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EX-32 - Yongye International, Inc. | v177333_ex32.htm |
EX-23.1 - Yongye International, Inc. | v177333_ex23-1.htm |
EX-23.2 - Yongye International, Inc. | v177333_ex23-2.htm |
EX-31.2 - Yongye International, Inc. | v177333_ex31-2.htm |
EX-31.1 - Yongye International, Inc. | v177333_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2009
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OR
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o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from _____ to
_____
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COMMISSION
FILE NO. 333-143314
YONGYE
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
NEVADA
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20-8051010
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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6th Floor,
Suite 608, Xue Yuan International Tower,
No. 1 Zhichun Road, Haidian
District, Beijing, PRC
(Address
of principal executive offices)
+86 10 8231
8626
(Issuer’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.
Yes o No x
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports); and (2) has been subject
to such filing requirements for the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
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 o
|
Accelerated
Filer o
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Non-Accelerated
Filer o
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Smaller
Reporting Company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
The
aggregate market value of the 24,936,637 shares of common equity stock held by
non-affiliates of the Registrant was approximately $90,021,259 on the last
business day of the Registrant’s most recently completed second fiscal quarter,
based on the last sale price of the registrant’s common stock on the most recent
date on which a trade in such stock took place prior thereto.
There
were a total of 44,532,241 shares of the registrant’s Common Stock, par
value $0.001 per share, outstanding as of March 12, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
(2)
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Portions
of the Registrant’s Proxy Statement relating to the Registrant’s 2009
Annual Meeting of Shareholders are incorporated by reference into Part III
of this Annual Report on Form 10-K
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TABLE
OF CONTENTS
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PART
I
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4
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ITEM
1
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Business
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4
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ITEM
1A.
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Risk
Factors
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16
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ITEM
1B.
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Unresolved
Staff Comments
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31
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ITEM
2
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Properties
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31
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ITEM
3
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Legal
Proceedings
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31
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ITEM
4
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Submission
Of Matters to a Vote Of Security Holders
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31
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PART
II
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31
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ITEM
5
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Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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31
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ITEM
6
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Selected
Financial Data
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32
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ITEM
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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32
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ITEM
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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ITEM
8
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Financial
Statements and Supplementary Data
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41
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ITEM
9
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosures
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41
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ITEM
9A.
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Controls
and Procedures
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41
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ITEM
9B.
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Other
Information.
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42
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PART
III
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42
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ITEM
10
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Directors,
Executive Officers and Corporate Governance
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42
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ITEM
11
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Executive
Compensation
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42
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ITEM
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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43
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ITEM
13
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Certain
Relationships and Related Transactions, and Director
Independence
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43
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ITEM
14
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Principal
Accounting Fees and Services
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44
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PART
IV
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44
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ITEM
15
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Exhibits
and Financial Statement Schedules
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44
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Index
to Consolidated Financial Statements
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Consolidated
Financial Statements
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2
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements and information relating to Yongye
International, Inc., that are based on the beliefs of our management as well as
assumptions made by and information currently available to us. When used in this
report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,”
“plan” and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. These statements reflect our
current view concerning future events and are subject to risks, uncertainties
and assumptions, including among many others: a general economic downturn; a
downturn in the securities markets; Securities and Exchange Commission
regulations which affect trading in the securities of “penny stocks,” and other
risks and uncertainties. Should any of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described in this report as anticipated, estimated or
expected. Except as required by law, we assume no obligation to update any
forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the future. Important
factors that may cause actual results to differ from those projected include the
risk factors specified above. Notwithstanding the above, Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act expressly state
that the safe harbor for forward-looking statements does not apply to companies
that issue penny stock. Because we may from time to time be considered as an
issuer of penny stock, the safe harbor for forward-looking statements may not
apply to us at certain times.
All
statements other than statements of historical fact are statements that could be
deemed forward-looking statements, including statements regarding new and
existing products and opportunities; statements regarding market and industry
segment growth and demand and acceptance of new and existing products; any
projections of sales, earnings, revenue, margins or other financial items; any
statements of the plans, strategies and objectives of management for future
operations; any statements regarding future economic conditions or performance;
uncertainties related to conducting business in China; any statements of belief
or intention; any of the factors mentioned in the “Risk Factors” section of this
Form 10-K; and any statements or assumptions underlying any of the
foregoing. Also, forward-looking statements represent our estimates and
assumptions only as of the date of this report. You should read this report and
the documents that we reference in this report, or that we filed as exhibits to
this report, completely and with the understanding that our actual future
results may be materially different from what we expect.
Except as
required by law, we assume no obligation to update any forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new
information becomes available in the future.
USE
OF CERTAIN DEFINED TERMS
Except as
otherwise indicated by the context, references in this report to:
·
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“Yongye,”
“we,” “us,” “YGYB,” “the Company” or “our Company” are references to
Yongye International, Inc.;
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·
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“Yongye
Nongfeng”, “CJV” or “YNFB” are reference to Yongye Nongfeng Biotechnology
Co., Ltd.;
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·
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“Inner
Mongolia Yongye”, “YBL” or “Yongye Biotechnology, Co.”are references to
Inner Mongolia Yongye Biotechnology Co.,
Ltd.
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·
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“China”
and “PRC” are a reference to the People’s Republic of
China;
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·
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“RMB”
is a reference to Renminbi, the legal currency of
China;
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·
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“U.S.
dollar,” “$” and “US$” are a reference to the legal currency of the United
States;
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·
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“SEC”
is a reference to the United States Securities and Exchange
Commission;
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·
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“Securities
Act” is a reference to Securities Act of 1933, as amended;
and
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·
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“Exchange
Act” is a reference to the Securities Exchange Act of 1934, as
amended;
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3
Part
I
ITEM
1 Business
Business
Overview
We
are engaged in the manufacture, research, development and sale of fulvic
acid based liquid and powder nutrient compounds for plants and animals
respectively which are used in the agriculture industry. Currently, we
manufacture and sell two principal products. Our universal liquid plant
product consists of our fulvic acid compound base mixed with additional
nutrients that plants typically need to grow. It is applied to various types of
crops by mixing with water and spraying directly on the plants, typically in
conjunction with normal fertilizer and pesticide usage. Our animal product is a
powder and consists of our fulvic acid base compound mixed with other
nutrients and Chinese herbs. Our animal product is currently targeted at
and administered to dairy cows by mixing the powder product with cows' food as
its antibiotic-type properties typically help decrease inflammation and
alleviate pain due to mastitis which occurs as a result of milking. Both of our
current products are marketed under the name Shengmingsu. We have been
engaged in the development of liquid plant products that are tailored for
specific crops and powder animal products for cows, pigs, chickens and
sheep. These products will supplement our current product offering.
We
believe our proprietary process for extracting fulvic acid from humic acid, our
patented process for mixing our liquid plant product and
our patent-pending process for producing our powder animal product
differentiate us in the China market and enable us to provide high
quality products that deliver reliable results for the end users of our
products from season to season.
On
December 6, 2008, the Inner Mongolia Autonomous Region Scientific and Technology
Bureau (IMARSTB), thoroughly reviewed scientific and economic data provided by
the Company and reached the opinion that our liquid plant product effectively
increases agricultural output, improves the utilization rate of fertilizer,
enhances a plant’s resistance to disease and has a lighter weight and higher
bio-activity than the other products it tested. In addition, the IMARSTB
concluded that large scale experimentation has proven that our product can
increase overall yields of staple crops, such as wheat and rice, and vegetables
by 10-20% and 15-30%, respectively, while also improving product
quality. In a separate study, the IMARSTB concluded that our extraction
process is more efficient and produces purer fulvic acid as compared to
traditional extraction methods.
Industry
and Market Overview
China
Agriculture Industry
Limited
and Shrinking Arable Land
China
devotes less of its land to agricultural cultivation than most nations as
reported in the October 3, 2008 article in China Daily. Currently, crop
production in China is limited to approximately 301 million acres of arable farm
land, which is approximately 14% of China's land according to a survey conducted
by China's National Bureau of Statistics in 2008, or 0.2 acres
of arable farm land per person, which is approximately one-third of the
global per capita average and half of the United States’ per
capita amount of land devoted to agricultural production.
Moreover,
increasing urbanization and desertification in China is encroaching upon
farmland, thereby decreasing the amount of land available for crop production.
According to the Chinese Academy of Sciences, since 1996, China has lost
approximately 6.4% of its arable land to urbanization and China approves
approximately 658,667 acres of land for construction each year, which impacts
approximately 464,454 acres of farmland, as its urban population continues to
increase. In 2006, China's urban population accounted for approximately 43.9% of
its total population and projections suggest that percentage will reach 70% by
2050. In addition, desertification, the transformation of arable or habitable
land to desert due to climate changes, claimed 296,460 acres of China's
land in 2007 according to the Ministry of Land and Resources.
Pollution,
especially by heavy metals, erosion and the overuse of fertilizers also
threatens to render currently arable land unusable or less productive for
agriculture.
4
Source:
National Statistics Bureau of China; Ministry of Land and Resources;
Reuters
Increasing
Wealth is Expected to Increase Spending on Agricultural Products
As the
economy grows and individual purchasing power expands in China, demand for more
food products with higher quality is expected to increase. According to the
Asian Development Bank, over 50% of China’s population is comprised of low
income, rural farmers. An April 2009 study by the Chinese Academy of Sciences
indicates that China’s government has made the raising of rural income levels,
especially in Western China, a top economic and social goal and expects annual
rural income to grow between 5% and 10% through 2010. Data from the Economic
Research Service of the United States Department of Agriculture shows that
increased income among a large portion of a population leads to higher
consumption of meat, fruit, vegetables, poultry and dairy products.
Government
Support for the Agricultural Industry
According
to an article published in the Guangming Daily Newspaper, in 2009, China’s
government budgeted RMB 595.5 billion for spending on agriculture, rural areas
and farmers, an increase of 37.9% from the previous year. The newspaper article
also reported that the budget included RMB 102.9 billion, twice the amount from
the previous year, in direct subsidies for grain production and purchases of
agricultural materials. China’s government is planning additional farm subsidies
and land reform initiatives, and to eliminate certain agricultural taxes and
promote the production of organically grown products by setting new standards.
We believe that these government policies will encourage growth in China’s
agricultural industry and that we will benefit from such growth.
China
Fertilizer Industry
Fertilizers
are traditionally classified as either organic fertilizers or chemical
fertilizers. Organic fertilizers are naturally occurring mineral deposits or
naturally occurring compounds manufactured through industrial processes.
Chemical fertilizers are also manufactured using naturally occurring deposits,
but the compounds are chemically altered. While the use of chemical fertilizers
is known to improve crop yields, chemical fertilizers may have long-term adverse
impact on the organisms living in soil and a detrimental long-term effect on
productivity of the soil. When properly applied, organic fertilizers can improve
both the health and productivity of soil and plants, as they provide essential
nutrients that encourage plant growth, and thereby increase agricultural
yields.
According
to China’s National Bureau of Statistics, between 1991 and 2007, the average
grain yield per acre grew 26.5% in China, as the country’s chemical fertilizer
use increased 54.1% during the same period. However, this increase in yields
resulting from increased use of chemical fertilizers appears to have damaged
soil and contributed to water pollution in China. According to the China
Agriculture Statistical Year Book, 70% of the nutrients existing in China’s soil
in 1980 were lost by 2005 due to overuse of chemical fertilizers. We believe
that there is a growing recognition among Chinese farmers and Chinese government
officials that the use of chemical fertilizer should be replaced with
alternative means of increasing productivity and, therefore, expect that demand
for organic plant fertilizers and nutrients will grow.
5
Source:
National Statistics Bureau of China
The rise
of a green food industry in China is also increasing demand for organic
fertilizers. According to the China Green Food Development Center, a
governmental agency, China’s domestic sales of green food increased at a
compound annual growth rate of 26.0% from RMB 50 billion in 2001 to RMB 200
billion in 2007, and during the same period, China’s exports of green food
increased at a compound annual growth rate of 33.8%, from US$400 million to
US$2.3 billion. We believe China’s domestic market for green food will continue
to expand as individual purchasing power grows in China.
Source:
China Green Food Development Center
China’s
Dairy Market
The
growth of China’s economy has lead to growth in consumer demand for dairy
products and China’s government has attached great importance to the development
of this industry, particularly after a food safety incident in China involving
milk adulterated with melamine was widely reported in the international media
during 2008.
According
to The McKinsey Quarterly, the Chinese dairy market generated total revenues of
approximately $18 billion in 2008, representing a compound annual growth rate of
7.8% for the period spanning 2004-2008, and is expected to grow to nearly $20
billion by the decade’s end. However, according to a research report published
by Beijing Orient Agribusiness Consultant Ltd., China’s average milk production
per cow is only about 4,100kg in 2006, which is 60% of the average per cow yield
in developed countries. One major reason for this low production is mastitis, an
inflammation of the teats that slows down milk production. The Chinese Journal
of Veterinary Medicine has reported that, in China, 50-80% of the cows have some
form of mastitis which develops during milk production.
6
Source:
McKinsey Quarterly; National Bureau of Statistics of China
Competitive
Advantages
We
believe that we our competitive advantages include the following.
Unique and scalable distribution
model. We sell our products in China through an effective distribution
model comprised of provincial distributors who purchase our products and sell
them through a chain of local distributors whose terminal sales point is either
a retail store or a large farm. We provide advertising support, training as well
as indoor and outdoor promotional display materials for our products to our
branded stores, and, in return, these stores agree to prominently display our
products along with these materials, and to have the store front painted with
Yongye colors. Our provincial level distributors are our direct customers. We do
not receive any payments from the retail stores selling our products, including
the branded stores, and the stores may sell our competitors'
products.
As of
December 31, 2009, we sold our products through 8 provincial distributors and
9,110 branded stores in nine provinces, two autonomous regions and several test
markets in northern, central and southern China. .
We
believe our unique distribution model has the following benefits:
|
·
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We
leverage our distributors local knowledge and resources to enable quicker
entry into new markets, more efficient qualification of branded stores and
better communication with farmers.
|
|
·
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We
have a highly scalable and replicable distribution model that can be
replicated in new markets. We are thus uniquely situated amongst our
competitors to take advantage of China’s growing market for fulvic acid
based products. The significant expansion of our distribution network
since 2008 has paralleled our robust growth in sales during the same
period.
|
|
·
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Our
“branded store” concept creates a highly synergistic partnership among
Yongye, our distributors and our branded stores. We believe retail store
owners embrace the branded store concept because they typically experience
higher customer traffic and generate more sales as their stores become
more prominent from the promotional displays and technical support we
provide them, and from our product advertising. We believe our advertising
campaign also effectively develops sales for distributors by attracting
store owners to our branded store network. With satisfied distributors and
branded stores, we are able to quickly scale up our distribution network
and provide better service to our
customers.
|
Name brand recognition supported by
integrated marketing campaign. Both of our current products are marketed
under the name Shengmingsu and we believe our integrated marketing campaign has
led to widespread recognition of our brand name by farmers in the areas serviced
by our distribution network.
Our
strategy is to build the Yongye brand by getting closer to farmers through both
media channels as well as indoor and outdoor displays. We work with our
distributors to coordinate advertisements on local television channels and in
local newspapers, and, in 2009, we began running an advertisement campaign on
CCTV-7, which is the national agriculture channel in China. We decorate the
exterior of our branded stores with Yongye color and banners, and our branded
stores prominently display our products alongside promotional display materials
that we provide. We create posters with village-specific case studies that
demonstrate a farmer’s incremental revenue, original investment and harvesting
time saved from using our products. We believe these case studies have been a
highly effective manner of marketing as they translate our product efficacy
directly into dollar terms and are communicated through stories which are highly
relevant to farmers.
7
In
addition, we support our distributors and farmers by providing product training
courses, conferences and seminars, product demonstrations, and educational
pamphlets, magazines and infomercials. Moreover, our products are associated
with increased yields and quality due to testing and analyses by the IMARSTB
that we have strived to publicize.
Proprietary extraction process for
high-quality fulvic acid backed by strong research and development platform.
