A. Risk Factors
            21Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds
            21Item
      3. Defaults Upon Senior Securities
            21Item
      4. Submission of Matters to a Vote of Security
    Holders
            21Item
      5. Other Information
            21Item
      6. Exhibits
            21SIGNATURES
            22




Except as otherwise required by the
context, all references in this report to "we", "us”, "our", “CYXI”, “China Yingxia”or "Company" refer to the
consolidated operations of China Yingxia International, Inc., a Florida
corporation, and its wholly owned subsidiaries.






2






Item
1. Financial Statements.




CHINA
YINGXIA INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS




Septermber
      30,
                  
                  
                  December
      31,ASSETS
                  
                  2008
                  
                  
                  2007(Unaudited)Current
      assets:Cash
      and cash equivalents
                  
                  $
                  5,376,431
                  
                  
                  $
                  736,683Account
      receivables, net of allowance for doubtful accounts
                  
                  
                  3,823,656
                  
                  
                  
                  20,081Inventory
                  
                  
                  8,377,587
                  
                  
                  
                  5,527,135Tax
      Receivable
                  
                  
                  24,112
                  
                  
                  
                  32,317Short-term
      loan receivable
                  
                  
                  -
                  
                  
                  
                  2,194,774Prepaid
                  
                  
                  368
                  
                  
                  
                  -Other
      receivables
                  
                  
                  2,872,842
                  
                  
                  
                  3,150,777Advances
      to suppliers
                  
                  
                  1,910,519
                  
                  
                  
                  1,434,059Loan
      Receivable from related parties
                  
                  
                  94,600
                  
                  
                  
                  2,037,551Total
      Current Assets
                  
                  
                  22,480,115
                  
                  
                  
                  15,133,377Property
      and equipment, net of accumulated depreciation
                  
                  
                  22,525,928
                  
                  
                  
                  15,515,896Other
      AssetsGoodwill
                  
                  
                  419,722
                  
                  
                  
                  -Deposits
      on buildings and land
                  
                  
                  1,564,042
                  
                  
                  
                  1,718,077Investment
      Advance
                  
                  
                  338,739
                  
                  
                  
                  4,112,631Intangible
      assets, net
                  
                  
                  744,125
                  
                  
                  
                  666,785Total
      other assets
                  
                  
                  3,066,628
                  
                  
                  
                  6,497,493Total
      Assets
                  
                  $
                  48,072,671
                  
                  
                  $
                  37,146,766LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  837,242
                  
                  
                  $
                  2,911Unearned
      revenue
                  
                  
                  39,591
                  
                  
                  
                  6,509Tax
      Payable
                  
                  
                  274,660
                  
                  
                  
                  -Accrued
      expenses and other payables
                  
                  
                  165,577
                  
                  
                  
                  357,976Total
      Current Liabilities
                  
                  
                  1,317,070
                  
                  
                  
                  367,396Total
      Liabilities
                  
                  
                  1,317,070
                  
                  
                  
                  367,396Stockholders'
      EquityPreferred
      stock, $0.001 par value, 10,000,000 shares authroized; - 0 -
      sharesoutstanding
      at  September 30,2008 and December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $0.001 par value, 100,000,000 shares authorized;44,469,787
      and 44,439,787 shares outstanding at September 30,2008and
      December 31, 2007, respectively
                  
                  
                  44,480
                  
                  
                  
                  44,440Additional
      paid in capital
                  
                  
                  16,841,627
                  
                  
                  
                  16,799,667Accumulated
      other comprehensive income
                  
                  
                  5,796,719
                  
                  
                  
                  2,885,038Statutory
      reserves
                  
                  
                  901,463
                  
                  
                  
                  901,463Retained
      earnings
                  
                  
                  23,171,312
                  
                  
                  
                  16,148,762Total
      Stockholders' Equity
                  
                  
                  46,755,601
                  
                  
                  
                  36,779,370Total
      Liabilities and Stockholders' Equity
                  
                  $
                  48,072,671
                  
                  
                  $
                  37,146,766
 
 See
accompanying notes to the condensed consolidated financial
statements







3






CHINA YINGXIA INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2007
 Nine
      Months Ended September 30,
                
                
                Three
      Months Ended September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Sales
                
                
                $
                15,985,310
                
                
                $
                10,380,713
                
                
                $
                7,457,814
                
                
                $
                3,513,674Cost
      of Sales
                
                
                7,192,816
                
                
                
                4,003,789
                
                
                
                3,519,908
                
                
                
                904,604Gross
      Profit
                
                
                8,792,494
                
                
                
                6,376,924
                
                
                
                3,937,907
                
                
                
                2,609,070Operating
      ExpensesResearch
      & Development Expense
                
                
                30,699
                
                
                
                279,286
                
                
                
                17,528
                
                
                
                144,547Selling,
      general and administrative
                
                
                1,407,004
                
                
                
                1,381,388
                
                
                
                507,335
                
                
                
                753,152Income
      before other Income and (Expenses)
                
                
                7,354,791
                
                
                
                4,716,250
                
                
                
                3,413,044
                
                
                
                1,711,371Other
      Income and (Expenses)Interest
      Income (expense)
                
                
                (36,746
                )
                
                
                -
                
                
                
                (35,421
                )
                
                
                -Other  Income
                
                
                50,256
                
                
                
                2,898
                
                
                
                -
                
                
                
                2,580Other
      Expense
                
                
                (2,026
                )
                
                
                -
                
                
                
                (1,711
                )
                
                
                -Other
      Income and Expenses Total
      Other Income and (Expenses)
                
                
                11,484
                
                
                
                2,898
                
                
                
                (37,132
                )
                
                
                2,580Income
      Before Income Taxes (Benefits)
                
                
                7,366,275
                
                
                
                4,719,148
                
                
                
                3,375,912
                
                
                
                1,713,951Provision
      for Income Taxes (Benefits)
                
                
                343,725
                
                
                
                -
                
                
                
                153,481
                
                
                
                -Net
      Income
                
                $
                7,022,550
                
                
                $
                4,719,148
                
                
                $
                3,222,431
                
                
                $
                1,713,951Other
      Comprehensive IncomeForeign
      Currency Translation Adjustment
                
                
                2,911,681
                
                
                
                1,005,178
                
                
                
                487,241
                
                
                
                478,188Comprehensive
      Income
                
                $
                9,934,231
                
                
                $
                5,724,326
                
                
                $
                3,709,671
                
                
                $
                2,192,139Basic
      and Diluted Income per common shareBasic
                
                $
                0.16
                
                
                $
                0.13
                
                
                $
                0.07
                
                
                $
                0.04Diluted
                
                $
                0.14
                
                
                $
                0.13
                
                
                $
                0.06
                
                
                $
                0.04Weighted
      average common share outstandingBasic
                
                
                44,463,546
                
                
                