We have developed a proprietary extraction process for deriving fulvic
acid from humic acid, which produces a high-quality fulvic acid compound. As
mentioned earlier, the IMARSTB has concluded that our extraction process is more
efficient and produces purer fulvic acid as compared to traditional extraction
methods. Based on both internal and industry studies, we believe our
proprietary fulvic acid extraction process is unique in the industry in that it
allows us to create products that are more effective than other fulvic acid
mixtures on the market.
In
addition to our internal research and development team with extensive experience
in the agricultural research fields, we have established project partnerships
with certain prestigious national and local agricultural universities and
research institutes including Inner Mongolia Agricultural University, Chinese
Academy of Agricultural Sciences, Beijing University of Agriculture and Inner
Mongolia Academy of Agricultural Sciences.
Compelling value proposition of
return on investment for farmers. Our patented plant product and
patent-pending animal product mixture processes are the result of large scale
experimentation to produce specific formulae. Our internal experimentation with
our products demonstrates increased production yields, shorter harvest times,
extended life cycles, and enhanced crop taste, nutrition and appearance. As
mentioned earlier, the IMARSTB concluded that it believes our product can
increase overall yields of staple crops, such as wheat and rice, and vegetables
by 10 – 20% and 15 – 30%, respectively, while improving
product quality.
Strength and experience of
management team. We believe that our management team collectively has a
great deal of experience in our relatively new market for fulvic acid based
products in China. Our chief executive officer, Wu Zishen, in particular, has
eight years of such experience in our new market alone. Additionally, our
senior management team have many years of experience and strong education
background in the Chinese agricultural industry, marketing and distribution,
finance and general management.
Growth
Strategies
Our
strategic growth plan for 2010 consists of the following key
elements.
Pursue vertical integration strategy
to improve control of raw material supply while continuing to increase our
fulvic acid production capacity. We plan to pursue vertical integration
by seeking to acquire lignite coal resources and constructing a new
manufacturing facility nearby that would be capable of extracting humic acid
from coal and producing 20,000 tons per year of our liquid plant product and
10,000 tons per year of our powder animal product. If we are able to
successfully execute this strategy, we expect that our gross margins will
increase as the cost of obtaining humic acid is currently the largest component
of our cost of sales.
In
addition, we plan to acquire certain portions of our distribution channels from
specific distributors that have strong, established branded store networks. We
believe executing this initiative will enable us to establish more direct
control over sales to branded stores and large farms, improve our profit
margins, and decrease the risk of customer concentration and increase
visibility.
We expect
to benefit from the continued growth in consumption of agriculture products in
China and we believe we are well positioned in the market to capture
opportunities that arise.
Geographic expansion of our
distribution and branded store network. We believe that there is
significant market potential for our products across China and we plan to
continue to enhance our coverage and penetration of the Chinese markets for
plant and animal nutrients in order to increase our market share and commercial
opportunities. We believe this will further expand our immediate and long term
revenue base. We believe that we can benefit from the growing market demand
resulting from the increased need to boost agricultural productivity and
decrease the overuse of chemical fertilizers and the rising preference for
“green” food in China. In addition to driving further penetration in our
historical markets, we plan to increase our distribution network, particularly
in central and southern China. We will also work to ensure continued successful
replication of our branded store model in new markets by leveraging our
provincial distributors capabilities to select high-quality branded stores, by
continuing to provide our distributors with value-added technical product and
sales leadership training, and through our integrated marketing
campaigns.
Enhance brand recognition on
national and local levels. We will continue to advertise in national and
local media to develop our brand image and increase our exposure in target
markets and to provide training and technical support to our distributors,
branded stores and farmers. We will also plan to add new product demonstration
sites over the coming years in various locations throughout China to complement
our existing site in Hohhot, Inner Mongolia.
8
Share
Exchange
We were
incorporated in the State of Nevada on December 12, 2006 under the corporate
name “Golden Tan, Inc.” At that time, we were engaged in the business of
offering sunless tanning services and selling tanning lotions. In 2008, we began
to pursue an acquisition strategy, whereby we sought to acquire an undervalued
business with a history of operating revenues in markets that provide room for
growth.
On April
17, 2008, we entered into a share exchange agreement with Fullmax Pacific
Limited, a company organized under the laws of the British Virgin Islands
(“Fullmax”), the shareholders of Fullmax, who together owned 100% of the equity
of Fullmax, and our principal shareholder. Pursuant to the share exchange
agreement, the Fullmax shareholders transferred to us 100% of Fullmax’s equity
in exchange for 11,444,755 shares of our common stock (the “Share Exchange”). As
a result of the Share Exchange, Fullmax became our wholly owned
subsidiary.
Restructuring
At the
time we acquired Fullmax, it had acquired some of the principle assets
that form the basis of our trading business from Inner Mongolia Yongye
Biotechnology Co., Ltd., a company organized under the laws of the PRC (“Inner
Mongolia Yongye”), and owned and controlled by Wu Zishen, our chairman, chief
executive officer and president. The first step in this process occurred in
November 2007, when Fullmax’s wholly-owned subsidiary, Asia Standard Oil
Limited, a Hong Kong company (“Asia Standard”) entered into a Sino-foreign
cooperative joint venture agreement with Inner Mongolia Yongye (the “CJV
Agreement”). The CJV which was formed was Yongye Nongfeng Biotechnology Co., Ltd
(“Yongye Nongfeng”).
In
connection with a September 2008 private placement of our common stock, we
agreed with the investors participating in the transaction to complete the
remaining steps necessary for acquiring the assets that form the basis of our
operations from Inner Mongolia Yongye. We completed these remaining steps, which
we refer to as the “Restructuring” in this prospectus, on October, 2009. Prior
to the Restructuring, Inner Mongolia Yongye owned and operated the principle
assets of our business and had been in the business of researching, producing
and selling its own fulvic acid based plant and animal products since 2003.
Until Yongye Nongfeng obtained the required license to produce our products in
May 2009, Inner Mongolia Yongye manufactured such products exclusively for
us.
As part
of the Restructuring and pursuant to the CJV Agreement, Inner Mongolia Yongye
transferred to Yongye Nongfeng its management and other personnel, and the land,
buildings and equipment comprising its manufacturing facility. In addition,
Inner Mongolia Yongye assisted with obtaining the necessary governmental
approvals required for these transfers, as well as with the issuance in May 2009
by the PRC Ministry of Agriculture of a fertilizer license, the patented
technology under which was formerly held in the name of Inner Mongolia Yongye,
to Yongye Nongfeng.
All of
our operations are conducted through Yongye Nongfeng. Pursuant to the terms of
the CJV Agreement, we are entitled to 95% of the profits of Yongye Nongfeng and
Inner Mongolia Yongye is entitled to 5%. Wu Zishen, our chairman,
president and chief executive officer, owns 91.7% of the outstanding equity
interests of Inner Mongolia Yongye and, therefore, is entitled to a portion of
the profits of Yongye Nongfeng that are payable to Inner Mongolia Yongye. In
addition, Mr. Wu and Inner Mongolia Yongye are parties to an employment
agreement, pursuant to which Mr. Wu is employed as chairman and chief executive
officer of Inner Mongolia Yongye.
9
The
following chart reflects our current organizational structure as of the date
hereof. The ownership percentages of Yongye Nongfeng are
approximations.
*
|
Pursuant
to the terms of the CJV Agreement, as amended, we are entitled to 95% of
the profits and liquidation distributions of Yongye Nongfeng and Inner
Mongolia Yongye is entitled to 5%. In preparing the consolidated financial
statements, Inner Mongolia Yongye was treated as a 5% noncontrolling
interest as of December 31,
2009.
|
Our
Principal Products and Services
The base
of our product is our own proprietary fulvic acid base compound, which is
extracted from humic acid. Fulvic acid is a complex, acidic, biochemical polymer
which is either created naturally through the decomposition of plant material,
or can be produced through a manufacturing process. Fulvic acid binds itself to
and strengthens the cell walls of plants and cell membranes of animals, thereby
increasing the ability of cells to retain vitamins and minerals and to fight
sickness and disease. Fulvic acid also acts as a transport agent, dissolving
into itself and delivering nutrients that stimulate cell growth, increasing
oxygen intake into cells, and binding with and removing toxins such as heavy
metals and other pollutants. These attributes maximize enzyme development, which
results in better nutrient uptake in plants and digestion in
animals.
Liquid
Plant Product
Our
universal liquid plant product consists of our fulvic acid compound base and
nutrients that plants need to grow, and can be applied to various types of crops
by spraying the liquid product directly on the plants, typically in conjunction
with fertilizers and pesticides. We primarily sell our plant product by the 100
milliliter bottle and in cases of 100 bottles per case.
We
believe that when used correctly, our product can help farmers more efficiently
use fertilizers and pesticides, which may reduce the farmers’ overall input
costs and environmental damage to the farmers’ land. While each crop varies in
response to our plant product, we believe based on internal studies that farmers
may be expected to experience yield increases on par with the following results
when our plant product is properly used along with sufficient amounts of
fertilizer and water:
10
Crop
|
Yield
|
|
Capsicum
(green pepper)
|
increases
yield by up to 22.7%
|
|
Carrot:
|
increases
yield by up to 26.5%
|
|
Celery:
|
increases
yield by up to 26.3%
|
|
Cucumbers:
|
increases
yield to 21.7%, and the leaves are greener, the plants are higher by
3.0cm, and earlier to market by 11 days
|
|
Grapes:
|
increases
weight of individual grape 0.4g, 18.2%, increases sugar content
37.5%
|
|
Potatoes:
|
increases
yield up to 17.3%, and the leaves are thicker and they bloom 7 to 10 days
earlier
|
|
Watermelon:
|
increases
yield by up to 16.9%, increases sugar content 0.8%-1.8%
|
|
Wheat:
|
increases
yield up to 10.7%
|
Source:
Company research
Powder
Animal Product
Our
animal nutrient product is a powder which consists of our fulvic acid compound
base, with additional nutrients and Chinese herbs that reduce inflammation, and
is currently targeted at and administered to dairy cows through mixture with cow
feed. We sell our animal product in bags that contain 20, 300 gram packets. In a
typical regime, one cow will digest 150 grams daily over a 100 day
period.
Our
animal product’s ability to reduce inflammation makes it attractive to Chinese
farmers because of the prevalence of mastitis, an inflammation of the teats that
slows down milk production, which is common in the global dairy industry. The
Chinese Journal of Veterinary Medicine has reported that, in China, 50-80% of
the cows have some form of mastitis, which is typically treated with antibiotics
according to the “Handbook of Organic Food Safety and Quality” (International
Standard Book Number 0849391547). Although antibiotics can clear up bacterial
infections when used correctly, overuse of antibiotics can lead to
drug-resistant strains of bacteria and antibiotics kill healthy gut bacteria,
which is vital to a healthy immune system. By using our animal product, Chinese
farmers can avoid costs and problems associated with the use of antibiotics to
treat mastitis.
Our
internal studies show that administration of our animal product to cows
increases milk production and milk quality in cows, improves immunity, reduces
mastitis and the need for antibiotics, and improves digestion and growth
rate.
New
Products
We are
evaluating the prospects for introducing animal products designed for pigs,
chickens and sheep.
We have
not introduced any new plant products in 2009 as we believe the market demand
for our universal plant product has remained strong. However, we are examining
market opportunities for introducing plant products targeted at corn, peppers,
wheat, rice, cucumbers, tomatoes, cotton, potatoes, sunflowers, grapes, tropical
fruits and flowers.
In 2010,
we will continue to evaluate opportunities to develop market driven additions to
our product lines.
Production
Raw
Materials
The
principal raw material used in the manufacture of fulvic acid is humic acid.
Humic acid is a naturally occurring organic soil matter that exists in coal,
peat, oceans and fresh waters. The best sources of humic acid are lignite coal
and leonardite coal. China is rich in humic acid resources and its lignite coal
reserves are large, widely distributed and high in quality. According to the
United States Energy Information Administration, China has approximately 52.3
billion tons of recoverable lignite coal reserves, ranking third in the
world.
The humic
acid we use comes from lignite coal or leonardite coal which is mined in Inner
Mongolia and can be purchased at normal market rates and is typically sold on a
per ton basis. We purchase humic acid from suppliers. As the industry is
experiencing rapid growth, we believe it is important to control the input of
humic acid. Currently, we have two principal suppliers which are both in Hohhot:
Wuchuan Shuntong Company and Wuchuan Sanda Company. Wuchuan Shuntong is our
largest supplier, providing us with more than 90% of our humic acid raw
material. Wuchuan Shuntong has dedicated one production line to us and has based
its production design on our specific technical requirements. The other supplier
contributes to our additional humic acid needs.
We use
various other ingredients during the production process, including nutrients and
Chinese herbs. These additional ingredients can be readily obtained in local
markets and do not carry special technical requirements.
11
Manufacturing
Process
The
manufacture of our products begins with our proprietary process for extracting
fulvic acid from humic acid and creating the fulvic acid compound base used in
both our liquid plant product and our powder animal product. We have determined
that this first step in our manufacturing process will remain a trade secret due
to its importance in the creation of our final product. If we were to patent
this process, we would necessarily have to publicly disclose certain information
as part of the patent application, and thus risk losing the competitive
advantage we believe we currently have.
After we
have created our fulvic acid compound base, we mix it with special nutrients and
other components specific to our plant and animal products, and, in the case of
our animal product, convert the resulting mixture into a powder. These processes
and mixtures are covered by current and pending patents.
Manufacturing Outsourcing
Contract (10,000 Tonnes Per Annum Capacity for Plant
Product)
From
January 2008 until June 1, 2009, Yongye Nongfeng Biotechnology had an
outsourcing contract with Inner Mongolia Yongye for the production of our
finished nutrient product. From January 2008 until September 2008, the
manufacturer was running at 2,000TPA capacity, but after constructing a new
8,000TPA facility, capacity was increased to 10,000TPA.
Raw
Materials and Our Principal Suppliers
The humic
acid we use is extracted from lignite coal by local humic acid
producers. They purchase lignite coal from nearby mines located in Inner
Mongolia and extract humic acid and sell it to us. Leonardite coal is defined as
highly oxidized low grade lignite that contains a relatively high concentration
of the smaller molecular units (fulvic acids (FA). According to the United
States Energy Information Administration, China has approximately 52.3 billion
tons of recoverable lignite coal reserves, ranking third in the world. Both
lignite coal and humic acid can be purchased locally at normal market rates on a
per ton basis.
We
believe we are able to produce a high quality fulvic acid base product
by controlling the input of humic acid from direct, contracted suppliers.
Currently, we have two principal suppliers which are both in Hohhot: Wuchuan
Shuntong Company and Wuchuan Sanda Company. Wuchuan Shuntong is our largest
supplier, providing us with more than 90% of our humic acid raw material.
Wuchuan Shuntong has dedicated one production line to us and has based its
production design on our specific technical requirements. The other supplier
contributes to our additional humic acid needs.
In
addition to humic acid, we also utilize various different components in our
production process, all of which can be readily obtained from numerous sources
in local markets and require no special purchase requirements.
Packaging
and Shipment
Our
liquid plant product is primarily packaged in 100 milliliter bottles and in
cases of 100 bottles per case. Our powder animal product is packaged in bags
that contain 20, 300 gram packets. Each type of packaging material, along with
packaging labels, are purchased from three to four separate manufacturers as
these materials are readily available in the market.
After
packaging our products at our manufacturing facility, we engage a third party to
ship them to our distributors and we bear the risk of loss until our products
are received by our distributors.
Quality
Control
We have
implemented and maintain strict quality control procedures. In July 2007, Inner
Mongolia Yongye received ISO 9001:2000 accreditation after a third party audit
of its quality control procedures at its manufacturing facility. In the
Restructuring, Inner Mongolia Yongye transferred its manufacturing facility and
personnel to Yongye Nongfeng and Yongye Nongfeng also received ISO 9001:2000
accreditation following a similar third party audit.
Production
Facility
We
operate one manufacturing facility in Hohhot, Inner Mongolia, China, which can
produce 10,000 tons per year of our liquid plant product and 1,000 tons per year
of our powder animal product when operated normally.
Our
growth strategy includes pursuing vertical integration by seeking to acquire
lignite coal resources and constructing a new manufacturing facility nearby that
would be capable of extracting humic acid from coal and producing 20,000 tons
per year of our liquid plant product and 10,000 tons per year of our powder
animal product.