                35,866,849
                
                
                
                44,469,787
                
                
                
                40,309,204Diluted
                
                
                49,728,231
                
                
                
                36,995,845
                
                
                
                49,736,552
                
                
                
                43,659,377
  See
accompanying notes to the condensed consolidated financial
statements
 
 4
   CHINA YINGXIA INTERNATIONAL, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2007








Nine
      Months Ended June 30,2008
                
                
                2007(Unaudited)
                
                
                (Unaudited)Cash
      Flows From Operating Activities:Net
      income
                
                $
                7,022,550
                
                
                $
                4,719,148Adjustments
      to reconcile net income to net cashprovided
      by (used in) operating activities:Depreciation
      and amortization
                
                
                868,227
                
                
                
                522,675Amortization
      of stock-based compensation
                
                
                42,000
                
                
                
                -Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (3,803,576
                )
                
                
                (439,134
                )Inventory
                
                
                (2,850,453
                )
                
                
                (870,399
                )Tax
      Receivable
                
                
                8,205
                
                
                
                -Prepaid
      expenses
                
                
                (368
                )
                
                
                95,479Other
      receivable
                
                
                (270,815
                )
                
                
                (3,000,319
                )Advances
      to suppliers
                
                
                (476,461
                )
                
                
                (3,809,214
                )Accounts
      payable
                
                
                834,332
                
                
                
                1,273,018Unearned
      revenue
                
                
                33,082
                
                
                
                3,337Taxes
      payable
                
                
                274,660
                
                
                
                29,427Accrued
      expenses and other payables
                
                
                (192,399
                )
                
                
                228,153Cash
      provided by (used in) operating activities
                
                
                1,488,985
                
                
                
                (1,247,829
                )Cash
      Flows From Investing Activities:Purchase
      of property and equipment
                
                
                (983,330
                )
                
                
                (1,170,900
                )Purchase
      of intangible assets
                
                
                -
                
                
                
                (106,523
                )Additions
      to construction in process
                
                
                (310,306
                )
                
                
                (761,145
                )Investment
      advance to India branch
                
                
                (329,316
                )
                
                
                -Acquisition
      of subsidiaries
                
                
                (176,733
                )
                
                
                -Collection
      of short term loan
                
                
                2,194,774
                
                
                
                -Deposits
      on buildings and land
                
                
                (501,133
                )
                
                
                -Advances
      to affiliates
                
                
                -
                
                
                
                (6,657,858
                )Collections
      on loans/Advance to related parties
                
                
                1,942,951
                
                
                
                1,332,381Cash
      provided by (used in) investing activities
                
                
                1,836,908
                
                
                
                (7,364,044
                )Cash
      Flows From Financing Activities:Net
      proceeds from issuance of common stock
                
                
                -
                
                
                
                9,306,743Cash
      provided by financing activities
                
                
                -
                
                
                
                9,306,743Effect
      of exchange rate changes on cash and cash equivalents
                
                
                1,313,855
                
                
                
                729,164Increase
      in cash and cash equivalents
                
                
                4,639,748
                
                
                
                1,424,034Cash
      and Cash Equivalents - Beginning of period
                
                
                736,683
                
                
                
                77,867Cash
      and Cash Equivalents - End of period
                
                $
                5,376,431
                
                
                $
                1,501,901Supplemental
      disclosures of cash flow information:1
      Interest
      paid
                
                $
                169,003
                
                
                $
                -2
      Income
      Taxes paid
                
                $
                279,477
                
                
                $
                -Supplemental
      disclosure of non-cash transactions3
      Transfer
      Investment Advance to Property & Equipment
                
                $
                4,295,425
                
                
                $
                -
 See
accompanying notes to the condensed consolidated financial
statements


5


CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
 
  1.  ORGANIZATION
AND DESCRIPTION OF BUSINESS
 
 China
Yingxia International, Inc. (the “Company” or “China Yingxia”) was incorporated
in the State of Florida on May 6, 1996 and formerly known as Agronix, Inc.
(“Agronix”).
  On May
12, 2006, the Company entered into a share exchange agreement with Warner
Nutraceutical International, Inc. (‘WNI”), which is the parent company to Harbin
Yingxia Industrial Group Co, Ltd. ("Harbin Yingxia"). Pursuant to the share
exchange agreement, the Company issued to WNI shareholders 54,811,475 shares of
Common Stock, par value $0.001 per share, and 1,473,649.074 shares of Class A
Preferred Stock, par value $0.001 per share, of which each share is convertible
into five hundred (500) shares of the Company’s Common Stock. As a result of the
transactions, there was a change in control of the Company as the shareholders
of WNI became the majority shareholders of the Company.
  For
accounting purpose, the transaction was accounted for as a reverse acquisition
under the purchase method. Accordingly, WNI and its subsidiary are treated as
the continuing entity for accounting purposes. Following the merger, Agronix
filed a Certificate of Amendment and changed its name to China Yingxia
International, Inc.
  On July
21, 2006, the Company’s board of directors approved a reverse stock split on
both common stock and preferred stock.  Each 24.9 shares of the
Company's Common Stock and Class A Preferred Stock were converted into one (1)
share of Common Stock and one (1) share of Class A Preferred Stock,
respectively. Simultaneously, all of the preferred shares were converted into
common shares at ration of 1 to 500 and the preferred shares were
cancelled.
 
 The
Company operates its business through its wholly-owned subsidiary Harbin Yingxia
Industrial Group, Ltd. (" Harbin Yingxia"), a joint stock corporation organized
and existing under the laws of the People's Republic of China (“PRC”) in 1998.
Harbin Yingxia is engaged in the development, manufacture and distribution of
nutritional food products and dietary supplements.
 
 On
February 28, 2008, the Company signed a letter of Intent with Guangzhou Chichi
Network Technology Development Co., Ltd. (“Guangzhou Technology”), and Guangzhou
Chichi Network Supermarket Chain Co., Ltd. (“Guangzhou Supermarket Chain”),
together known as the Chichi Wang companies.  Subsequent to this
agreement, the Company spent RMB 1,200,000 (approximately US$171,000) to
finalize the acquisition on April 25, 2008. The Company intends to expand
its distribution channel, customer base and sales revenue by utilizing Chi Chi
Wang’s online network in Southern China.
 
 On
January 17, 2008, the Company has signed an agreement with Jinao Foods Shanghai
Ltd. and Jingao Fushang Trading Shanghai Ltd. to purchase six production lines,
together with the product brand name of “Kingland”, production technology,
enterprise patent, and existing market resources from Shanghai Jinao Food Co.,
Ltd. (Shanghai Jinao), a Sino-Australian joint-venture that produces soybean
based milk and yogurt, as well as the 25% share of the technology holding in the
soy yogurt production line in Harbin Yingxia held by an individual named Chengli
Xu. The total purchase price is RMB 30,000,000 yuan. The Company paid the
purchase price in three equal installments by January 31, 2008.
 