12
Marketing
and Sales Support
Our sales
staff is trained to work with the distributor network, retail stores and farmers
to ensure that our customers have the right product knowledge and good
after-sales support. They share their knowledge by walking through farming
communities, organizing training courses, inviting local agricultural experts
and university professors to speak on proper agricultural techniques as well as
the use of our product.
Demonstration
Sites
We also
utilize a product demonstration site for marketing purposes. This site is
located adjacent to our manufacturing facility in Hohhot, Inner Mongolia and
features six greenhouses and an open field. To improve brand awareness as well
as the accessibility of our product demonstrations for distributors, branded
store owners and farmers who may reside far from Inner Mongolia, part of our
growth strategy over the coming years is to construct additional demonstration
sites in various locations throughout China.
Media
Marketing Programs
We work
with our distributors to coordinate advertisements on local television channels
and in local newspapers, and, in 2009, we began running an advertisement
campaign on CCTV-7, which is the national agriculture channel in China. In
addition, we use conferences and seminars, newspaper ads and pamphlets to
increase customer brand recognition.
Distribution
& Sales Network
We sell
our products in China through a distribution network comprised of
provincial distributors who purchase our products and sell them through a chain
of local distributors whose terminal sales point is either a retail store or
large farm. Our distributors are our sole source of revenue, as we do not
sell our products directly to retail stores or to farmers. Nearly all of our
sales in 2008 were to distributors operating in Inner Mongolia and Xinjiang
autonomous regions, and Gansu and Hebei provinces, which are located in northern
China. Beginning in 2009, we expanded our sales in provinces located in central
and southern China, and plan to continue to expand the geographic reach of our
distribution network.
As of
December 31, 2009, there were 9,110 independently
owned retail stores selling our products. We work with our distributors to
identify these stores. Thereafter, we provide advertising support, training
and indoor and outdoor promotional display materials for our products, and,
in return, the store agrees to prominently display our products along with these
materials, and to have the store front painted with Yongye colors. Our
provincial level distributors are our direct customers
This
network of retail stores creates a “community-direct” model through which our
distributors sell our product. We believe these stores have a local feel and
have standing community recognition as the “trusted” local agricultural product
expert. The goal is to encourage farmers to make Yongye products a greater part
of their annual planning process while building brand awareness.
The table
below presents the number of retail stores that were branded stores and stores
in trials to become branded stores at the end of the periods
indicated.
FY2009
|
FY2008
|
|||||||
Branded
Stores
|
9,110 | 775 | ||||||
Branded
Stores in Trials
|
0 | 350 | ||||||
Total
|
9,110 | 1,125 |
Customers
Since our
inception, we have worked to build and maintain our sales and distribution
networks. We have established good relationships with leading agricultural
products distributors in Hebei and Gansu provinces, and Inner Mongolia and
Xinjiang autonomous regions, and an increasing number of distributors outside
these areas.
We sign
three year contracts with distributors that we identify and choose based upon
their overall business strength, credit worthiness and proven ability to develop
their local markets.
Competition
The
Chinese fertilizer industry is highly fragmented. As of November 2009, there
were over 4,000 fertilizer products in the PRC Ministry of Agriculture’s
registry. We compete more directly with producers of humic acid based products,
of which there were 522 in the registry as of November 2009.
Moreover,
the market for fulvic acid based products has not matured into a saturated
market. We believe we have a broader distribution network than our competitors
and, therefore, that we are uniquely situated amongst our competitors to take
advantage of China’s growing market for fulvic acid based
products.
13
Research
and Development
We
currently have certain research personnel on staff, including Baosheng Tong, our
chief scientist, who has 20 years of experience in China’s agriculture industry
and holds a masters degree in animal nutrition and a bachelors degree in animal
husbandry from China Agriculture University.
Our
research and development process begins with an internal evaluation of market
demand for new types of products. After we initially identify market
opportunities for new products, we, either alone or in conjunction with our
research partners, conduct research activities and develop new products. Once
our research and development activities are complete, we make a final judgment
regarding whether and when to bring the new product to market based upon a
second evaluation of market demand, an estimate of the time and expense that
will be required to obtain any necessary governmental approvals, the
desirability for obtaining patents or feasibility of protecting our intellectual
property by other means, and the results of test marketing. The entire process
may take anywhere from one to three years, depending on the
product.
We are
currently researching various customized products for plants and animals, and
are test marketing a new product for cows. We have not introduced any products
into the market other than our current universal liquid plant product and our
powder animal product targeted at cows, and no assurance can be given that we
will ultimately bring to market the products we are currently researching or the
product we are currently test marketing.
Intellectual
Property
Our
intellectual property consists of our proprietary method for extracting fulvic
acid from humic acid, our invention patent related to our plant product and our
pending patent related to our animal product. Our extraction process for fulvic
acid remains a trade secret and is protected by a non-compete contract with
Professor Gao Jing, who developed the extraction process and is the former chief
scientist of Innner Mongolia Yongye. We have chosen not to seek a patent
covering our method for extracting fulvic acid in order to avoid the public
disclosure that would be required in connection with applying for a
patent.
On
December 6, 2008, the IMARSTB, thoroughly reviewed scientific and economic data
provided by the Company and reached the opinion that our liquid plant product
effectively increases agricultural output, improves the utilization rate of
fertilizer, enhances a plant’s resistance to disease and has a lighter weight
and higher bio-activity than the other products it tested. In addition, the
IMARSTB concluded that large scale experimentation has proven that our product
can increase overall yields of staple crops, such as wheat and rice, and
vegetables by 10-20% and 15-30%, respectively, while improving product
quality. In a separate study, the IMARSTB has concluded that our
extraction process is more efficient and produces purer fulvic acid as compared
to traditional extraction methods.
The
patents related to our plant product and the pending patent application related
to our animal product cover both the mixture process of, and the base formulas
for, such products. Our current patent is valid for 20 years from October 2006
and, once issued, our pending patent will also be valid for a 20 year term. We
will work to ensure that this mixture process is consistently carried out while
also protecting our intellectual property.
We have
obtained a registered trademark for “Yongye” from the Trademark Bureau of the
State Administration of Industry and Commerce of the PRC, which is valid until
October 2017.
In
addition to trademark and patent protection law in China, we rely on contractual
confidentiality and non-compete provisions to protect our intellectual property
rights and brand. We also take further steps to limit the number of people
involved in the production process and refer to each ingredient by number rather
than name when collecting and preparing them for mixture.
Employees
The past
few years have seen significant growth in the Company and our employee base has
also grown. The table below presents the number of our employees as of the end
of the periods indicated.
Category
|
FY2009
|
FY2008
|
||||||
Admin
|
63 | 88 | ||||||
Manufacturing
|
207 | 0 | ||||||
Research
& Development
|
29 | 0 | ||||||
Sales
& Support
|
100 | 65 | ||||||
Total
|
399 | 153 |
14
Governmental
Regulation
Our
products and services are subject to regulation by central and provincial
governmental agencies in the PRC, which require us to obtain licenses and
certifications. We are required to renew, pass an examination with respect to,
or make a filing in connection with these licenses and certifications on a
regular basis.
Business
License
Yongye
Nongfeng’s business license enables it to research, develop, process,
manufacture, market and sell fulvic acid based products and plant and animal
nutrients. The business license is valid until January 4, 2018, although it is
subject to annual examination, which was passed in 2008.
Fertilizer
Registration
All
fertilizers produced in the PRC must be registered with the PRC Ministry of
Agriculture or its local branches at a provincial level. No fertilizer can be
manufactured without such registration. As part of the Restructuring process,
Yongye Nongfeng applied for its initial fertilizer registration certificate in
May 2009 and it was received on June 1, 2009. The certificate is valid
until February 2010 and may be renewed twice for additional one-year terms.
Thereafter, if all conditions remain satisfied, a long-term certificate
will be issued with a five-year term that is renewable for additional five-year
terms so long as all requirements continue to be met. On November 4, 2009 the
long-term certificate with a five-year term has been issued to Yongye
Nongfeng.
Feed
Certificate
Producers
of animal feed in the PRC are required to obtain a Quality Certificate for the
Examination of Feed Production Enterprises. Yongye Nongfeng was granted this
certificate in September 2009 by the Inner Mongolia agricultural authority,
which is the local branch of the Ministry of Agriculture in Inner Mongolia, but
must make an annual filing before the end of March each year to maintain its
effectiveness.
Environmental,
Health and Safety Laws
We are in
compliance in all material respects with the various laws, regulations, rules,
specifications and permits, approvals and registrations relating to human health
and safety and the environment except where noncompliance would not have a
material adverse effect on our business, financial condition and results of
operations.
Legal
Proceedings
We are
not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead a third party to initiate legal
proceedings against us.
Property
Our
principal executive offices are located at 6th floor, Xue Yuan International
Tower, No. 1 Zhichun Road, Haidian District, Beijing PRC and the telephone
number is 86-10-8232-8866. The office space is approximately 1,000 square meters
in area. Our manufacturing facility and the adjacent greenhouses and open
field, which serve as a research and product demonstration site, is in the High
Tech Economic Development Zone in Hohhot, Inner Mongolia.
There is
no private ownership of land in China. All land ownership is held by the
government of the PRC, its agencies and collectives. Land use rights can be
transferred upon approval by the land administrative authorities of the PRC (the
State Land Administration Bureau) upon payment of the required land transfer
fee. Yongye Nongfeng owns the land use rights for the land on which our
manufacturing facility, greenhouses and open field are situated, which have a
term of 50 years that expires in 2057. We lease our principal executive offices
under a lease that provides for a three year term.
Executive
Office
Our
principal executive offices are located on the 6th Floor, Suite 608, at Xue Yuan
International Tower, No. 1 Zhichun Road, Haidian District, Beijing, PRC. Our
telephone number at that address is 86-10-8232-8866. Our corporate website is
www.yongyeintl.com.
15
ITEM
1A Risk Factors
An
investment in our Common Stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this report, including the
consolidated financial statements and notes thereto, before deciding to invest
in our Common Stock. The risks described below are not the only ones facing our
Company. Additional risks not presently known to us or that we presently
consider immaterial may also adversely affect our Company. If any of the
following risks occur, our business, financial condition and results of
operations and the value of our Common Stock could be materially and adversely
affected.
Risks
Related to Our Business
Yongye
Nongfeng, our CJV, recently completed transitioning its business operations from
Inner Mongolia Yongye Biotechnology.
We
established our PRC cooperative joint venture, Yongye Nongfeng, on January 4,
2008, with the intention and ultimate goal of carrying out the business of
marketing and distributing our fulvic acid plant and animal nutrient products.
As of October, 2009, we have transitioned all the operations including the
manufacturing of our nutrient products from Inner Mongolia Yongye Biotechnology
(which is under the control of Mr. Zishen Wu), to the CJV (Mr. Wu is also the
CEO of the CJV), including all assets related to the manufacturing, distribution
and sales as well as all applicable licenses and titles (the “Restructuring”).
On October 10, 2009 the CJV Agreement and CJV's articles were revised to reflect
that both the profit distribution percentage and the post-dissolution remaining
asset distribution percentage of Inner Mongolia Yongye in the CJV increased to
5% from the previous 0.5%.
The
limited operating history and the early stage of development of our CJV may make
it difficult to evaluate our business and future prospects. Although Inner
Mongolia Yongye Biotechnology’s revenues have risen quickly and
although Inner Mongolia Yongye Biotechnology has transferred its agreements to
our CJV, we cannot assure you that the CJV will continue to maintain such
profitability or that it will not incur net losses in the future. We expect that
our operating expenses will increase as we pursue our growth strategies. Any
significant failure to realize anticipated revenue growth could result in
operating losses.
Failure
to manage our recent dramatic growth could strain our management, operational
and other resources, which could materially and adversely affect our business
and prospects.
We have
been expanding our operations dramatically and believe they will continue to do
so. To meet the demand of our customers, we expect to expand our distribution
network in terms of numbers and locations. The rapid growth of our business has
resulted in, and if we continue to grow at this rate, will continue to result
in, substantial demands on our management, operational and other resources. In
particular, the management of our growth will require, among other
things:
|
·
|
increased
sales and sales support activities;
|
|
·
|
improved
administrative and operational
systems;
|
|
·
|
stringent
cost controls and sufficient working
capital;
|
|
·
|
continued
responsibility for disclosure of material facts relating to our
business;
|
|
·
|
strengthening
of financial and management controls;
and
|
|
·
|
hiring
and training of new personnel.
|
As we
continue this effort, we may incur substantial costs and expend substantial
resources. We may not be able to manage our current or future operations
effectively and efficiently or compete effectively in new markets we enter. If
we are not able to manage our growth successfully, our business and prospects
may be materially and adversely affected.
We
do not own 100% of the equity interests in the CJV, which may not be as
stable and effective in providing operational control as 100% ownership,
and potential exists for conflict of interests.
We
operate our business through our CJV. If there are disagreements between us
and our cooperative joint venture partner, Inner Mongolia Yongye Biotechnology,
regarding the business and operations of the CJV, we cannot assure you that we
will be able to resolve them in a manner that will be in our best interests. In
addition, our joint venture partner may (i) have economic or business interests
or goals that are inconsistent with ours; (ii) take actions contrary to our
instructions, requests, policies or objectives; (iii) be unable or unwilling to
fulfill their obligations; (iv) have financial difficulties; or (v) have
disputes with us as to the scope of their responsibilities and obligations. Any
of these and other factors may materially and adversely affect the performance
of our CJV, which may in turn materially and adversely affect our financial
condition and results of operations.
16
We rely
on the CJV Agreement with Inner Mongolia Yongye Biotechnology to operate our business.
If Inner Mongolia Yongye Biotechnology fails to perform its obligations under
the CJV Agreement, we may have to incur substantial costs and resources to
enforce such arrangements and rely on legal remedies under PRC laws, including
seeking specific performance or injunctive relief and damages, which we cannot
assure you would be effective. Accordingly, it may be difficult for us to change
our corporate structure or to bring claims against Inner Mongolia Yongye
Biotechnology if it does not perform its obligations under the CJV Agreement
with us.
The CJV
agreement is governed under PRC law. Accordingly, this agreement would be
interpreted in accordance with PRC laws and any disputes would be resolved in
accordance with PRC legal procedures. The legal environment in the PRC is not as
developed as in other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce the CJV
Agreement. In the event we are unable to enforce the CJV Agreement, we may not
be able to exert effective control over our operating entities, and our ability
to conduct our business may be negatively affected.
Mr Zishen
Wu, our President and CEO, owns a controlling interest in Inner Mongolia Yongye.
The potential exists for conflicts of interests between his duties to us and his
ownership interests in Inner Mongolia Yongye. We can provide no assurance
that if potential conflicts of interests arise, these conflicts will not result
in a significant loss in corporate opportunities for us or a diversion of our
resources to Inner Mongolia Yongye, which may not be in the best interest of the
Company.
Our
business will be harmed if our major distributors reduce their orders or
discontinue doing business with us.
We sell
our products through a distribution network comprised of provincial or regional
distributors who purchase our products and sell them through a chain of local
agents whose terminal sales point is either a retail store or large farm. Our
distributors are our sole source of revenue, as we do not sell our products
directly to retail stores or to farmers. Although we believe that our
relationship with these distributors is good, if some or all of these
distributors reduce their orders or discontinue doing business with us, we could
have difficulties finding new distributors to distribute our products and our
revenues and net income could in turn decline considerably. Our reliance on
these major distributors could also affect our bargaining power in getting
favorable prices for our products. In addition, untimely payment and/or failure
to pay by these major distributors would negatively affect our cash
flow.
One or more of our distributors could
engage in activities that are harmful to our brand and to our
business.
Due to
our reliance on a distribution network comprised of provincial or regional sales
distributors to sell our products, we are susceptible to our distributors
engaging in activities that are harmful to our brand and to our business. If our
distributors do not implement our branding strategy properly, our brand name may
be damaged. In addition, if our distributors sell our products under another
brand, purchasers will not be aware of our brand name. Moreover, our ability to
provide appropriate customer service to these purchasers will be negatively
affected, and we may be unable to develop our local knowledge of the needs of
these purchasers and their environment. Furthermore, if any of our
distributors sell inferior products produced by other companies under our brand
name, our brand and reputation could be harmed, which could make marketing of
our products more difficult.
If
we cannot renew our fertilizer registration certificate, we will be unable to
sell some of our products which will cause our sales revenues to significantly
decrease.
All
fertilizers produced in the PRC must be registered with the PRC Ministry of
Agriculture or its local branches at a provincial level. No fertilizer can be
manufactured without such registration. As part of the Restructuring process,
the CJV applied for its initial fertilizer registration certificate in May 2009
and it was received on June 1, 2009. The certificate is valid until
February 2010 and may be renewed twice for additional one-year terms.
Thereafter, if all conditions remain satisfied, a long-term certificate
will be issued with a five-year term that is renewable for additional five-year
terms so long as all requirements continue to be met. On November 4, 2009 the
long-term certificate with a five-year term has been issued to Yongye
Nongfeng.
We
believe that the PRC Ministry of Agriculture will generally grant an application
for renewal in the absence of illegal activity by the applicant. However, there
is no guarantee that the PRC Ministry of Agriculture will renew our fertilizer
registration certificate. If we cannot obtain the necessary renewal, we will not
be able to manufacture and sell our fertilizer products in China, which will
cause the termination of our commercial operations.
Our proprietary technology for fulvic acid
extraction, patented plant product mixture process and patent pending animal
product mixture process may become obsolete which could materially and adversely
affect the competitiveness of our plant and animal nutrient
products.
The
production of our plant and animal nutrient products is based on our proprietary
fertilizer formula, patented plant product mixture process and patent pending
animal product mixture process. Our future success will depend upon our ability
to address the increasingly sophisticated needs of our customers by supporting
existing and emerging humic acid products and by developing and introducing
enhancements to our existing products and new products on a timely basis that
keep pace with evolving industry standards and changing customer requirements.
If our proprietary fertilizer formula, patented plant product mixture process
and patent pending animal product mixture process become obsolete as our
competitors develop better products than ours, our future business and financial
results could be adversely affected. In addition, although we entered into
confidentiality agreements with our key employees, we cannot assure you if there
would be any breach of such agreement in which case our rights over such
proprietary fertilizer formula would be adversely affected.
17
We may not possess all the licenses
required to operate our business, or may fail to maintain the licenses we
currently hold. This could subject us to fines and other penalties, which could
have a material adverse effect on our results of
operations.
In
addition to fertilizer registration certificate, we are required to hold a
variety of other permits, licenses and certificates to conduct our business in
China. We may not possess all the permits, licenses and certificates required
for our business. In addition, there may be circumstances under which the
approvals, permits, licenses or certificates granted by the governmental
agencies are subject to change without substantial advance notice, and it is
possible that we could fail to obtain the approvals, permits, licenses or
certificates that are required to expand our business as we intend. If we fail
to obtain or to maintain such permits, licenses or certificates or renewals are
granted with onerous conditions, we could be subject to fines and other
penalties and be limited in the number or the quality of the products that we
would be able to offer. As a result, our business, result of operations and
financial condition could be materially and adversely affected.
Zishen
Wu, our chairman, chief executive officer and president, has played an important
role in the growth and development of our business since its inception, and a
loss of his services in the future could severely disrupt our business and
negatively affect investor confidence in us, which may also cause the market
price of our common stock to go down.
To date,
we have relied heavily on Mr. Wu’s expertise in, and familiarity with, our
business operations, his relationships within the industries in which we
operate, including with our suppliers, and his reputation and experience. In
addition, Mr. Wu continues to be primarily responsible for formulating our
overall business strategies and spearheading the growth of our operations. If
Mr. Wu were unable or unwilling to continue in his present positions, we may not
be able to easily replace him and may incur additional expenses to identify and
train his successor. In addition, if Mr. Wu were to join a competitor or form a
competing business, it could severely disrupt our business and negatively affect
our financial condition and results of operations. Although Mr. Wu is subject to
certain non-competition restrictions during and after termination of his
employment with us, we cannot assure you that such non-competition restrictions
will be effective or enforceable under PRC law. Moreover, even if the departure
of Mr. Wu from our Company would not have any actual impact on our operations
and the growth of our business, it could create the perception among investors
or the marketplace that his departure could severely damage our business and
operations and could negatively affect investor confidence in us, which may
cause the market price of our common stock to go down. We do not maintain key
man insurance for Mr. Wu.
We
depend heavily on skilled personnel, and any loss of such personnel, or the
failure to continue to attract such personnel in the future, could harm our
business.
Our
business is specialized and requires the employment of personnel with
significant scientific and operational experience in the industry. Accordingly,
we must attract, recruit and retain a workforce of technically and
scientifically competent employees. Due to the intense market competition for
highly skilled workers and experienced senior management and our geographical
location, we have faced difficulties locating personnel that have the necessary
scientific, technical and operational skills and experience with the
fertilizer industry. Our ability to effectively implement our business
strategy will depend upon, among other factors, the successful recruitment and
retention of additional management and such other key personnel. These
individuals are difficult to find in the PRC and we may not be able to retain
such skilled employees and replace them within a reasonable period of time, or
at all. Our business may be severely disrupted, our financial condition and
results of operations may be materially and adversely affected, and we may
incur additional expenses in recruiting and training additional personnel.
Although our employees and senior management members are subject to certain
non-competition restrictions during and after termination of their employment,
we cannot assure you that such non-competition restrictions will be effective or
enforceable under PRC law. If any of our key personnel joins a competitor or
forms a competing business, our business may be severely disrupted. We have no
key man insurance with respect to our key personnel that would provide insurance
coverage payable to us for loss of their employment due to death or
otherwise.
The
markets in which we operate are highly competitive and fragmented and we may not
be able to maintain market share.
We
operate in highly competitive markets and compete with numerous local PRC
fertilizer manufacturers and we expect competition to persist and intensify in
the future. Our competitors are mainly domestic leaders in the fertilizer
markets in China. Our small local competitors may have better access in certain
local markets to customers and prospects, an enhanced ability to customize
products to a particular region or locality and more established local
distribution channels within a small region. We also compete with large PRC
national competitors who may have competitive advantages over us in certain
areas such as access to capital, technology, product quality, economies of scale
and brand recognition and may also be better positioned than us to develop
superior product features and technological innovations and to exploit and adapt
to market trends. Additionally, we may not be able to conduct in-depth research
and analysis on our current or new markets due to the lack of public or
third-party sources of competitive information available on our industry and
competitors in the PRC. Therefore, we may not have a clear estimate of the
current number of our direct competitors or such competitors' revenues or market
share.
18
In
addition, China’s entry into the World Trade Organization may lead to increased
foreign competition for us. International producers and traders import products
into China that generally are of higher quality than those produced in the local
Chinese market. If they are localized and become recognized as the type of
fertilizer we produce, we may face additional competition. If we are not
successful in our marketing and advertising efforts to increase awareness of our
brands, our revenues could decline, which could have a material adverse effect
on our business, financial condition, results of operations and share
price. We cannot assure you that additional competitors will not enter our
existing markets, or that we will be able to compete successfully against
existing or new competition.
If
we need additional financing, we may not be available to find such financing on
satisfactory terms or at all.
Our
capital requirements may be accelerated as a result of many factors, including
the growth and timing of our business development activities, budget shortfalls,
unanticipated expenses or capital expenditures, future product opportunities,
future licensing opportunities and future business combinations. Consequently,
we may need to seek additional debt or equity financing, which may not be
available on favorable terms, if at all, and which may be dilutive to our
stockholders.
We may
seek to raise additional capital through public or private equity offerings,
debt financings or additional corporate collaboration and licensing
arrangements. To the extent we raise additional capital by issuing equity
securities, our stockholders may experience dilution. To the extent that we
raise additional capital by issuing debt securities, we may incur substantial
interest obligations, may be required to pledge assets as security for the debt
and may be constrained by restrictive financial and/or operational covenants.
Any provider of debt financing would also be superior to our stockholders’
interest in bankruptcy or liquidation. To the extent we raise additional funds
through collaboration and licensing arrangements, it may be necessary to
relinquish some rights to our technologies or product candidates, or grant
licenses on unfavorable terms.
Financial
damages may be imposed on us if we are unable to retain certain “financial
professionals” as required by the securities purchase agreements.
The
purchase agreements entered into in connection with several private capital
raises we have consummated obligate us to hire a chief financial officer
who has experience as a senior financial officer of a United States public
reporting company and who is (i) fluent in English, (ii) residing or will
reside, upon employment by us, in Asia, and (iii) familiar with GAAP and
auditing procedures and compliance for United States public companies, and to
enter into an employment agreement with such an officer for a term of no less
than two years. Although we have hired Mr. Sam (Yue) Yu as the chief
financial officer in accordance with the preceding obligations, if we fail to
continue to comply with the above obligations regarding such an officer, we may
incur monthly financial damages in the amount of 1% of the proceeds of the
financing, up to an aggregate amount of 6% of the amount of the
financing.
The
imposition of such financial damages would require us to use capital that we had
planned to use, and may require, in connection with our business.
If we fail to adequately protect or
enforce our intellectual property rights, or to secure rights to patents and
trademarks of others, the value of our intellectual property rights could
diminish.
Our
success, competitive position and future revenues will depend in part on our
ability to obtain and maintain patent protection for our products, methods,
processes and other technologies, to preserve our trade secrets, to prevent
third parties from infringing on our proprietary rights and to operate without
infringing the proprietary rights of third parties.
To date,
we have received one patent for our plant product and have one patent pending
for our animal product with the State Intellectual Property Office of the
PRC. We have obtained a registered trademark for “Yongye” from the
Trademark Bureau of the State Administration of Industry and Commerce of the PRC
(“CTMO”). Our PRC partner, Inner Mongolia Yongye Biotechnology has filed a
trademark application for the brand name of “Shengmingsu” with the CTMO, and
Inner Mongolia Yongye Biotechnology will transfer this mark to the CJV upon
procurement of trademark registration with the CTMO. In addition, we rely on
trade secret protection for our proprietary process of extracting fulvic acid
from humic acid and creating the base fulvic acid compound used in both our
plant (liquid form) and animal nutrient (powder form) products because we
believe if we were to patent this process, we would necessarily have to publicly
disclose certain information as part of the patent application, and thus
lose our competitive advantage we believe we currently have. However, we cannot
predict the degree and range of protection patents, trademarks and trade secrets
will afford us against competitors. Third parties may find ways to invalidate or
otherwise circumvent our patents, proprietary technology and trademark. Third
parties may attempt to obtain patents claiming aspects similar to our patent and
trademark applications. If we need to initiate litigation or administrative
proceedings, such actions may be costly and may divert management attention as
well as expend other resources which could otherwise have been devoted to our
business. An adverse determination in any such litigation will impair our
intellectual property rights and may harm our business, prospects and
reputation. In addition, historically, implementation of PRC intellectual
property-related laws has been lacking, primarily because of ambiguities in the
PRC laws and difficulties in enforcement. Accordingly, intellectual property
rights and confidentiality protections in China may not be as effective as in
the United States or other countries, which increases the risk that we may not
be able to adequately protect our intellectual property. Moreover, litigation
may be necessary in the future to enforce our intellectual property rights.
Future litigation could result in substantial costs and diversion of our
management’s attention and resources, and could disrupt our business, as well as
have a material adverse effect on our financial condition and results of
operations. Given the relative unpredictability of China’s legal system and
potential difficulties enforcing a court judgment in China, there is no
guarantee that we would be able to halt the unauthorized use of our intellectual
property through litigation.
19
If
we infringe the rights of third parties, we could be prevented from selling
products, forced to pay damages and compelled to defend against
litigation.
If our
products, formula, methods, processes and other technologies infringe
proprietary rights of other parties, we could incur substantial costs, and may
have to obtain licenses (which may not be available on commercially reasonable
terms, if at all), redesign our products or processes, stop using the subject
matter claimed in the asserted patents, pay damages, or defend litigation or
administrative proceedings, which may be costly whether we win or lose. All of
the above could result in a substantial diversion of valuable management
resources.
We
believe we have taken reasonable steps, including comprehensive internal and
external prior patent searches, to ensure we have freedom to operate and that
our development and commercialization efforts can be carried out as planned
without infringing others’ proprietary rights. However, we cannot guarantee that
no third-party patent has been filed or will be filed that may contain subject
matter of relevance to our development, causing a third-party patent holder to
claim infringement. Resolving such issues has traditionally resulted, and could
in our case result, in lengthy and costly legal proceedings, the outcome of
which cannot be predicted accurately.
Our
business is sensitive to the current global economic crisis. A severe or
prolonged downturn in the global economy could materially and adversely affect
our business and results of operations.
Recent
global market and economic conditions have been unprecedented and challenging
with recession in most major economies persisting in 2009. Continued concerns
about the systemic impact of potential long-term and wide-spread recession,
energy costs, geopolitical issues, and the availability and cost of credit have
contributed to increased market volatility and diminished expectations for
economic growth around the world. The difficult economic outlook has negatively
affected businesses and consumer confidence and contributed to volatility of
unprecedented levels.
The PRC
economy also faces challenges. The stimulus plans and other measures implemented
by the PRC Government may not work effectively or quickly enough to maintain
economic growth in China or avert a severe economic downturn. If economic growth
slows or an economic downturn occurs, our business and results of operations may
be materially and adversely affected.
We
rely upon third-party suppliers for raw materials.
We are
dependent upon third parties for our supply of humic acid and other raw
materials. Currently, we have two principal suppliers which are both in
Hohhot: Wuchuan Shuntong Company and Wuchuan Sanda Company. Wuchuan Shuntong is
our largest supplier and has dedicated one production line to us and based its
production design on our specific technical requirements. Our other
supplier contributes our remaining humic acid needs. Should any of these
suppliers terminate their supply relationships with our CJV, we may be unable to
procure sufficient amounts of humic acid on acceptable terms, in a timely
manner, that meet our specifications or that meet the demands of our customers
and our profitability may be limited. In addition, these suppliers may not
perform their obligations as they have to date, and it may not be possible to
specifically enforce the relationships we have formed with such suppliers. If we
are unable to obtain adequate quantities of humid acid at economically viable
prices which meet our specifications, our financial condition and results of
operations could be adversely affected.
Any
significant fluctuation in our production costs may have a material adverse
effect on our operating results.
The
prices for the raw materials and other inputs to manufacture our plant and
animal nutrient products are subject to market forces largely beyond our
control, including the price of lignite or leonardite coal, our energy
costs and freight costs. The costs for these inputs may fluctuate significantly
based upon changes in the economy and markets. Although we may pass any increase
of such costs through to our customers, in the event we are unable to do
so, we could incur significant losses and a diminution of our share
price.
Disruptions
in the supply of raw materials used in our products could cause us to be unable
to meet customer demand, which could result in the loss of customers and net
sales.
Humic
acid is the primary raw material that we use to manufacture our products and is
extracted from lignite or leonardite coal. Currently, we have two
principal suppliers which are all in Hohhot City: Wuchuan Shuntong Company and
Wuchuan Sanda Company. If there are any business interruptions at any of
these two principal suppliers and we are unable to locate an alternative supply
in a timely manner, we may not be able to meet customer demand, which could
result in the loss of customers and net sales.
20
We
may be subject to more stringent governmental regulation on our
products.
The
manufacture and sale of our fertilizer and feed products in the PRC is regulated
by the PRC and the provincial government. The legal and regulatory regime
governing our industry is evolving, and we may become subject to different,
including more stringent, requirements than those currently applicable to us.
While we believe a more stringent standard will have a bigger impact on those
manufacturers with poor quality products, we cannot assure you any regulatory
change will not adversely affect our business.
We
have limited insurance coverage and may incur losses due to business
interruptions resulting from natural and man-made disasters, and our insurance
may not be adequate to cover liabilities resulting from accidents or injuries
that may occur.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited commercial insurance products. While we carry
property insurance on our office building, production facility, raw materials
and inventories in Hohhot facilities, and carry auto insurance on our vehicles
and maintain workers compensation insurance for certain of our workers, we do
not carry any product liability insurance. We believe that current facilities
are adequate for our current and immediately foreseeable operating needs. We
have determined that balancing the risks of disruption or liability from our
business, the cost of insuring for these risks on the one hand, and the
difficulties associated with acquiring such insurance on commercially reasonable
terms on the other hand, makes it impractical for us to have such
insurance.