 The
Company further paid RMB 8,000,000 during the second quarter of 2008 as working
capital to be spent in advertizing, purchase of raw materials and existing
inventories, as well as the salaries for workers and staff members of Shanghai
Jinao.
 
 At the
end of June 2008, the company received the business license of Shanghai Jinao
Foods Co. Ltd. under the name of Ms Yingxia Jiao as the corporation
representative. Therefore the accounts of Shanghai Jinao have been consolidated
with Harbin Yingxia from the third quarter of 2008.
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information.  They may not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 2008
and 2007 are not necessarily indicative of the results that may be expected for
the full years. The information included in this Form 10-Q should be read in
conjunction with Management’s Discussion and Analysis and the financial
statements and notes to thereto included in the Company’s 2007 Form
10-KSB.
  2.   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
  Principles
of consolidation
 
 The
consolidated financial statements of China Yingxia International, Inc. include
the accounts of the Company and its wholly owned subsidiaries, WNI and Harbin
Yingxia.  All significant inter-company balances and transactions are
eliminated in consolidation.
  6
   CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
   2.   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Basis
of presentation
  The
Company’s condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America (“US GAAP”). This basis of accounting differs in certain material
respects from that used for the preparation of the books of account of the
Company’s principal subsidiary, which are prepared in accordance with the
accounting principles and the relevant financial regulations applicable to
enterprises with limited liabilities established in the PRC, the accounting
standards used in the places of their domicile.  The accompanying
consolidated financial statements reflect necessary adjustments not recorded in
the books of account of the Company’s subsidiary to present them in conformity
with US GAAP.
  Use
of estimates
 
 In
preparing the financial statements in conformity with US GAAP, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting year. Significant estimates, required by
management, include the recoverability of long-lived assets and the valuation of
inventories.  Actual results could differ from those
estimates.
 
 Cash
and cash equivalents
 
 For
purposes of the statement of cash flow, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
 
 Accounts
receivables
 
 Accounts
receivables are stated at net realizable value. This value includes an
appropriate allowance for estimated uncollectible accounts. The allowance is
calculated based upon the evaluation and the level of past due accounts and the
relationship with and the economic status of the customers.  The
allowance for doubtful accounts was $124,884 as of September 30,
2008.  Although accounts receivable stays high as of the end of the
third quarter, it is proportionally lower than that of the second quarter
because the sales are higher.  The Company maintains a large balance
of accounts receivable from sales of seedlings due to the nature of its
business, and the collections on these accounts receivable has been generally
good. Except for the above reserved allowance, the Company has not encountered
any uncollected accounts receivable.
  Inventories
 
 Inventories
are composed of raw materials and packing materials for manufacturing, work in
process, and finished goods. Inventories are valued at the lower of cost or
market with cost determined on a first-in first-out basis. Management compares
the cost of inventory with the market value and an allowance is made for writing
down the inventory to its market value, if lower than cost.
 
 Property
and equipment
 
 Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives as
below:
  Category
                Estimated
      Useful LivesMachinery
      & Equipment
                4-5    yearsAutomobiles
                7       yearsBuildings
                15-40
      years
 
 Advance
to suppliers
 
 Advance
to suppliers represent the payments made and recorded in advance for goods and
services received. The Company makes advances to certain vendors’ inventory
purchases, construction projects and equipment purchases. The advance to
suppliers totaled $1,910,519 as of September 30, 2008.
  7
  CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
   2.   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Impairment
of long-lived assets
  Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
  Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset.   If the carrying amount
of an asset exceeds its estimated undiscounted future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the assets.  Fair value is generally
determined using the asset’s expected future discounted cash flows or market
value, if readily determinable.
 
 Goodwill
  Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets of the business acquired. Goodwill
is not subject to amortization, but is generally subject to an annual assessment
for impairment, applying a fair-value based test. Goodwill is also tested in
between annual test dates if events or circumstances indicate that the carrying
amount of goodwill exceeds its implied fair value.
  Income
taxes
 
 The
Company accounts for income tax under the provisions of SFAS No.109 "Accounting
for Income Taxes", which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of the events that have
been included in the financial statements or tax returns.  Deferred
income taxes are recognized for all significant temporary differences between
tax and financial statements bases of assets and
liabilities.  Valuation allowances are established against net
deferred tax assets when it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
 
 The
Company does not have any long-term deferred tax assets or liabilities in China
that will exist once the tax holiday (See Note 11) expires. The Company does not
have any significant deferred tax asset or liabilities that relate to tax
jurisdictions not covered by the tax holiday.
 
 Revenue
recognition
 
 The
Company's revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured.
 
 Cost
of revenues
  Cost of
revenues consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products.  Write-down of inventory to lower of cost or market
is also recorded in cost of revenues.
 
 Stock-based
compensation
 
 Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
“Share-Based Payments,” which establishes the accounting for employee
stock-based awards. Under the provisions of SFAS No. 123(R), stock-based
compensation is measured at the grant date, based on the calculated fair value
of the award. And it is recognized as an expense over the requisite employee
service period (generally the vesting period of the grant).
 
 The
Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”.  The fair value of the option
issued is used to measure the transaction, as this is more reliable than the
fair value of the services received.  Fair value is measured as the
value of the Company’s common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty’s
performance is complete.  The fair value of the equity instrument is
charged directly to compensation expense and additional paid-in
capital.
  8
  CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
   2.   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Concentration
of credit risk
 
 Financial
instruments that potentially subject the Company to concentration of credit risk
consist primarily of accounts receivable and other receivables.  The
Company does not require collateral or other security to support these
receivables.  The Company conducts periodic reviews of its clients'
financial condition and customer payment practices to minimize collection risk
on accounts receivable.
 
 The
operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
 
 Fair
value of financial instruments
 
 The
carrying amounts of certain financial instruments, including cash and cash
equivalents, accounts receivable, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable approximate fair
value due to the short-term nature of these items.  The carrying
amounts of bank borrowings approximate the fair value based on the Company's
expected borrowing rate for debt with similar remaining maturities and
comparable risk.
 
 Foreign
currency translation
  The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income". Gains and losses resulting from foreign currency
transactions are included in accumulated other comprehensive income.  There
is no significant fluctuation in exchange rate for the conversion of RMB to USD
after the balance sheet date.
  Research
and Development
 
 Research
and development costs are related primarily to the Company developing its
intellectual property. Research and development costs are expenses as incurred.
The costs of material and equipment that are acquired or constructed for
research and development activities and have alternative future uses are
classified as plant and equipment and depreciated over their estimated useful
lives.
 