Should
any natural catastrophes such as earthquakes, floods, or any acts of terrorism
occur in Inner Mongolia, where our primary operations are located and most of
our employees are based, or elsewhere, we might suffer not only significant
property damage, but also loss of revenues due to interruptions in our business
operations.
The
occurrence of a significant event for which we are not fully insured or
indemnified, and/or the failure of a party to meet its underwriting or
indemnification obligations, could materially and adversely affect our
operations and financial condition. Moreover, no assurance can be given that we
will be able to maintain adequate insurance in the future at rates we consider
reasonable.
Any
disruption of the operations in our production facility would damage our
business.
All of
our fertilizer products are currently manufactured in our production facility in
Inner Mongolia, China. Our operations could be interrupted by fire, flood,
earthquake and other events beyond our control. Any disruption of the operations
in our production facility would have a significant negative impact on our
ability to manufacture and deliver products as we would likely be unable to
outsource our production on terms favorable to us, if at all. Failure to replace
any lost production capability would cause a potential diminution in sales, the
cancellation of orders, loss of valuable employees, damage to our reputation and
potential lawsuits.
The
fertilizer and feed products that we manufacture pose safety risks and could
expose us to product liability claims.
Defects
in, or unknown harmful effects caused by, organic and inorganic chemicals and
elements in our products could subject us to potential product liability claims
that our products cause some harm to the human body or the plants and animals
which use our products. Although we have adopted safety measures, which we
believe meet industry standards, in our research, development and manufacturing
processes, accidents may still occur. We do not carry any product liability
insurance and any accident, either at the manufacturing phase or during the use
of our products, may subject us to significant liabilities to persons and
farmers harmed by these products. Public perception that our products are not
safe, whether justified or not, could damage our reputation, involve us in
litigation, and damage our brand names and our business. As of the date of this
report, no product liability claim has ever been brought against us. However, if
we are involved in litigation in the future, the potential judgment or
settlement along with the litigation costs could harm our financial
performance.
An outbreak of food scares in China
would materially and adversely affect our business.
Any major
outbreak of food scares, such as the milk contamination scandal in the PRC in
2008, may result in significant disruptions to our business operations. A major
food scare could result in considerable decreases in the demand for the products
in which our products are used, which would materially and adversely
affect our business and our profitability. Adverse publicity and concerns
resulting from such a food scare may discourage consumers from purchasing
products in which our products are used. Such a reduction in demand would
adversely impact our financial performance and results of
operations.
Because
we may rely on dividends and other distributions on equity paid by our current
and future Chinese subsidiaries for our cash requirements, restrictions under
Chinese law on their ability to make such payments could materially and
adversely affect our ability to grow, make investments or acquisitions that
could benefit our business, pay dividends to you, and otherwise fund and conduct
our businesses.
We have
adopted a holding company structure, and our holding companies may rely on
dividends and other distributions on equity paid by our current and future PRC
subsidiaries for their cash requirements, including the funds necessary to
service any debt we may incur or financing we may need for operations other than
through our PRC subsidiaries. PRC legal restrictions permit payments of
dividends by our PRC subsidiaries only out of their accumulated after-tax
profits, if any, determined in accordance with PRC GAAP. Our PRC subsidiaries
are also required under PRC laws and regulations to allocate at least 10% of
their after-tax profits determined in accordance with PRC GAAP to statutory
reserves until such reserves reach 50% of the company’s registered capital.
Allocations to these statutory reserves and funds can only be used for specific
purposes and are not transferable to us in the form of loans, advances or cash
dividends. Any limitation on the ability of our current or future PRC
subsidiaries to transfer funds to us could materially and adversely limit our
ability to grow, make investments or acquisitions that could be beneficial to
our business, pay dividends and otherwise fund and conduct our
business.
21
If we are unable to establish
appropriate internal financial reporting controls and procedures, it could cause
us to fail to meet our reporting obligations, result in the restatement of our
financial statements, harm our operating results, subject us to regulatory
scrutiny and sanction, cause investors to lose confidence in our reported
financial information and have a negative effect on the market price for shares
of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports
and effectively prevent fraud. We maintain a system of internal control
over financial reporting, which is defined as a process designed by, or under
the supervision of, our principal executive officer and principal financial
officer, or persons performing similar functions, and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
As a
public company, we have significant additional requirements for enhanced
financial reporting and internal controls. We are required to document and test
our internal control procedures in order to satisfy the requirements of Section
404 of the Sarbanes-Oxley Act of 2002, which requires annual management
assessments of the effectiveness of our internal controls over financial
reporting. The process of designing and implementing effective internal controls
is a continuous effort that requires us to anticipate and react to changes in
our business and the economic and regulatory environments and to expend
significant resources to maintain a system of internal controls that is adequate
to satisfy our reporting obligations as a public company. We cannot assure
you that we will not, in the future, identify areas requiring improvement in our
internal control over financial reporting. We cannot assure you that the
measures we will take to remediate any areas in need of improvement will be
successful or that we will implement and maintain adequate controls over our
financial processes and reporting in the future as we continue our growth. If we
are unable to establish appropriate internal financial reporting controls and
procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on
the market price for shares of our common stock.
Lack
of experience as officers of publicly traded companies of our management team
may hinder our ability to comply with the Sarbanes-Oxley Act.
It may be
time consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley Act of
2002. We may need to hire additional financial reporting, internal controls and
other finance staff in order to develop and implement appropriate internal
controls and reporting procedures. If we are unable to comply with the
Sarbanes-Oxley Act’s internal controls requirements, our auditor could not issue
an unqualified opinion of our internal control over financial
reporting.
We
have incurred increased costs as a result of being a public
company.
As a
public company, we have incurred significant legal, accounting and other
expenses that we did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the
SEC, has required changes in corporate governance practices of public companies.
We expect these new rules and regulations to increase our legal, accounting and
financial compliance costs and to make certain corporate activities more
time-consuming and costly. In addition, we will incur additional costs
associated with our public company reporting requirements. We are currently
evaluating and monitoring developments with respect to these new rules, and we
cannot predict or estimate the amount of additional costs we may incur or the
timing of such costs.
Risks
Associated With Doing Business In China
Adverse
changes in PRC economic and political policies could have a material adverse
effect on the overall economic growth of China, which could reduce the demand
for our products and materially and adversely affect our business.
Substantially
all of our assets are located in China. Substantially all of our revenue is
derived from our operations in China and we anticipate that sales of our
products in the PRC will continue to represent a substantial proportion of our
total sales in the near future. Accordingly, our results of operations and
prospects are subject, to a significant extent, to the economic, political and
legal developments in China. The PRC economy differs from the economies of most
developed countries in many aspects, including:
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the
growth rate;
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the
level and control of capital
investment;
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the
control of foreign exchange; and
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allocation of resources.
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While the
Chinese economy has grown significantly in the past two decades, the growth has
been uneven geographically, among various sectors of the economy and during
different periods. We cannot assure you that the Chinese economy will continue
to grow or to do so at the pace that has prevailed in recent years, or that if
there is growth, such growth will be steady and uniform. In addition, if there
is a slowdown, such slowdown could have a negative effect on our business. Any
measures taken by the PRC Government, even if they benefit the overall Chinese
economy in the long-term, may have a negative effect on us. For example, our
financial condition and results of operations may be materially and adversely
affected by government control over capital investments. Although the Chinese
economy has been transitioning from a planned economy to a more market-oriented
economy, a substantial portion of the productive assets in China is still owned
by the PRC Government. The continued control of these assets and other aspects
of the national economy by the PRC Government could materially and adversely
affect our business. The PRC Government also exercises significant control over
Chinese economic growth through allocating resources, controlling payment of
foreign currency denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Any adverse change
in the economic conditions or government policies in China could have a material
adverse effect on the overall economic growth and the level of investments and
expenditures in China, which in turn could lead to a reduction in consumer
demand for our products and consequently have a material adverse effect on our
business and financial condition.
We
derive a substantial portion of our sales from the PRC.
Substantially
all of our sales are generated from the PRC. We anticipate that sales of our
products in the PRC will continue to represent a substantial proportion of our
total sales in the near future. Any significant decline in the condition of the
PRC economy could adversely affect consumer demand for our products, among other
things, which in turn would have a material adverse effect on our business and
financial condition.
The
PRC legal system embodies uncertainties that could limit the legal protections
available to you and us.
Unlike
common law systems, the PRC legal system is based on written statutes and
decided legal cases have little precedential value. In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation since then has
been to significantly enhance the protections afforded to various forms of
foreign investment in China. Our PRC operating subsidiary is subject to laws and
regulations applicable to foreign investment in China. Our CJV is subject to
laws and regulations governing the formation and conduct of domestic PRC
companies. Relevant PRC laws, regulations and legal requirements may change
frequently, and their interpretation and enforcement involve uncertainties. For
example, we may have to resort to administrative and court proceedings to
enforce the legal protection that we enjoy either by law or contract. However,
since PRC administrative and court authorities have significant discretion in
interpreting and implementing statutory and contractual terms, it may be more
difficult to evaluate the outcome of administrative and court proceedings and
the level of legal protection we enjoy than under more developed legal systems.
Such uncertainties, including the inability to enforce our contracts and
intellectual property rights, could materially and adversely affect our business
and operations. Accordingly, we cannot predict the effect of future developments
in the PRC legal system, particularly with respect to the fertilizer and feed
sector, including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, or the preemption of local regulations by
national laws. These uncertainties could limit the legal protections
available to us and other foreign investors.
Currency
fluctuations may adversely affect our business.
Our
reporting currency is the U.S. dollar and our operating subsidiary in China
uses the local currency as its functional currency. Substantially all
of our revenue and expenses are in Renminbi. We are subject to the effects of
exchange rate fluctuations with respect to any of these currencies. For example,
the value of the Renminbi depends to a large extent on Chinese government
policies and China’s domestic and international economic and political
developments, as well as supply and demand in the local market. Since 1994, the
official exchange rate for the conversion of Renminbi to the U.S. dollar had
generally been stable and the Renminbi had appreciated slightly against the U.S.
dollar. However, on July 21, 2005, the PRC Government changed its policy of
pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the
Renminbi may fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in an
approximately 17% appreciation of the Renminbi against the U.S. dollar between
July 21, 2005 and December 31, 2009.
It is
possible that the PRC Government could adopt a more flexible currency policy,
which could result in more significant fluctuations of the Renminbi against the
U.S. dollar. We can offer no assurance that the Renminbi will be stable against
the U.S. dollar or any other foreign currency.
23
To the
extent the U.S. dollar strengthens against foreign currencies, the translation
of foreign currency denominated transactions will result in reduced revenue,
operating expenses and net income for our international operations. Similarly,
to the extent the U.S. dollar weakens against foreign currencies, the
translation of the foreign currency denominated transactions will result in
increased revenue, operating expenses and net income for our international
operations. We are also exposed to foreign exchange rate fluctuations as we
convert the financial statements of Fullmax Ltd., Asia Standard Oil, Ltd., and
Yongye Nongfeng into U.S. dollars in consolidation. If there is a change in
foreign currency exchange rates, the conversion of our foreign subsidiaries’
financial statements into U.S. dollars will lead to a translation gain or loss
which is recorded as a component of other comprehensive income. In addition, we
may have certain assets and liabilities that are denominated in currencies other
than the relevant entity’s functional currency. Changes in the functional
currency value of these assets and liabilities result in foreign exchange gain
or loss. We have not entered into agreements or purchased instruments to hedge
our exchange rate risks, although we may do so in the future. The availability
and effectiveness of any hedging transaction may be limited and we may not be
able to successfully hedge our exchange rate risks.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices, they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business or from government officials who might give them priority in
obtaining new licenses, which would put us at a disadvantage. Although we inform
our personnel and other agents that such practices are illegal, we cannot assure
you that our employees or other agents will not engage in such conduct for which
we might be held responsible. If our employees or other agents are found to have
engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations.
Changes
in foreign exchange regulations in the PRC may affect our ability to pay
dividends in foreign currency or conduct other foreign exchange
business.
The
Renminbi is not currently a freely convertible currency, and the restrictions on
currency exchanges may limit our ability to use revenues generated in Renminbi
to fund our business activities outside the PRC or to make dividends or other
payments in United States dollars. The PRC government strictly regulates
conversion of Renminbi into foreign currencies. Over the years, foreign exchange
regulations in the PRC have significantly reduced the government’s control over
routine foreign exchange transactions under current accounts. In the PRC, the
State Administration for Foreign Exchange, or the SAFE, regulates the conversion
of the Renminbi into foreign currencies. Pursuant to applicable PRC laws and
regulations, foreign invested enterprises incorporated in the PRC are required
to apply for “Foreign Exchange Registration Certificates”. Currently, conversion
within the scope of the “current account” (e.g. remittance of foreign currencies
for payment of dividends, etc.) can be effected without requiring the approval
of SAFE. However, conversion of currency in the “capital account” (e.g. for
capital items such as direct investments, loans, securities, etc.) still
requires the approval of SAFE. In addition, on October 21, 2005, SAFE issued the
Notice on Issues Relating to the Administration of Foreign Exchange in
Fundraising and Reverse Investment Activities of Domestic Residents Conducted
via Offshore Special Purpose Companies (“Notice 75”), which became effective as
of November 1, 2005. Notice 75 replaced the two rules issued by SAFE in January
and April 2005. According to Notice 75:
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prior
to establishing or assuming control of an offshore company for the purpose
of obtaining overseas equity financing with assets or equity interests in
an onshore enterprise in the PRC, each PRC resident, whether a natural or
legal person, must complete the overseas investment foreign exchange
registration procedures with the relevant local SAFE
branch;
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an
amendment to the registration with the local SAFE branch is required to be
filed by any PRC resident that directly or indirectly holds interests in
that offshore company upon either (1) the injection of equity interests or
assets of an onshore enterprise to the offshore company, or (2) the
completion of any overseas fund raising by such offshore company;
and
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an
amendment to the registration with the local SAFE branch is also required
to be filed by such PRC resident when there is any material change in the
capital of the offshore company that does not involve any return
investment, such as (1) an increase or decrease in its capital, (2) a
transfer or swap of shares, (3) a merger or division, (4) a long term
equity or debt investment, or (5) the creation of any security
interests.
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Moreover,
Notice 75 applies retroactively. As a result, PRC residents who have established
or acquired control of offshore companies that have made onshore investments in
the PRC in the past are required to complete the relevant overseas investment
foreign exchange registration procedures by March 31, 2006. Under the relevant
rules, failure to comply with the registration procedures set forth in Notice 75
may result in restrictions being imposed on the foreign exchange activities of
the relevant onshore company, including the payment of dividends and other
distributions to its offshore parent or affiliate and the capital inflow from
the offshore entity, and may also subject relevant PRC residents to penalties
under PRC foreign exchange administration regulations.
24
In
addition, SAFE issued updated internal implementing rules , or the Implementing
Rules, in relation to Notice 75. The Implementing Rules were promulgated and
became effective on May 29, 2007. Such Implementing Rules provide more detailed
provisions and requirements regarding the overseas investment foreign exchange
registration procedures. However, even after the promulgation of Implementing
Rules there still exist uncertainties regarding the SAFE registration for PRC
residents’ interests in overseas companies.
As a
result, we cannot predict how they will affect our business operations following
a business combination. For example, our ability to conduct foreign exchange
activities following a business combination, such as remittance of dividends and
foreign-currency-denominated borrowings, may be subject to compliance with the
SAFE registration requirements by such PRC residents, over whom we have no
control. In addition, we cannot assure you that such PRC residents will be able
to complete the necessary approval and registration procedures required by the
SAFE regulations. We will require all our shareholders, following a business
combination, who are PRC residents to comply with any SAFE registration
requirements, if required by Notice 75, Implementing Rules or other applicable
PRC laws and regulations, although we have no control over either our
shareholders or the outcome of such registration procedures. Such uncertainties
may restrict our ability to implement our business combination strategy and
adversely affect our business and prospects following a business
combination.
Recent
PRC regulations relating to mergers and acquisitions of domestic enterprises by
foreign investors may increase the administrative burden we face and create
regulatory uncertainties.