 Start-up
Costs
 
 In
accordance with the American Institute of Certified Public Accountants Statement
of Position 98-5, “Reporting on the Costs of Start-up Activities”, the Company
expenses all costs incurred in connection with the start-up and organization of
the Company.
 
 Earnings
per share
 
 Basic
earnings per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
There are 5,362,565 warrants outstanding for dilution purposes as of September
30, 2008
  9
  CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
  2.   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 New
accounting pronouncements
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective of FAS 159 is to provide
opportunities to mitigate volatility in reported earnings caused by  
measuring related assets and liabilities differently without having to
apply hedge accounting provisions. FAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets
and liabilities. SFAS 159 will be effective in the first quarter of fiscal 2009.
The Company is evaluating the impact that this statement will have on its
consolidated financial   statements.
  In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed. The
Company has adopted FSP EITF 07-3 and expensed the research and development
as it incurred.
 
 In
December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
non-controlling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
has not determined the effect that the application of SFAS 160 will have on its
consolidated financial statements.
 
 In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business Combinations, was
issued. SFAS No. 141R replaces SFAS No. 141, Business Combinations.SFAS
141R retains the fundamental requirements in SFAS 141 that the acquisition
method of accounting (which SFAS 141 called the purchase method) be used for
all business combinations and for an acquirer to be identified for each business
combination. SFAS 141R requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any non-controlling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. This replaces SFAS 141’s cost-allocation process, which required the
cost of an acquisition to be allocated to the individual assets acquired
and liabilities assumed based on their estimated fair values. SFAS 141R also
requires the acquirer in a business combination achieved in stages (sometimes
referred to as a step acquisition) to recognize the identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, at the
full amounts of their fair values (or other amounts determined in accordance
with SFAS 141R). SFAS 141R applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. An entity may not
apply it before that date. The Company has adopted SFAS No.
141R.
 
 In March
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 161, Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133, which requires additional
disclosures about the objectives of the derivative instruments and hedging
activities, the method of accounting for such instruments under SFAS
No. 133 and its related interpretations, and a tabular disclosure of the
effects of such instruments and related hedged items on our financial position,
financial performance, and cash flows. SFAS No. 161 is effective beginning
January 1, 2009. We are currently assessing the potential impact that
adoption of SFAS No. 161 may have on our financial statements.
 
 In June
2008, the FASB issued FASB Staff Position on Emerging Issues Task Force Issue
03-6, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
states that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share (“EPS”) pursuant to the two-class method. FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period EPS data
presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with
the provisions of FSP EITF 03-6-1. Early application is not permitted.
Management is currently evaluating the impact FSP EITF 03-6-1 will have on the
Company’s EPS calculations.
  10
  CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
   3.   INVENTORY
  September
      30, 2008
                  
                  
                  December
      31, 2007Packing
      Materials
                  
                  $
                  144,864
                  
                  
                  $
                  102,707Raw
      Materials
                  
                  
                  5,281,653
                  
                  
                  
                  2,660,601Work
      in process
                  
                  $
                  321,205
                  
                  
                  
                  210,864Finished
      Goods
                  
                  
                  2,629,865
                  
                  
                  
                  2,552,963Total
                  
                  $
                  8,377,587
                  
                  
                  $
                  5,527,135
 
 No
allowance for inventory was made for the nine months ended September 30, 2008
and December 31, 2007.
  4.   PROPERTY,
PLANT AND EQUIPMENT, NET
 
 Property,
plant and equipment consist of the following at September 30, 2008 and December
31, 2007:
 
 September
      30, 2008
                    
                    
                    December
      31, 2007Machinery
      & Equipment
                    
                    $
                    7,936,730
                    
                    
                    $
                    2,906,024Automobiles
                    
                    
                    435,161
                    
                    
                    
                    405,054Buildings
                    
                    
                    16,118,814
                    
                    
                    
                    13,358,530Sub
      total For China  Yingxia
                    
                    
                    24,490,705
                    
                    
                    
                    16,669,608Less:
      Accumulated Depreciation
                    
                    
                    (4,493,135
                    )
                    
                    
                    (3,371,764
                    )Construction
      in progress
                    
                    
                    2,528,358
                    
                    
                    
                    2,218,052Total
      property, plant & Equipment, net
                    
                    $
                    22,525,928
                    
                    
                    $
                    15,515,896
 
 Depreciation
expense for the nine months ended September 30, 2008 and 2007 was $846,523 and
$516,480, respectively.
 
 5.  
INTANGIBLE ASSETS
 
 Intangible
assets include land use right and patent right.
 
 Land use
right – all land in the People’s Republic of China is government owned and
cannot be sold to any individual or company. Instead, the government grants the
user a “Land use right” (the Right) to use the land. The Company has the right
to use the land for 50 years and amortized the Right on a straight-line basis
over 50 years.
 
 Patent –
capitalized patent costs represent the acquisition costs paid for exclusive use
of the patented organic rice seeds.  Capitalized patent costs are
amortized on a straight method over the related patent term of 15
years.
 
 Net
intangible assets at September 30, 2008 and December 31, 2007 were as
follows:
  September
      30, 2008
                  
                  
                  December
      31, 2007Land
      use right
                  
                  $
                  455,808
                  
                  
                  $
                  424,271Patent
                  
                  
                  294,555
                  
                  
                  
                  274,175Chichi
      brand name
                  
                  
                  50,101Less:
      Accumulated amortization
                  
                  
                  (
      56,339)
                  
                  
                  
                  (31,661)Intangible
      assets, net
                  
                  $
                  744,125
                  
                  
                  $
                  666,785
 
 Amortization
expense for the nine months ended September 30, 2008 and 2007 amounted to
$21,704 and $6,196, respectively.
 
 6.  OTHER
RECEIVABLES
 
 Other
receivables typically represent cash advances to employees and sales
representatives for normal business purposes. As of September 30, 2008 the
Company has other receivables in the amount of $2,447,531. The biggest component
of other receivables is $1,413,865 for short term loans to the new soy yogurt
shops in Harbin area for their initial capital needs. They are expected to be
collect by the end of the year.
 
 7.  ADVANCE
TO SUPPLIES
 
 The
advances to suppliers at the end of the quarter were $1,910,519. These are
prepayments to the suppliers who will sell to the company raw materials and
other products at late stages by contracts. This quarter the amount mainly
consists of advance payments to farmers who will supply the company grain
products by the end of the year.
  8.
RELATED PARTY LOANS
 
 As of
September 30, 2008, the Company has loans receivable from related parties in the
amount of $94,600. All related party loans are provided to the affiliated retail
stores or companies to facilitate the initial establishment of their businesses
for selling the Company’s products. These loans are interest free and unsecured
and are due upon demand.
  11
  CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
  9.  DEPOSITS
ON BUILDINGS AND LAND
 
 The
Company made separate deposits in the total amount of $1,564,042 on one office
space in Beijing and a piece of land in Anhui Province it intends to purchase.
All purchases are evidenced by purchase agreements and the transactions were not
finalized as of September 30, 2008. Once the Company completes the title
transfers, the deposits will be reclassified to Property, Plant and Equipment
account.
 
 10.
INVESTMENT ADVANCE
 
 On
January 23, 2008, the Company registered ‘China Xianhe India Private Limited” in
New Deli, India. RMB 2,000,000 was made an advance as initial start up cost.
.. The Company intends to expand its dietary supplement products into Indian
market in the next several months.
 
 As of
September 30, 2008, this Indian subsidiary has not generated sales yet. It has
received the license of direct sales from the Indian authorities and is
currently marketing Yingxia products and dealing with the logistics of shipping
the products to India.
 
 11.
GOODWILL
 
 Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets of the 100% interest in Guangzhou
Chichi Network Companies and Shanghai Jinao acquired.  The following
represents the total goodwill of these two acquisitions as of September 30,
2008
  Goodwill
      - Guangzhou Chichi Network Companies, Ltd
                  
                  $
                  58,032Goodwill
      - Shanghai Jinao Food Co. Ltd
                  
                  $
                  361,690Goodwill
                  
                  $
                  419,722
  12.  INCOME
TAXES
 
 The
Company is governed by the Income Tax Law of the People’s Republic of China
concerning the private-run enterprises, which are subject to tax at a statutory
rate of 25% and were, until January 2008, subject to tax at a statutory rate of
33% (30% state income tax plus 3% local income tax) on its taxable
income.
 
 In 2006,
the Company obtained its foreign-owned entity (“WOFE”) status upon completion of
the reverse acquisition. According to the Provisional Regulations of the
People’s Republic of China on Income Tax, the Document of Reductions and
Exemptions of Income Tax for the Company has been approved by the local tax
bureau and the Management Regulation of Harbin Economic and Technological
Development Zone for the reporting period. The Company was granted the status of
WOFE and therefore is exempt from income tax from January 1, 2004 through
December 31, 2007. The Company has also been approved to have its tax rate
reduced by 50% from January 1, 2008 to December 31, 2010.
 
 On
March 16, 2007, the National People’s Congress of China approved the
Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”),
which is effective from January 1, 2008. Under the new CIT law, the
corporate income tax rate applicable to all Companies, including both domestic
companies and foreign-invested companies, is 25%, replacing the prior
applicable tax rate of 33%. However, companies previously approved for any
income holiday will not be subject to the new enacted tax rate until the holiday
runs out.
 
 To
continue with its WOFE tax holiday of tax rate reduction by 50% for three years,
Harbin Yingxia is subject to 12.5% of income tax rate from January 1, 2008 to
December 31, 2010.  Shanghai Jiao enjoys a two-year tax exemption through
December 31, 2009, and enjoys an additional 50% income tax reduction from
January 1, 2010 to December 31, 2012.. Guangzhou Chichi Network Companies pays
normal corporate income tax of 25%. For the nine months ended September 30,
2008, the Company has income tax provision of $343,725
  One of
our product categories, cactus raw materials, is also exempted from corporate
income tax and value-added tax.
 
 13.
STATUTORY RESERVES
 
 Pursuant
to the laws of People’s Republic of China, the Company is required to maintain
certain statutory reserves by appropriating from its after-tax profit before
declaration or payment of dividends. The statutory reserves include surplus
reserve fund, common welfare fund and the enterprise fund. These statutory
reserves represent restricted retained earnings.
  12
  CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
  13.
STATUTORY RESERVES (CONTINUED)
  Surplus reserve
fund
 
 The
Company is generally required to transfer 10% of its net income, as determined
under PRC accounting rules and regulations, to a statutory surplus reserve fund
until such reserve balance reaches 50% of the Company’s registered capital.
However, the laws exclude the companies owned by foreign entities. The Company’s
operating subsidiary, Harbin Yingxia, became a foreign owned entity in 2007 upon
acquisition by the Company. Therefore, it is exempted from making any more
mandatory reserves. It is at the management’s discretion whether to make any
additional reserves.  For the nine months end September 30, 2008, the
Company elected not to make any additional funds to this reserve.
 
 The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
 
 Common welfare
fund
 
 The
Company is required to transfer 5% to 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to the statutory
common welfare fund. Making any additional common welfare reserve becomes
voluntary for the Company because of its foreign entity status. For the nine
months ended September 30, 2008, the Company elected not to make any additional
funds to this reserve.
 
 This fund
can only be utilized on capital items for the collective benefit of the Company’
s employees, such as construction of dormitories, cafeteria facilities, and
other staff welfare facilities. This fund is non-distributable other than upon
liquidation.
  Enterprise
fund
 
 The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expend on production and operation of the business. No minimum
contribution is required and the Company did not make any contribution to this
fund during the nine months ended September 30, 2008
 
 The
following represents the accumulated balances of the appropriations as of
September 30, 2008:
  Surplus
      Reserve
                  
                  $
                  600,975Common
      Welfare Reserve
                  
                  
                  300,488Total
                  
                  $
                  901,463
 
  14.
SEGMENT REPORTING
 
 The
company operates in one operating segment in accordance with the provisions of
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information”. Although the Company develops, manufactures and commercializes
various products such as nutritional food products, dietary supplements,
cosmetic products, raw cactus plants and personal care products etc., the
Company’s chief operating decision maker reviews and evaluates one set of
combined financial information deciding how to allocate resources and in
assessing performance.
 
 For the
nine months ended September 30, 2008 and 2007, the Company’s sales revenue from
various products are as follows:
 
 September
      30, 2008
                      
                      
                      September
      30, 2007Nutritional
      Food Products
                      
                      $
                      3,445,742
                      
                      
                      $
                      1,624,606Dietary
      Supplements
                      
                      
                      2,639,100
                      
                      
                      
                      1,455,460Cosmetic
      Products
                      
                      
                      233,064
                      
                      
                      
                      475,997Cactus
      products
                      
                      
                      7,933,170
                      
                      
                      
                      4,596,230Personal
      Care Products & others
                      
                      
                      226,452
                      
                      
                      
                      2,230,397Chichi
      Network Companies
                      
                      
                      738,881
                      
                      
                      
                      --Shanghai
      Jinao Food Co.
                      
                      
                      768,901Total
                      
                      $
                      15,985,310
                      
                      
                      $
                      10,382,692
  All of
the Company’s revenue was generated in China. The Company’s sales in foreign
nations represent pilot programs that as of yet have not become full-scale
operations.
  13
  CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
  15. STOCKHOLDERS’
EQUITY
 
 A.
Issuance of Common
Stock
 
 July
2007 Private Placement
 
 On July
16, 2007, the Company entered into a stock subscription and warrant agreement,
(“Subscription Agreement”), with three (3) accredited investors. Pursuant to the
Subscription Agreement, the investors purchased 1,000,000 units, each unit
consisting of (a) two shares of common stock and (b) one common stock purchase
warrant, at a purchase price of $2.00 per unit. The Company received net
proceeds of $1,980,000 in connection with this private placement.
 