On August
8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or
MOFCOM, the State Assets Supervision and Administration Commission, or SASAC,
the State Administration for Taxation, the State Administration for Industry and
Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE, jointly
adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors, or New M&A Rule, which became effective on September 8,
2006 and was amended on June 22, 2009. The New M&A Rule purports, among
other things, to require offshore special purpose vehicles, or SPVs, formed for
overseas listing purposes through acquisitions of PRC domestic companies and
controlled by PRC companies or individuals, to obtain the approval of the CSRC
prior to publicly listing their securities on an overseas stock
exchange.
On
September 21, 2006, pursuant to the New M&A Rule and other PRC laws and
regulations, the CSRC, in its official website, promulgated relevant guidance
with respect to the issues of listing and trading of domestic enterprises’
securities on overseas stock exchanges (the “Related Clarifications”), including
a list of application materials with respect to the listing on overseas stock
exchanges by SPVs.
There are
substantial uncertainties regarding the interpretation and application of the
above rules, and CSRC has yet to promulgate any written provisions or formally
to declare or state whether the overseas listing of PRC related company similar
to the case of us shall be subject to the approval of CSRC. If CSRC
approval is required in connection with our listing, our failure to obtain or
delay in obtaining such approval could result in penalties imposed by CSRC and
other PRC regulatory agencies. These penalties could include fines and
penalties on our operations in China, restriction or limitation on remitting
dividends outside of China, and other forms of sanctions that may cause a
material and adverse effect to our business, operations and financial
conditions.
Notwithstanding
those provisions, we are advised by our PRC counsel, Han Kun Law
Offices, that CSRC approval is not required in the context of our listing
because (i) we are not a special purpose vehicle formed or controlled by
PRC companies or PRC individuals, (ii) we are owned or substantively
controlled by foreigners, and (iii) establishment of the CJV is not subject
to the New M&A rules. However, we cannot assure that the relevant PRC
government agencies, including the CSRC, would reach the same conclusion, and we
still cannot rule out the possibility that CSRC may deem our listing structure
circumvents the New M&A rules, Related Clarifications and PRC Securities
Law.
Though
the New M&A rules do not have express provisions in terms of penalties
against non-procurement of CSRC approval, there are some other penalty
provisions in other PRC laws and regulations regulating offshore listing, which
can be cited as a reference:
(i)
Pursuant to Article 188 of the PRC Securities Law, any entity that issues
securities or issues securities in disguised form without verification or
examination and approval by the statutory authority shall be ordered to cease
issuance and refund the funds thus raised, together with bank deposit interest
for the same period, and shall also be fined not less than one percent but not
more than five percent of the amount of the proceeds illegally raised. The
persons directly in charge and the other persons directly responsible shall be
given a disciplinary warning and also be fined not less than RMB30,000 but not
more than RMB300,000. However, we believe that this penalty is mainly
designed for and targeted at domestic listing because the PRC Securities Law
mainly regulate domestic listings, and listing or de-listing of a company’s
stock in the US stock market should be subject to the SEC’s regulation, which is
beyond the CSRC’s jurisdiction.
(ii)
Pursuant to the Circular of the State Council Concerning Further Strengthening
the Administration of Overseas Issuance and Listing of Securities, the overseas
listing of securities of a PRC related company which violates this Circular
shall be deemed an issuance of shares without authorization or approval.
Persons in charge of the competent departments responsible for approval of
such an overseas issuance could be subject to administrative sanctions if such
person in charge is liable for such violation. People heading the issuing
entity and other people directly responsible for issuance shall be penalized,
including degraded to a lower lever position and termination of employment by
the upper level department. If the violation constitutes a crime, criminal
liability shall be claimed against relevant responsible persons according to
applicable laws. The issuing entity, relevant agencies involved and the
responsible people thereof shall be penalized by the CSRC in accordance with the
provisions of the Interim Regulations on the Administration of Issuance and
Trading of Securities and other relevant provisions.
25
Government
regulations on environmental matters in China may adversely impact on our
business.
Our
manufacturing operations are subject to numerous laws, regulations, rules and
specifications relating to human health and safety and the environment. These
laws and regulations address and regulate, among other matters, wastewater
discharge, air quality and the generation, handling, storage, treatment,
disposal and transportation of solid and hazardous wastes and releases of
hazardous substances into the environment. In addition, third parties and
governmental agencies in some cases have the power under such laws and
regulations to require remediation of environmental conditions and, in the case
of governmental agencies, to impose fines and penalties. We make capital
expenditures from time to time to stay in compliance with applicable laws and
regulations.
We
believe we have obtained all permits and approvals and filed all registrations
required for the conduct of our business, except where the failure to obtain any
permit or approval or file any registration would not have a material adverse
effect on our business, financial condition and results of operations. We
believe we are in compliance in all material respects with the numerous laws,
regulations, rules, specifications and permits, approvals and registrations
relating to human health and safety and the environment except where
noncompliance would not have a material adverse effect on our business,
financial condition and results of operations.
The PRC
governmental authorities have not revealed any material environmental liability
that would have a material adverse effect on us. We have not been notified by
any governmental authority of any continuing noncompliance, liability or other
claim in connection with any of our properties or business operations, nor are
we aware of any other material environmental condition with respect to any of
our properties or arising out of our business operations at any other location.
However, in connection with the ownership and operation of our properties
(including locations to which we may have sent waste in the past) and the
conduct of our business, we potentially may be liable for damages or cleanup,
investigation or remediation costs.
No
assurance can be given that all potential environmental liabilities have been
identified or properly quantified or that any prior owner, operator, or tenant
has not created an environmental condition unknown to us. Moreover, no assurance
can be given that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition of
the properties will not be affected by the condition of land or operations in
the vicinity of the properties (such as the presence of underground storage
tanks), or by third parties unrelated to us. State and local environmental
regulatory requirements change often.
It is
possible that compliance with a new regulatory requirement could impose
significant compliance costs on us. Such costs could have a material adverse
effect on our business, financial condition and results of
operations.
We
may have difficulty managing the risk associated with doing business in the
Chinese fertilizer and feed sector.
In
general, the fertilizer and feed sector in China is affected by a series of
factors, including, but not limited to, natural, economic and social such as
climate, market, technology, regulation, and globalization, which makes risk
management difficult. Fertilizer and feed operations in China face similar risks
as present in other countries, however, these can either be mitigated or
exacerbated due to governmental intervention through policy promulgation and
implementation either in the fertilizer and feed sector itself or sectors which
provide critical inputs to fertilizer and feed such as energy or outputs such as
transportation. While not an exhaustive list, the following factors could
significantly affect our ability to do business:
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food,
feed, and energy demand including liquid fuels and crude
oil;
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agricultural,
financial, energy and renewable energy and trade
policies;
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input
and output pricing due to market factors and regulatory
policies;
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production
and crop progress due to adverse weather conditions, equipment
deliveries, and water
and irrigation conditions; and
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infrastructure
conditions and policies.
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Currently,
we do not hold and do not intend to purchase insurance policies to protect
revenue in the case that the above conditions cause losses of
revenue.
26
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The PRC
historically has been unaccustomed to and lacking in Western style management
and financial reporting concepts and practices, as well as in modern banking,
computer and other control systems. We may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the PRC. As a
result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. We may have
difficulty establishing adequate management, legal and financial controls in the
PRC.
We
face risks related to health epidemics and other outbreaks.
Our
business could be adversely affected by the effects of swine flu, avian flu,
severe acute respiratory syndrome, or SARS, or another epidemic or outbreak.
From 2005 to 2009, there have been reports on the occurrences of avian flu and
swine flu in various parts of China and elsewhere in Asia, including a few
confirmed human cases and deaths. Any prolonged recurrence of swine flu, avian
flu, SARS or other adverse public health developments in China may have a
material adverse effect on our business operations. Our operations may be
impacted by a number of health-related factors, including, among other things,
quarantines or closures of our factories and the facilities of our supplier and
customers which could severely disrupt our operations. Any of the foregoing
events or other unforeseen consequences of public health problems could
adversely affect our business and results of operations. We have not adopted any
written preventive measures or contingency plans to combat any future outbreak
of swine flu, avian flu, SARS or any other epidemic.
Inflation
in the PRC could negatively affect our profitability and growth.
While the
PRC economy has experienced rapid growth, it has been uneven among various
sectors of the economy and in different geographical areas of the country. Rapid
economic growth can lead to growth in the money supply and rising inflation. If
prices for our products do not rise at a rate that is sufficient to fully absorb
inflation-driven increases in our costs of supplies, our profitability can be
adversely affected.
During
the past ten years, the rate of inflation in China has been fluctuating quite
significantly. The Chinese government, from time to time, has adopted various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. In order to control inflation in the past, the PRC
government has imposed controls on bank credits, limits on loans for fixed
assets and restrictions on state bank lending. The implementation of these and
other similar policies can impede economic growth and thereby harm the market
for our products.
Because
our assets and operations are located in PRC, you may have difficulty enforcing
any civil liabilities against us under the securities and other laws of the
United States or any state.
We are a
holding company, and all of our assets are located in the PRC. In addition,
substantially all of our directors and officers are non-residents of the United
States, and all or a substantial portion of the assets of these non-residents
are located outside the United States. As a result, it may be difficult for
investors to effect service of process within the United States upon these
non-residents, or to enforce against them judgments obtained in United States
courts, including judgments based upon the civil liability provisions of the
securities laws of the United States or any state.
There is
uncertainty as to whether courts of the PRC would enforce:
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judgments
of United States courts obtained against us or these non-residents based
on the civil liability provisions of the securities laws of the United
States or any state; or
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in
original actions brought in the PRC, liabilities against us or
non-residents predicated upon the securities laws of the United States or
any state.
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Enforcement
of a foreign judgment in the PRC also may be limited or otherwise affected by
applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or
similar laws relating to or affecting creditors’ rights generally and will be
subject to a statutory limitation of time within which proceedings may be
brought.
We
may not receive the preferential tax treatment we previously enjoyed under PRC
law, and our global income and dividends paid to us from our operations in China
may become subject to income tax under PRC law.
The rate
of income tax on companies in China may vary depending on the availability of
preferential tax treatment or subsidies based on their industry or
location. The PRC government promulgated on March 16, 2007 the new
Enterprise Income Tax Law, or the EIT Law, and its implementing rules, which
became effective January 1, 2008. Pursuant to the new law, the enterprise income
tax of 25% shall be applied to any enterprise. However, in December 2009 we were
notified that our tax rate for the full year of 2009 and 2010 would be set at
15%. There is no assurance whether we can receive this preferential
rate after 2010 or if any new law may change the preferential treatment granted
to us. Any loss or substantial reduction of the tax benefits enjoyed by us would
reduce our net profit and have a material adverse effect on our financial
condition and results of operations.
27
Notwithstanding
the foregoing provision, the new EIT Law also provides that dividends paid
between “qualified resident enterprises” are exempt from enterprise income tax.
Under the new EIT Law and its implementing rules, an enterprise established
outside the PRC with its “de facto management body” within the PRC is
considered a “resident enterprise” and will be subject to the enterprise
income tax at the rate of 25% on its worldwide income. The “de
facto management body” is defined as the organizational body that
effectively exercises overall management and control over production and
business operations, personnel, finance and accounting, and properties of
the enterprise. It remains unclear how the PRC tax authorities
will interpret such a broad definition. Substantially most of our
management members or business operations are based in the PRC. If the PRC
tax authorities subsequently determine that we should be classified as
a resident enterprise, then it is possible that our worldwide income
will be subject to income tax at a uniform rate of 25%.
In
addition, under the new EIT law and its implementing rules, dividends paid
by a foreign invested enterprise in the PRC to its foreign investor
who is a non-resident enterprise will be subject to a 10% PRC withholding
income tax (5% for a qualified Hong Kong beneficial owner), unless such tax is
eliminated or reduced under an applicable tax treaty. Asia Standard Oil, the
95% shareholder of our CJV, is incorporated in Hong Kong. Therefore,
if Asia Standard Oil is considered a non-resident enterprise for purposes
of the new EIT law, this new withholding income tax imposed on dividends
paid to us by our PRC subsidiaries would reduce our net income in the event
we decide to declare a dividend, which may have an adverse effect on our
operating results.
It is
unclear whether the dividends we receive from our CJV will constitute dividends
between “qualified resident enterprises” and would therefore qualify for the tax
exemption because it is unclear as to (i) the detailed qualification
requirements for such exemption and (ii) whether dividend payments by our PRC
subsidiary and investee company to us will meet such qualification requirements,
even if we are considered a PRC resident enterprise for tax
purposes.
Moreover,
since ASO, the 95% shareholder of our CJV, is incorporated in Hong Kong, even if
ASO is considered a non-resident enterprise, it is also unclear whether ASO
should be considered as a Hong Kong beneficial owner. The beneficial owner means
persons who possess ownership and right of control on their proceeds or rights
or properties generated from such proceeds. The beneficial owner generally
engages in substantive operation activities and may be individuals, companies or
any other associations. Agents and companies for tax evasion purposes are not
beneficial owner. If ASO is not considered Hong Kong beneficial owner, it will
be subject to a 10% PRC withholding income tax.
Dividends
payable to our non-PRC investors and any gain on the sale of our shares may be
subject to taxes under PRC tax laws.
If our
dividends payable to our shareholders are treated as income derived from sources
within China, then those dividends, and any gain on the sale or transfer of our
shares, may be subject to taxes under PRC tax laws.
Under the
EIT Law and its implementing rules, a withholding income tax at the rate of 10%
is applicable to dividends paid by us to our investors that are non-resident
enterprises so long as (i) any such non-resident enterprise investor does not
have an establishment or place of business in China, or (ii) despite the
existence of an establishment or place of business in China, the relevant income
is not effectively connected with such an establishment or place of business in
China and (iii) such dividends are derived from sources within PRC. Similarly,
any gain realized on the transfer of our shares by such investors is also
subject to a 10% withholding income tax if such gain is regarded as income
derived from sources within China and we are considered a resident enterprise
domiciled in China for tax purposes. If we are required under the EIT Law to
withhold PRC income tax on our dividends paid to our foreign shareholders or
investors who are nonresident enterprises, or if you are required to pay PRC
income tax on the transfer of our shares under the circumstances mentioned
above, the value of your investment in our shares may be materially and
adversely affected.
In
January 2009, the State Administration of Taxation promulgated the Provisional
Measures for the Administration of Withholding of Enterprise Income Tax for
Non-resident Enterprises (“Measures”). Entities which have the direct obligation
to make the following types of payments to a non-resident enterprise will be the
relevant tax withholders for such a non-resident enterprise: income from equity
investment (including dividends and other return on investment), interest, rent,
royalties, and income from assignment of property as well as other income
subject to enterprise income taxes received by non-resident enterprises in
China. Further, the Measures provide that in the case of an equity transfer
between two non-resident enterprises outside of the PRC, the non-resident
enterprise which receives the equity transfer payment shall file a tax
declaration with the PRC tax authority located at the place of the PRC company
whose equity has been transferred, and the PRC company whose equity has
been transferred shall assist the tax authorities to collect taxes from the
relevant non-resident enterprise. However, it is unclear whether the Measures
cover equity transfers of a non-resident enterprise which is a direct or an
indirect shareholder of a PRC company. Given these Measures, there is a
possibility that we may have an obligation to withhold income tax in respect of
the dividends paid to non-resident enterprise investors.
28
PRC
regulation of direct investment and loans by offshore holding companies to PRC
entities may delay or limit our ability to use the proceeds of any offering of
securities to make additional capital contributions or loans to our PRC
operating business.