 With the
warrants attached to the units sold in the private placement, the investors are
entitled to purchase an aggregate of 1,000,000 shares of common stock at an
exercise price of $1.50 per share. All these warrants are exercisable for five
years from the effective date of registration statement.
 
 Upon
completion of the placement, the Company incurred approximately $20,000 in legal
and other expenses.
 
 August
2007 Private Placement
 
 On August
9, 2007, the Company completed another private placement of its securities to
accredited investors pursuant to Regulation D under the Securities Act of 1933,
as amended. The Company entered into a stock subscription agreement and warrant
agreement (“Subscription Agreement”), with twenty (20) accredited investors.
Pursuant to the Subscription Agreement, the investors purchased 34.90052 units,
each unit consisting of (a) 250,000 shares of common stock and (b) a 5-year
stock purchase warrant to purchase 125,000 shares of common stock exercisable at
$2.00 per share. The units were sold for a price of $250,000 per unit, yielding
gross proceeds of $8,725,130 from the sale of the units. The Company paid fees
and commissions in the aggregate amount of $1,398,387 in connection with this
offering.
 
 B.
Warrants
 
 Upon the
execution of the both Subscription Agreements, the Company issued to the
investors (i) 1,000,000 warrants under July 2007 Private Placement and
(ii)4,362,565 warrants under August 2007 Private Placement. All warrants do not
contain a cashless exercise provision. Accordingly, in accordance with EITF
00-19, the warrants are classified as equity.
  
 The fair
value of the warrants was calculated using the Black-Scholes options pricing
model using the following assumptions: Volatility 63%, risk free interest rate
5.050% for July 2007 Placement and 4.790% for August 2007 Placement, and
expected term of 5 years.
 
 Following
is a summary of the status of warrants outstanding as of September 30,
2008:
 
 Outstanding
      WarrantsExercise
      Price
                    
                    Number
                    Average
      Remaining Life (In years)$
                    1.50
                    
                    1,000,000
                    3.75$
                    2.00
                    
                    4,362,565
                    3.835,362,565
   14
   CHINA
YINGXIA INTERNATIONAL INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
  14. STOCKHOLDERS’ EQUITY
(CONTINUED)
  C.
Stock issued for
consulting services
 
 In 2007,
105,800 shares of common stock were issued as full compensation to several
consultants for certain consulting services provided to the Company.  An
amount of $212,744, which represents the aggregate fair value of the shares
issued in excess of par value, was included in additional paid-in capital. The
full amount was expensed and included in the Statements of Income as a part of
general and administrative expenses.
 
 On
February 26, 2008, 40,000 shares of common stock were issued as full
compensation to certain consultants for consulting services provided to the
Company. An amount of $41,960, which represents the aggregate fair value of the
shares issued in excess of par value, was included in additional paid-in
capital. The full amount was amortized and included in the Statements of Income
as a part of general and administrative expenses.
 
 As a
result of these offerings, the Company issued a total of 10,840,930 shares of
its common stock. As of September 30, 2008, there are 44,469,787 shares of
common stock outstanding and no preferred stock.
 
 15.
COMMITMENTS AND CONTINGENCIES
 
 The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by 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.
 
 The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency outside of the
PRC. We receive substantially all of our revenues in Renminbi. Under existing
PRC foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the
PRC State Administration of Foreign Exchange by complying with certain
procedural requirements.
  15
  Item
2.  Management’s Discussion and Analysis or Plan of Operation.
  The
following discussion should be read in conjunction with the Financial Statements
and Notes thereto appearing elsewhere in this Form 10-Q.
  Safe Harbor Regarding
Forward-Looking Statements
  The
following discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 relating to future events or our future performance. Actual
results may materially differ from those projected in the forward-looking
statements as a result of certain risks and uncertainties set forth in this
prospectus. Although management believes that the assumptions made and
expectations reflected in the forward-looking statements are reasonable, there
is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual results will not be different from expectations expressed
in this report.
 
 Overview of
Operations
 
 The
company has achieved substantial growths in revenue and net income this quarter
as compared with the same period last year. Our growth was driven by 1. The
continued expansion of our network of franchisee owned retail stores all across
the country, and 2. Successful execution of two acquisitions carried out during
the first and second quarters.
 
 We  believe
the fact that we are growing year over year both for the nine months and the
three months periods show that our production and growth strategies are
working.
 
 Our
general production strategy is to grow our revenue year over year at a healthy
and steady rate, at the same time rationalizing our product
portfolio.
 
 Our
growth strategies are to expand the chain of our franchisee owned retail stores,
and at the same time to acquire other companies to break geographical barriers
into new markets and to gain access to better products and
technologies.
 
 We
classify the chain of franchisee owned retail stores into four levels: Order
size over $30,000 makes the store provincial level store. $22,400 municipal
level, $15,000 county level, and $5,910 trial stores. A trial store does not
have physical store space and is usually an individual selling from his/her
home. All store must pay a one time fee to register with the company, and
reorder in every three months to keep the status as a franchisee. The company
provides incentives, such as rebates to large orders.
 
 Provincial
stores are mostly stand alone shops or a counter in major supermarkets. Most of
the stores open during the third quarter in Harbin are provincial stores. The
stores opened in other cities are mostly county level and trial
stores.
    Our focus
is on the nutritional food segment, that are more value-added and have larger
market potentials, based on the research and market surveys done by reputable
organizations.
  16
 
 Our
operations have a pattern of seasonality.  Usually the best quarter in
terms of sales is the fourth quarter., when nutritional foods and dietary
supplements sell well. The second quarter is the second best quarter, mostly
because there are two months in the quarter that the cacti are
harvested.  The third and fourth quarters have only month, whereas the
first quarter has almost no cactus harvest. Cactus is the largest segment of our
products in terms of sales. Therefore the first quarter is the slowest
quarter.
  Results of
Operations
  Revenue
 
 For the
nine months ended September 30, 2008 and 2007
 
 The
Company generated $15,985,310 in sales for the nine months ended
September 30, 2008, an increase of $5,604,597 or 53.99% as compared to
the revenue of $10,380,713 for the nine months ended September 30,
2007.
 
 The major
reasons for the growth are: We added on a total number of 419 stores to our
network of franchisee owned retail stores during the period while at the same
time same store order sizes went up. In 2007 the average order for a store was
$1,925.19. In 2008 by the end of Q3, it was $3,831.33. All the stores are
required to place at least one order in every three months.
 We are
very close to reaching our target of adding 500 new stores this
year.
 
 We also
acquired two companies, Guangzhou Chichi Network Companies and Shanghai Jinao
Food Co. Ltd. during the first and second quarter.
 
 
 For the
three months ended September 30, 2008 and 2007
 
 For the
three months ended September 30, 2008, the sales totaled $7,457,814, an increase
of $3,944,140, or 112.25% as compared to the net sales of $3,513,674 for the
three months ended September 30, 2007.
 
 Both new
subsidiaries started to contribute their sales to China Yingxia, because the
accounts of Shanghai Jinao that have been consolidated into Harbin Yingxia and
Guangzhou Chichi was for the full three months of the third quarter instead of
only two months of sales consolidated into Harbin Yingxia in the second
quarter.
 
 The
number of franchisee owned retail stores increased during the third quarter is
146. Please see the table below for their distribution and contribution to the
total sales of the Company.
 
 During
the third quarter, the Company continues to expand its distribution network and
has created 146 new franchisees stores. The total sales contribution of these
new stores in the quarter was $571,359. The distribution of the new stores is as
follows:
 
 Region
                  City
                  #
      of stores
                  Revenue
      contribution in Q3
                  Note
                    P-Provincial
      level
                    M-City
      level
                    C-County
      levelNortheast
                  
                  78
                  $304,986Harbin
                  30
                  
                  PDaqing
                  17
                  
                  CQiqihar
                  13
                  
                  CMudanjiang
                  10
                  
                  CSuihua
                  8
                  
                  CNorthern
      China
                  
                  7
                  $27,326
                  CBeijing
                  7
                  
                  CEastern
      China
                  
                  13
                  $52,167
                  CShanghai
                  10
                  
                  CHefei
                  3
                  
                  CSouthern
      China
                  
                  27
                  $106,819
                  CGuangzhou
                  17
                  
                  CShenzhen
                  10
                  
                  CNorthwest
                  
                  3
                  $12,575
                  CLanzhou
                  3
                  
                  CSouthwest
                  
                  13
                  $49,683
                  CChongqing
                  13
                  
                  CSouthcentral
                  
                  5
                  $17,802
                  CWuhan
                  5
                  
                  CTotal
                  
                  146
                  $571,359
                  C
 
 17
  A
breakdown of sales by product categories and as a percentage of total sales, as
well as their respective gross margins for both first nine months of 2008 and
the third quarter of 2008 are listed below:
  Jan.
      to Sept 2008
                                    Revenue
                                  
                                  
                                  Percentage
      of Revenue
                                  
                                  
                                  Gross
      MarginsNutritional
      Foods
                                  
                                  $
                                  3,445,742
                                  
                                  
                                  
                                  21.56
                                  %
                                  
                                  
                                  50.38
                                  %Dietary
      Supplements
                                  
                                  $
                                  2,639,100
                                  
                                  
                                  
                                  16.51
                                  %
                                  
                                  
                                  64.85
                                  %Cosmetic
      Products
                                  
                                  $
                                  233,064
                                  
                                  
                                  
                                  1.46
                                  %
                                  
                                  
                                  68.78
                                  %Cactus
      Materials
                                  
                                  $
                                  7,933,170
                                  
                                  
                                  
                                  49.63
                                  %
                                  
                                  
                                  57.60
                                  %Personal
      Care and Other Products
                                  
                                  $
                                  226,452
                                  
                                  
                                  
                                  1.42
                                  %
                                  
                                  
                                  69.72
                                  %Chichi
      Network Companies
                                  
                                  $
                                  738,881
                                  
                                  
                                  
                                  4.62
                                  %
                                  
                                  
                                  30.61
                                  %Shanghai
      Jinao Food Co.
                                  
                                  $
                                  768,901
                                  
                                  
                                  
                                  4.81
                                  %
                                  
                                  
                                  30.04
                                  %Total
                                  
                                  $
                                  15,985,310
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  
                                  55.00%
                                  %
 
 
 Jul.-Sept.
      2008
                                Revenue
                              
                              
                              Percentage
      of Revenue
                              
                              
                              Gross
      MarginsNutritional
      Foods
                              
                              $
                              1,316,467
                              
                              
                              
                              17.65
                              %
                              
                              
                              49.92
                              %Dietary
      Supplements
                              
                              $
                              813,213
                              
                              
                              
                              10.90
                              %
                              
                              
                              62.75
                              %Cosmetic
      Products
                              
                              $
                              78,695
                              
                              
                              
                              1.06
                              %
                              
                              
                              70.33
                              %Cactus
      Materials
                              
                              $
                              3,674,173
                              
                              
                              
                              49.27
                              %
                              
                              
                              59.26
                              %Personal
      Care and Other Products
                              
                              $
                              70,512
                              
                              
                              
                              0.95
                              %
                              
                              
                              71.30
                              %Chichi
      Network Companies
                              
                              $
                              737,424
                              
                              
                              
                              9.89
                              %
                              
                              
                              38.00
                              %Shanghai
      Jinao Food Co.
                              
                              $
                              767,330
                              
                              
                              
                              10.29
                              %
                              
                              
                              30.04
                              %Total
                              
                              $
                              7,457,814
                              
                              
                              
                              100
                              %
                              
                              
                              56.16
                              %
  Within
the two of the major categories:
 
 Nutritional
      Foods
                      
                      Jul.
      – Sept. 2008
                        Revenue
                      
                      
                      Percentage
      of Nutritional Food SalesOrganic
      Rice
                      
                      $
                      650,613
                      
                      
                      
                      49.42
                      %Soybean
      Milk and Yogurt
                      
                      $
                      321,516
                      
                      
                      
                      24.42
                      %Long
      Gu Millet
                      
                      $
                      29,339
                      
                      
                      
                      2.23
                      %
 Dietary
      Supplements
                      
                      Jul.
      – Sept. 2008
                        Revenue
                      
                      
                      Percentage
      of Dietary Supplements SalesAlpha
      Roots
                      
                      $
                      302,396
                      
                      
                      
                      37.19
                      %Cactus
      and Other Herbal Tablets
                      
                      $
                      123,366
                      
                      
                      
                      15.17
                      %Wild
      Herbal Nutritional Pills
                      
                      $
                      111,570
                      
                      
                      
                      13.72
                      %
  Besides
the seasonality discussed above, the trends in the sales are: 1. Cactus products
remain the largest segment of the revenue, at about 50% of the total. The
nutritional foods come as the second, with a share of 25% - 30%. Because the
newly acquired Shanghai Jinao Foods Co. produces soybean milk and yogurt, its
revenue belongs to the nutritional food sales. The third major product category
is the dietary supplements. Its share of the sales is between 10% to
20%.
  Cost
of Sales
  The cost
of sales was $7,192,816 for the nine months ended September 30,
2008, an increase of $3,189,027 or 79.65% as compared
to the cost of sales of $4,003,789 for the nine months ended September 30,
2007.
 