Any
capital contributions or loans that we, as an offshore company, make to our PRC
operating business, including from the proceeds of this offering, are subject to
PRC regulations. For example, any of our loans to our PRC operating business
cannot exceed the difference between the total amount of investment our PRC
operating business are approved to make under relevant PRC laws and their
respective registered capital, and must be registered with the local branch of
SAFE as a procedural matter. In addition, our capital contributions to the CJV
must be approved by the NDRC and MOFCOM or their local counterpart and
registered with the SAIC or its local counterpart. We cannot assure you that we
will be able to obtain these approvals on a timely basis, or at all. If we fail
to obtain such approvals, our ability to make equity contributions or provide
loans to our PRC operating business or to fund its operations may be negatively
affected, which could adversely affect its liquidity and its ability to fund its
working capital and expansion projects and meet its obligations and
commitments. Furthermore, SAFE promulgated a new circular in August 2008 with
respect to the administration of conversion of foreign exchange capital
contribution of foreign invested enterprises into RMB. Pursuant to this new
circular, RMB converted from foreign exchange capital contribution can only be
used for the activities within the approved business scope of such foreign
invested enterprise and cannot be used for domestic equity investment or
acquisition unless otherwise allowed by PRC laws or regulations. As a result, we
may not be able to increase the capital contribution of our operating subsidiary
or equity investee and subsequently convert such capital contribution into RMB
for equity investment or acquisition in China.
Recent
changes in the PRC labor law restrict our ability to reduce our workforce in the
PRC in the event of an economic downturn and may increase our labor
costs.
In June
2007, the National People’s Congress of the PRC enacted the Labor Contract Law,
which became effective on January 1, 2008. To clarify certain details in
connection with the implementation of the Labor Contract Law, the State Council
promulgated the Implementing Rules for the Labor Contract Law, or the
Implementing Rules, on September 18, 2008 which came into effect immediately.
The Labor Contract Law provides various rules regarding employment contracts
that will likely have a substantial impact on employment practices in China. The
Labor Contract Law imposes severe penalties on employers that fail to timely
enter into employment contracts with employees. The employer is required to pay
a double salary to the employee if it does not enter into a written contract
with the employee within one month of the employment, and a non-fixed-term
contract is assumed if a written contract is not executed after one year of the
employment. Additionally, the Labor Contract Law sets a limit of two fixed-term
contracts regardless of the length of each term, after which the contract must
be renewed on a non-fixed-term basis should the parties agree to a further
renewal unless otherwise required by the respective employee. This requirement
curtails the common practice of continuously renewing short-term employment
contracts. The Implementing Rules appear to further tighten this rule by
suggesting that an employee has the right to demand a non-fixed-term contract
upon the completion of the second fixed term regardless of whether the employer
agrees to a contract renewal. A non-fixed-term contract does not have a
termination date and it is generally difficult to terminate such a contract
because termination must be based on limited statutory grounds. The employer can
no longer supplement such statutory grounds through an agreement with the
employee. In addition, the Labor Contract Law requires the payment of statutory
severance upon the termination of an employment contract in most circumstances,
including the expiration of a fixed-term employment contract.
Under the
Labor Contract Law, employers can only impose a post-termination non-competition
provision on employees who have access to their confidential information for a
maximum period of two years. If an employer intends to maintain the
enforceability of a post-termination non-competition provision, the employer has
to pay the employee compensation on a monthly basis post-termination of the
employment. Under the Labor Contract Law, a “mass layoff” is defined as
termination of more than 20 employees or more than 10% of the workforce. The
Labor Contract Law expands the circumstances under which a mass layoff can be
conducted, such as when a company undertakes a restructuring pursuant to the PRC
Enterprise Bankruptcy Law, suffers serious difficulties in business operations,
changes its line of business, performs significant technology improvements,
changes operating methods, or where there has been a material change in the
objective economic circumstances relied upon by the parties at the time of the
conclusion of the employment contract, thereby making the performance of
such employment contract impractical. The employer must follow specific
procedures in conducting a mass layoff. There is little guidance on what
penalties an employer will suffer if it fails to follow the procedural
requirements in conducting the mass layoff. Finally, the Labor Contract Law
requires that the employer discuss the company’s internal rules and regulations
that directly affect the employees’ material interests (such as employees’
salary, work hours, leave, benefits, and training, etc.) with all employees or
employee representative assemblies and consult with the trade union or employee
representatives on such matters before making a final decision.
All of
our employees based exclusively within the PRC are covered by the new laws. As
there has been little guidance and precedents as to how the Labor Contract Law
and its Implementing Rules shall be enforced by the relevant PRC authorities,
there remains uncertainty as to their potential impact on our business and
results of operations. The implementation of the Labor Contract Law and its
Implementing Rules may increase our operating expenses, in particular our
personnel expenses and labor service expenses. If we want to maintain the
enforceability of any of our employees’ post-termination non-competition
provisions, the compensation and procedures required under the Labor Contract
Law may add substantial costs and cause logistical burdens to us. Prior to the
new law such compensation was often structured as part of the employee’s salary
during employment, and was not an additional compensation cost. In the event
that we decide to terminate employees or otherwise change our employment or
labor practices, the Labor Contract Law and its Implementing Rules may also
limit our ability to effect these changes in a manner that we believe to be
cost-effective or desirable, which could adversely affect our business and
results of operations. In particular, our ability to adjust the size of our
operations when necessary in periods of recession or less severe economic
downturns such as the recent financial turmoil may be affected. In addition,
during periods of economic decline when mass layoffs become more common, local
regulations may tighten the procedures by, among other things, requiring the
employer to obtain approval from the relevant local authority before conducting
any mass layoff. Such regulations can be expected to exacerbate the adverse
effect of the economic environment on our results of operations and financial
condition.
29
Our
failure to fully comply with PRC labor laws exposes us to potential
liability.
Companies
operating in China must comply with a variety of labor laws, including certain
social insurance, housing fund and other staff welfare-oriented payment
obligations. While we believe we have complied with such obligations, there
exist uncertainties to the interpretation, implementation and enforcement of
such obligations. If relevant governmental authorities determine that
we have not complied fully with such obligations, we may be in violation of
applicable PRC labor laws and we cannot assure you that PRC governmental
authorities will not impose penalties on us for any failure to comply. In
addition, in the event that any current or former employee files a complaint
with relevant governmental authorities, we may be subject to making up such
staff-welfare oriented obligations as well as paying administrative
fines.
Risks
Related to the Common Stock
Our
common stock may be affected by limited trading volume and may fluctuate
significantly.
Our
common stock is traded on the Nasdaq Global Select Market. Although an active
trading market has developed for our common stock, there can be no assurance
that an active trading market for our common stock will be sustained. Failure to
maintain an active trading market for our common stock may adversely affect our
shareholders’ ability to sell our common stock in short time periods, or at all.
In addition, sales of substantial amounts of our common stock in the public
market could harm the market price of our common stock. Our common stock
has experienced, and may experience in the future, significant price and volume
fluctuations. Some of the factors that may materially affect the market price of
our common stock are beyond our control, such as changes in financial estimates
by industry and securities analysts, conditions or trends in the industry in
which we operate or sales of our common stock. These factors may materially
adversely affect the market price of our common stock, regardless of our
performance. These broad market fluctuations may adversely affect the market
price of our common stock
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of our restricted stock in the
public marketplace could reduce the price of our common stock.
From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act (“Rule
144”), subject to certain limitations. In general, pursuant to Rule 144, a
stockholder (or stockholders whose shares are aggregated) who has satisfied a
six-month holding period may, under certain circumstances, sell within any
three-month period a number of securities which does not exceed the greater of
1% of the then outstanding shares of common stock or the average weekly
trading-volume of the class during the four calendar weeks prior to such sale.
Rule 144 also permits, under certain circumstances, the sale of securities,
without any limitations, by a non-affiliate of our company that has satisfied a
one-year holding period. Any substantial sale of common stock pursuant to Rule
144 or pursuant to any resale prospectus may have an adverse effect on the
market price of our securities.
Your
percentage ownership in us may be diluted by future issuances of capital stock,
which could reduce your influence over matters on which stockholders
vote.
Subject
only to any applicable stockholder approval requirements imposed by the Nasdaq
Global Select Market, our board of directors has the authority to issue all or
any part of our authorized but unissued shares of common stock. Issuances of
common stock would reduce your influence over matters on which our stockholders
vote.
Stockholders
should have no expectation of any dividends.
To date,
we have not declared nor paid any cash dividends. The Board of Directors does
not intend to declare any dividends in the near future, but instead intends to
retain all earnings, if any, for use in the operation and expansion of our
business. If we decide to pay dividends, foreign exchange and other regulations
in China may restrict our ability to distribute retained earnings from China or
convert those payments from Renminbi into foreign currencies.
If
our common stock were delisted and determined to be a “penny stock,” a
broker-dealer may find it more difficult to trade our common stock and an
investor may find it more difficult to acquire or dispose of our common stock in
the secondary market.
If our
common stock were removed from listing with the Nasdaq Global Market, it may be
subject to the so-called “penny stock” rules. The SEC has adopted regulations
that define a “penny stock” to be any equity security that has a market price
per share of less than $5.00, subject to certain exceptions, such as any
securities listed on a national securities exchange. For any transaction
involving a “penny stock,” unless exempt, the rules impose additional sales
practice requirements on broker-dealers, subject to certain exceptions. If our
common stock were delisted and determined to be a “penny stock,” a broker-dealer
may find it more difficult to trade our common stock and an investor may find it
more difficult to acquire or dispose of our common stock on the secondary
market. Investors in penny stocks should be prepared for the possibility that
they may lose their whole investment.
30
ITEM
1B. Unresolved Staff Comments
None.
ITEM
2 Properties
Our
principal executive offices are located at 6th floor, Xue Yuan International
Tower, No. 1 Zhichun Road, Haidian District, Beijing PRC and the telephone
number is +86-10-8232-8626. The office space is approximately 1,000 square
meters in area. Inner Mongolia Yongye’s main production facility is
in the High Tech Economic Development Zone in Hohhot City in Inner
Mongolia.
There is
no private ownership of land in China. All land ownership is held by the
government of the PRC, its agencies and collectives. Land use rights can be
transferred upon approval by the land administrative authorities of the PRC
(State Land Administration Bureau) upon payment of the required land transfer
fee. Inner Mongolia Yongye owns the land use rights for the land on which its
manufacturing facility is situated, which have a term of 50 years from
2003.
ITEM
3 Legal Proceedings
We are
not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead a third party to initiate legal
proceedings against us.
ITEM
4 Submission Of Matters to a Vote Of Security Holders
Not
applicable.
Part
II
ITEM
5 Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market
Information
Our
common stock is quoted on The NASDAQ Stock Market (“NASDAQ”) under the trading
symbol “YONG”. Between April 30, 2008 and September 3, 2009, our common stock
was quoted on the OTC Bulletin Board (“OTCBB”) under the trading symbol
“YGII.OB”. Until April 29, 2008, our common stock was traded under the symbol
“GDTN.OB”. The closing price for our common stock on NASDAQ on March 12, 2010
was $8.70 per share.
The
following table sets forth the high and low bid prices for our common stock
prior to September 3, 2009 and the high and low sale prices for our common stock
for subsequent periods, as reported by the OTC Bulleting Board System and the
Nasdaq Global Market, respectively. There were no reported bids for our
common stock during 2007, 2006 and the first quarter of 2008. The OTCBB
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Year
|
Period
|
High
|
Low
|
||||||
2008
|
First
Quarter
|
—
|
—
|
||||||
Second
Quarter
|
$ |
3.75
|
$ |
1.75
|
|||||
Third
Quarter
|
4.65
|
2.00
|
|||||||
|
|||||||||
Fourth
Quarter
|
2.00
|
1.25
|
|||||||
2009
|
First
Quarter
|
$ |
1.60
|
$ |
0.65
|
||||
Second
Quarter
|
3.62
|
1.50
|
|||||||
Third Quarter
|
8.39
|
3.30
|
|||||||
Fourth Quarter
|
11.72
|
7.11
|
|||||||
2010
|
First Quarter
(through March 12)
|
9.21
|
6.87
|
31
Holders
As of
December 31, 2009, there were approximately 28 active record holders of our
common stock.
Dividends
We have
not paid any cash dividends on shares of our common stock and do not plan to do
so in the near future. We currently plan to retain future earnings to fund the
development and growth of our business. Any future determination related to our
dividend policy will be made at the discretion of our Board of
Directors.
Securities
Authorized for Issuance Under Equity Compensation Plans
As of
December 31, 2009, we did not have any active equity compensation
plans.
Purchases
of Equity Securities by the Company and Affiliated Purchasers
During
the fourth quarter of our fiscal year ended December 31, 2009, neither we nor
any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange
Act) purchased any shares of our common stock, the only class of our equity
securities registered pursuant to section 12 of the Exchange Act.
Recent
Sales of Unregistered Securities
We have
reported all sales of our unregistered equity securities that occurred during
2009 in our Reports on Form 10-Q or Form 8-K, as applicable.
ITEM
6 Not Applicable
ITEM
7 Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Except
for the historical information contained herein, the matters discussed in this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and elsewhere in this report are forward-looking statements that
involve risks and uncertainties. The factors listed in the section captioned
“Risk Factors,” as well as any cautionary language in this report, provided
examples of risks, uncertainties and events that may cause our actual results to
differ materially from those projected. Except as may be required by law, we
undertake no obligation to update any forward-looking statement to reflect
events after the date of this prospectus.
Overview
We are
engaged in the research and development, manufacturing, distribution and
sale of fulvic acid based liquid and powder nutrient compounds used in the
agriculture industry. Our headquarters is in Beijing, China and additional
administrative offices and our manufacturing unit are located in Hohhot, Inner
Mongolia, China. Currently, we sell two lines of products, both based on our
fulvic acid compound base: a plant nutrition liquid compound and animal
nutrition powder which is a food additive. Our products start with our
proprietary fulvic acid base which is extracted from humic acid, and to which we
add other natural substances to customize the base for use in our plant and
animal product lines. Based on our internal data and research, we believe our
proprietary technology for fulvic acid extraction creates some of the purest and
most effective fulvic acid base on the market in China today. We have found that
our fulvic acid has a very light weight molecular composition, which we believe
improves the overall permeability of cell walls and allows more complete
transport of nutrients across plant membranes, effectively strengthening the
overall health of plants. We believe our proprietary process for extracting
fulvic acid from humic acid and our patented process for mixing our plant
nutrient and patent pending process for mixing our animal nutrient are key
differentiators in the market and may help us provide a
high quality product that we can control from procurement of raw materials to
final production, which we also believe may help our products to provide
reliable results from season to season.
Our
products start with our fulvic Acid base then, in addition, we add other natural
substances to customize the base for use in our plant or animal lines of
products. Our plant products are intended to add naturally occurring macro and
micro nutrients such as nitrogen, phosphorus, potassium, boron and zinc. Our
animal product adds natural herbs which we believe may help to reduce bacterial
inflammation (mastitis) in cows. It also assists many animals to digest
food more completely and thus we believe that our animal products may help
animals who use them to be healthier.
32
In 2009,
we sold approximately 8,502 tons of plant product (approximately 852,200
units), which represented 93% of revenue at USD $91.2M. We also sold
approximately 1,175 tons of our animal products (approximately 174,200
units). This represented 7% of revenue at USD $6.9M. Yongye’s top 3 provinces by
revenue for 2009 represented 66% of sales and were Hebei at $29M (30%), Inner
Mongolia at $18.5M (19%) and Xinjiang at $16.7M (17%).
Recent
Development
Factors
affecting our operating results
Demand
for our products
One major
tenet of the PRC government’s 11th Five-Year National Economic and Social Plan
(the “NESDP”) (2006-2010) is the focus towards developing China’s western
region. This is one of the top-five economic priorities of the nation. The goal
is to increase rural income growth which will in turn increase demand for more
food and agriculture products. Currently, a large majority of our products are
sold in this western region and this government focus will increase our
opportunity to sell more plant and animal nutrients to farmers who have to
keep up with the demand for higher quantity and higher quality of
products.
According
to the Asian Development Bank statistics, well over 60% of the nation’s 1.3
billion total population is comprised of low-income, rural farmers. According to
the 11th Five-Year NESDP (2006-2010), raising the level of rural income is a top
economic and social goal for the country. Many government initiatives, including
removal of certain agricultural and local product taxes, have been
implemented to spur rural income development. The government expects annual
rural income to grow between 5% and 10% through 2010 (Xinhua, October 12, 2008).
Additionally, according to the National Population and Family Planning
Commission, China's population will reach 1.5 billion by 2030. Therefore, the
country has the challenge of producing approximately 100 million more tons of
crops needed to feed the additional 200 million people. This put pressure on the
agricultural system to increase production capacity.