 For the
three months ended September 30, 2008 and 2007
 
 For the
three months ended September 30, 2008, the cost of sales increased by
$2,615,304, or 289.11%, as compared to the cost of sales of $904,604 for the
three months ended September 30, 2007.
 
 These
increases are larger than the percentage increases in revenues. This shows we
face margin pressure due to increasing raw material costs, such as fertilizers
and energy costs, such as gasoline for our transportation vehicles. We have long
term contracts with local farmers who supply the company with agricultural raw
materials at pre-negotiated prices. We also grow many of our raw materials by
ourselves.
  Total
Operating Expenses
 
 For the
nine months ended September 30, 2008 and 2007
  18
 
 Total
operating  expenses were $1,437,703 for the nine months ended September 30,
2008,  a decrease  of  $222,971 or 13.43% as  compared to
total operating expenses of  $1,660,674 for the nine months 
ended  September 30, 2007.  These decreases are the results of 1. The
company has entered a slow phase of R & D activities and limited the related
expenses. The company currently has enough new products to focus on their sales.
2. of the company’s streamlining its management expenses and professional
services fees.
 
 For the
three months ended September 30, 2008 and 2007
 
 For the
three months ended September 30, 2007 and 2008, the operating expense also
dropped significantly, by $372,836, or 41.53%, from $897,699 in 2007 to
$524,863. The reasons for this decline are similar to those for the nine-month
period as outlined above.
 
 Net
Income
 
 Net
income for the nine months ended September 30, 2008 increased by $2,303,402 or
48.81% to $7,022,550 from $4,719,148 for the nine months ended September 30,
2007. For the three months ended September 2008, net income also increased by
$1,508,480, or 88.01%, from $1,713,951 in 2007 to $3,222,431 in 2008. The
increases in net income are the direct results of increase in
revenue.
 
 Liquidity and Capital
Resources
 
 As of
September 30, 2008, the Company had cash and cash equivalents of $5,376,431, as
compared to $736,683 at December 31, 2007. As of September 30, 2008, the Company
had working capital of $21,163,045, as compared to $ 14,765,981 as ofDecember 31,
2007.
 
 Net cash
provided by the operating activities totaled $1,488,985 for the nine months
ended September 30, 2008, as compared to cash used by operating activities of
$1,247,829 for the nine months ended September 30, 2007. The net cash
provide in operations was largely affected by the
increase in net income.
 
 Net cash
provided by investing activities totaled $1,836,908 for the nine months ended
September 30, 2008 as compared to net cash used of $7,364,044 for the nine
months ended September 30, 2007. During the nine month period ended September
30, 2008, we were able to collect short term loans of $2,194,774 and loans to
related parties of $1,942,951. These collections are related to the short term
loans we made to the farmers of our Hulan production base to finance the
construction of well sinkers during the drought in 2007.
 
 These
collections offset purchase of property and equipment, investment advance to
support India operations, Company’s working capital, deposits on buildings and
land along with investment made toward the development of our business in
southern China with Chichi Wang companies.
 
 On
January 23, 2008, the Company registered ‘China Xianhe India Private Limited” in
New Deli, India.   RMB2,000,000 (approximately US$283,322) was
made an advance as initial start up cost as of June 30, 2008.  The
Company is expected to expand its dietary supplement products into Indian market
in November of 2008. It has received the business license of direct sales from
Indian authorities and is currently organizing logistics for shipping the
products to India
 
 Deposits
on buildings and land of $1,564,042 were related to our sales office in Beijing
along with land in Anhui. The office in Harbin has completed with the title
transferred under China Yingxia and has been reclassified into Property, Plant
and Equipment, as of the end of September 30, 2008.
 
 Net cash
used or provided in financing activities were nil for the nine months ended
September 30, 2008 as compared to $9,306,743 provided for the nine months ended
September 30, 2007.
 
 19
 
 As of
September 30, 2008, the Company has loans receivable from related parties in the
amount of $94,600. All related party loans are provided to the affiliated retail
stores or companies to facilitate the initial establishment of their businesses
for selling the Company’s products. These loans are interest free and unsecured
and are due upon demand. As many stores are closing down and turned into
online stores, the loans have not increased significantly compared with the
second quarter of 2008, even when the number of new stores has
increased.
 
 The
Company made separate deposits in the total amount of $1,564,042 on one office
space in Beijing and a piece of land in Anhui Province it intends to purchase.
All purchases are evidenced by purchase agreements and the transactions were not
finalized as of September 30, 2008. Once the Company completes the title
transfers, the deposits will be reclassified to Property, Plant and Equipment
account.


Item
3.  Quantitative and Qualitative Disclosures About Market Risk




The
Company is subject to certain market risks, including changes in interest rates
and currency exchange rates.  The Company does not undertake any specific
actions to limit those exposures.




Item
4T. Evaluation
of Disclosure Controls and Procedures




Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”),
the Company carried out an evaluation, with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”) and Chief
Accounting Officer (“CAO”) (the Company’s principal financial and accounting
officer), of the effectiveness of the Company’s disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this report. Based upon that evaluation, the
Company’s CEO and CAO concluded that the Company’s disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that the Company files or submits under the Exchange
Act, is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to the Company’s management, including the Company’s CEO and
CAO, as appropriate, to allow timely decisions regarding required
disclosure.




Management’s
Report on Internal Controls over Financial Reporting




Internal
control over financial reporting is a process to provide reasonable assurance
regarding the reliability of consolidated financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.  There has been no change in
the Company’s internal control over financial reporting during the quarter ended
September 30, 2008 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.




The
Company’s management, including the Company’s CEO and CAO, does not expect that
the Company’s disclosure controls and procedures or the Company’s internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of the
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected.






20










PART
II - OTHER INFORMATION


Item
1.    Legal Proceedings.




None.




Item
1A.    Risk Factors.






Item
2.    Unregistered Sales of Equity Securities and Use of
Proceeds.




None.




Item
3.    Defaults Upon Senior Securities.




None.




Item
4.   Submission of Matters to a Vote of Security Holders.




None.




Item
5.   Other Information.




None.




Item
6.   Exhibits.




Exhibit No.
            
            Title
      of Document31.1
            
            Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended31.2
            
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended32.1
            
            Certification
      pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Executive
      Officer)32.2
            
            Certification
      pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Financial
      Officer)






21




SIGNATURES




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




CHINA
      YINGXIA INTERNATIONAL, INC.November
      14, 2008
            By:
            /s/Yingxia
      JiaoChief
      Executive Officer




November
      14 , 2008
            By:
            /s/Ren
      HuChief
      Financial Officer
              (Principal
      Financial and Accounting Officer)










22