Seasonality
We face
very seasonal demand patterns. In general, the second and third quarters
drive the bulk of our overall sales, while the first and fourth quarters
are typically our slowest quarters due to the lack of agriculture
activities.
Agriculture
Sector
Agriculture
continues to be a heavily invested sector in China. Brand name investors
continue to invest into China’s agriculture space because they have confidence
in China’s long term outlook. The market volume for agriculture products is
large, both for domestic sales and export and there is no set threshold for
foreign investment into the sector as opposed to other industries, such as
energy, finance, mining, and telecommunications. This is driven by the growing
demand for higher quality food products domestically and international reliance
on food products from China. Currently, China is the world’s biggest grower and
consumer of grains and yet must boost crop yields by at least 1 percent a year
to ensure the country has enough food to feed its 1.3 billion people, according
to the Minister of Agriculture, Sun Zhengcai (China Economic Net, July 21,
2008).
Additional
policy changes are expected to include protecting farmland and working to
increase rural incomes to retain farming interest with the goal being to
maintain self-sufficiency in food production by improving yields based on stable
farmland. This extended to ensuring crop production for 2009 by targeting idle
farmland to grow new crops.
New Land
Reform Policy
Farmland
in China is owned by the local government, but given to local farmers under 30
year use contracts. With the allure of higher incomes and better living
conditions in the city, farmers have abandoned the land and no others farmers
have stepped in to bring it back into production. This has created a
shortage of productive agricultural land. The government has acknowledged this
issue and recently enacted a new land use reform policy which liberalizes the
exchange of land among the nation’s farmers. This creates a new model for
China’s 730 million farmers with the idea being to create more stable farmland
by shifting the country away from the single household farm plot model to the
amalgamation of larger-scale operations which should be more productive due to
technology and economies of scale. Farmers will be able to transfer their
land-use rights to others through a new market system for rural land-use rights.
This will ensure national food security through increasing the supply of
agricultural products.
Drought
In the
last six months of 2008, it was widely reported that China faced substantial
drought conditions in important agricultural areas (as noted by The Economist in
its “China’s Dry Patch” article dated February 6, 2009). This led many to the
conclusion that this weather condition would have an overall negative
impact on China’s annual agricultural output for 2008 and potentially for 2009
which would then have an impact on our company’s revenue. At the time, we did
not believe this to be the case and set out to corroborate this with related
government agencies, our sales and support staff, distributors, and branded
store network owners in our provincial locations. We then gathered localized
information about ways the drought might impact our distributors, their
customers and our end users and found that they believed it would not create an
impact on their sales and thus on our revenue for 2008. We also do not believe
it will impact our sales activities in 2009 at this point in time.
33
In the
ensuing months after the initial reports, there were several key events which
occurred to mitigate some of the impact of the drought conditions faced by the
farmers such as additional governmental spending on increased efforts to
irrigate land using other water sources and additional rainfall which fell on
once drought impacted areas in northern China as reported in Xinhua on February
9, 2008. The State Flood Control and Drought Relief Headquarters reported that
there was a reduction of farmland affected because of these key events (Xinhua
February 9, 2009). The government has also begun their stimulus injections into
the agriculture community to help ward off the affects of any drought induced
financial hardships (as reported in USA Today, February 8, 2009).
FINANCIAL
HIGHLIGHTS
YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
For the Years Ended
|
||||||||
December 31, 2009
|
December 31, 2008
|
|||||||
SALES
|
||||||||
External
customers
|
$ | 95,870,906 | $ | 48,092,271 | ||||
Related
party
|
2,221,936 | - | ||||||
TOTAL
SALES
|
98,092,842 | 48,092,271 | ||||||
COST
OF SALES
|
||||||||
External
customers
|
44,966,126 | 23,165,684 | ||||||
Related
party
|
1,023,260 | - | ||||||
COST
OF SALES
|
45,989,386 | 23,165,684 | ||||||
GROSS
PROFIT
|
52,103,456 | 24,926,587 | ||||||
SELLING
EXPENSES
|
14,720,657 | 8,665,755 | ||||||
RESEARCH
& DEVELOPMENT EXPENSES
|
1,690,248 | - | ||||||
GENERAL
AND ADMINISTRATIVE EXPENSES
|
4,289,488 | 2,573,017 | ||||||
INCOME
FROM OPERATIONS
|
31,403,063 | 13,687,815 | ||||||
OTHER
EXPENSES/(INCOME)
|
||||||||
Interest
expense, net
|
70,101 | 3,135 | ||||||
Other
(income)/expenses, net
|
(174,152 | ) | 526,039 | |||||
Increase/(decrease)
in fair value of derivative liabilities
|
24,009,802 | (2,118,797 | ) | |||||
TOTAL
OTHER EXPENSES/(INCOME), NET
|
23,905,751 | (1,589,623 | ) | |||||
EARNINGS
BEFORE INCOME TAX EXPENSE
|
7,497,312 | 15,277,438 | ||||||
INCOME
TAX EXPENSE
|
4,997,105 | 864,292 | ||||||
NET
INCOME
|
2,500,207 | 14,413,146 | ||||||
LESS:
NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
|
304,556 | 1,102,388 | ||||||
NET
INCOME ATTRIBUTABLE TO YONGYE INTERNATIONAL, INC.
|
2,195,651 | 13,310,758 | ||||||
Earnings per
share:
|
||||||||
Basic
|
$ | 0.07 | $ | 0.68 | ||||
Diluted
|
$ | 0.07 | $ | 0.56 | ||||
Weighted
average shares used in computation:
|
||||||||
Basic
|
31,324,830 | 19,599,054 | ||||||
Diluted
|
31,324,830 | 20,106,433 |
34
RESULTS
OF OPERATIONS
Fiscal
year ended December 31, 2009 compared with Fiscal year ended December 31,
2008
Our
business for the year ended December 31, 2009 grew at a rate of 104% in net
sales or a $ 50M increase over the same period in 2008. We experienced strong
growth due to increased market demand in our existing markets, sales in new
markets opened in 2009, a stable pricing model and overall industry
growth.
The
following table shows, for the periods indicated, information derived from our
consolidated statements of income.
Yongye
|
Yongye
|
|||||||||||
International, Inc.
|
International, Inc.
|
|||||||||||
FY 2009
|
FY 2008
|
Increase/ (decrease)
|
||||||||||
Net
Sales
|
$ | 98,092,842 | $ | 48,092,271 | 104 | % | ||||||
Gross
Profit
|
$ | 52,103,456 | $ | 24,926,587 | 109 | % | ||||||
Operating
Income
|
$ | 31,403,063 | $ | 13,687,815 | 129 | % | ||||||
Net
Income
|
$ | 2,500,207 | $ | 14,413,146 | (83 | )% | ||||||
Gross
Margins
|
53 | % | 52 | % | 2 | % | ||||||
Net
Margins
|
3 | % | 30 | % | (90 | )% | ||||||
EPS-
Basic
|
$ | 0.07 | $ | 0.68 | (89 | )% | ||||||
EPS-
Diluted
|
$ | 0.07 | $ | 0.56 | (87 | )% |
Our
financial position at December 31, 2009 and December 31, 2008:
Yongye
|
Yongye
|
|||||||||||
International, Inc.
|
International, Inc.
|
Increase
|
||||||||||
FY 2009
|
FY 2008
|
/ (decrease)
|
||||||||||
Cash
|
$ | 65,518,181 | $ | 4,477,477 | 1363 | % | ||||||
Accounts
receivable, net of allowance for doubtful accounts
|
$ | 6,161,796 | $ | 2,748,042 | 124 | % | ||||||
PP&E,
net
|
$ | 9,156,915 | $ | 5,368,074 | 71 | % | ||||||
Total
assets
|
$ | 154,355,688 | $ | 34,504,261 | 347 | % | ||||||
Short
term bank loan
|
$ | 2,925,174 | $ | - | 100 | % | ||||||
Long-term
loans - current portion
|
$ | 331,693 | $ | 167,652 | 98 | % | ||||||
Long-term
loans
|
$ | 545,327 | $ | 230,121 | 137 | % | ||||||
Total
equity of the Company’s shareholders
|
$ | 134,463,424 | $ | 27,300,603 | 392 | % |
35
We
increased our cash position to $65,518,181 at December 31, 2009 from
$4,477,477 at December 31, 2008, which is an overall increase of $61,040,704
or 1363% . This was primarily due to the December
Financing.
Accounts
receivable increased by 124% to $6,161,796 as of December 31, 2009 from
$2,748,042 as of December 31, 2008 which was an increase of $3,413,754 due to
growth in overall sales for the year.
Property,
plant and equipment increased to $9,156,915 at December 31, 2009 from $5,368,074
at December 31, 2008, which was a 71% increase, or $3,788,841, and was largely
due to completion of the acquisition of Shengmingsu manufacturing
business in the fourth quarter.
Additionally,
shareholders’ equity increased by $107,162,821 to $134,463,424 as of December
31, 2009, which is an overall 392% increase compared to $27,300,603 as of
December 31, 2008, and was due primarily to our May and December 2009 equity
offering transactions and the exercise of warrants that were issued to investors
in 2008 and 2009 in connection with our equity offerings.
Net
Sales
Yongye
|
Yongye
|
|||||||||||
International, Inc.
|
International, Inc.
|
|
||||||||||
FY 2009
|
FY 2008
|
Increase
|
||||||||||
Sales
|
$ | 98,092,842 | $ | 48,092,271 | 104 | % | ||||||
Gross
Profit
|
$ | 52,103,456 | $ | 24,926,587 | 109 | % | ||||||
Gross
Margin
|
53 | % | 52 | % | 2 | % |
Sales
revenue for the year ended December 31, 2009 was $98,092,842, an increase of
$50,000,571 or 104%, compared with the corresponding period in 2008. This
increase was the result of continued expansion of our distribution network and
higher penetration ratio in our markets.
Gross
profit for the year ended December 31, 2009 was $52,103,456, and represented 53%
of sales. This was an increase of $27,176,869, or 109%, when compared with
$24,926,587 in the corresponding period in 2008. Overall, when comparing gross
margin percentages, the rates remained relatively stable between the two
years.
The
number of independently owned stores brought into our branded store network grew
to 9,110 in the year ended December 31, 2009 from 1,125 in the same period ended
December 31, 2008 which was an increase of 709%. This was due to our expanding
sales territories and higher penetration in our markets.
Sales by
Product Line
Yongye
|
Yongye
|
|||||||||||||||||||||||
International, Inc.
|
International, Inc.
|
|||||||||||||||||||||||
Units
|
FY 2009
|
% of Total
|
Units
|
FY 2008
|
% of Total
|
|||||||||||||||||||
Shipped
|
Total sales
|
Sales
|
Shipped
|
Total sales
|
Sales
|
|||||||||||||||||||
Plant
|
852,200 | 91,172,988 | 93 | % | 427,196 | 44,842,062 | 93 | % | ||||||||||||||||
Animals
|
174,200 | 6,919,854 | 7 | % | 98,058 | 3,250,209 | 7 | % | ||||||||||||||||
Total
|
1,026,400 | 98,092,842 | 100 | % | 525,254 | 48,092,271 | 100 | % |
Sales of
plant product increased 99% to 852,200 units for the year ended December 31,
2009 from 427,196 units in the same period ended December 31, 2008.
Sales of
animal product increased 78% to 174,200 units for the year ended December 31,
2009 from 98,058 units in the same period ended December 31, 2008.
36
Customers
Yongye
|
Yongye
|
|||||||||||||||
International, Inc.
|
International, Inc.
|
|||||||||||||||
FY 2009
|
FY 2008
|
|||||||||||||||
% of Sales
|
Sales
|
% of Sales
|
Sales
|
|||||||||||||
5 Major
Customers
|
82 | % | $ | 80,274,006 | 92 | % | $ | 44,109,814 | ||||||||
3
Major Customers
|
66 | % | $ | 64,284,474 | 70 | % | $ | 33,718,961 | ||||||||
1
Major Customer
|
30 | % | $ | 29,004,998 | 43 | % | $ | 20,541,267 |
Five
major customers accounted for 82% and one major customer accounted for 30% of
the Company’s net revenue for the twelve months period ended December 31, 2009.
Five major customers accounted for 92% and one major customer accounted for 43%
of net revenue for the twelve months period ended December 31, 2008. The
Company’s total sales to five major customers were $80,274,006 and $44,109,814,
for the years ended December 31, 2009 and 2008, respectively.
Cost
of Goods Sold
Yongye
|
Yongye
|
|
||||||||||
International, Inc.
|
International, Inc.
|
Increase
|
||||||||||
FY 2009
|
FY 2008
|
/ (decrease)
|
||||||||||
Cost
of Sales
|
$ | 45,989,386 | $ | 23,165,684 | 99 | % | ||||||
Percentage
of Sales
|
47 | % | 48 | % | (1 | )% |
Cost of
goods sold for the year ended December 31, 2009 was $45,989,386 which is 47% of
revenues. This is an increase of $22,823,702 over the previous period which
represents a 99% increase overall. As a percent of revenue, the ratio remained
relatively stable.
Selling,
General & Administrative Expenses
Yongye
|
Yongye
|
|
||||||||||
International,
Inc.
|
International,
Inc.
|
Increase /
|
||||||||||
FY 2009
|
FY 2008
|
(decrease)
|
||||||||||
Selling,
General and Administrative (excluding research and development
costs)
|
$
|
19,010,145
|
$
|
11,238,772
|
69
|
% | ||||||
Percentage
of Sales
|
19
|
% |
23
|
% |
(4
|
)% |
Selling,
general and administrative (“SG&A”) expenses excluding research and
development expenses for the year ended December 31, 2009 was $19,010,145, an
overall increase of $7,771,373 or 69% when compared with the corresponding
period in 2008. The increase is result of our significantly increased sales.
SG&A, as a percentage of revenue, decreased by 4%, primarily because of more
efficient use of marketing programs. We increased staffing overall as we
employed an additional 243 staff across the organization as compared with
December 31, 2008. In line with this, we experienced increased salaries in the
amount of $1.2 million over the year ended December 31, 2008. Selling expense
increased by $6.1 million primarily due to increased advertising activities to
drive high sales volume. The increases in other expenses including freight,
office expense, rental, travel and related expenses, etc, were mainly due to our
business expansion. As of December 31, 2008, an allowance for
doubtful accounts of $305,338 was provided against an accounts receivable that
management believed to be uncollectible at that time. The allowance for doubtful
accounts of $305,338 was reversed during the year ended December 31, 2009 as the
total amount of the accounts receivable was repaid by the customer during the
year ended December 31, 2009.
Research
and development expenses for the year ended December 31, 2009 were $1,690,248 as
compared with $0 for the same period ended 2008 and which represented 2% of
revenues for 2009.
37
Loss
on change in fair value of derivative liabilities
The
Company has accounted for warrants issued to investors and Roth in April
Offering and September Offering in year 2008 and May Offering in year 2009 as
liability measured at fair value. The change in their fair value during the year
ended December 31, 2009 resulted in a loss of $24,009,802 as compared with
a gain of $2,118,797 for the year ended December 31, 2008. In addition, the loss
recognized for the year ended December 31, 2009 was mainly due to the
significant increase of our stock price as of December 31, 2009
compared to December 31, 2008 and May 8, 2009.
Corporate
Income Taxes
The
Company did not carry on any business and did not maintain any branch office in
the United States during the years ended December 31, 2009 and 2008 and does not
intend to repatriate any earnings from the Chinese operations. Therefore, no
provision for withholding taxes for the undistributed earnings of foreign
subsidiaries or U.S. federal income taxes or deferred income tax benefits has
been made.
For the
year ended December 31, 2009, the Company’s income tax expense was $4,997,105
and income tax payable was $4,082,424
as of
December 31, 2009 as compared to $ 864,292 and $219,366, respectively, for the
same period in 2008.
Effective
from January 1, 2008, the PRC’s statutory income tax rate is 25%. According to
the approval from the tax authority in the city level of Hohhot in Inner
Mongolia Autonomous Region, Yongye Nongfeng was assessed to use the deemed
profit method to determine the amount of income tax provision for the period
from April 1, 2008 to December 31, 2008. Under the deemed profit method, Yongye
Nongfeng is subject to income tax at 25% on its deemed profit which is
determined based on its revenue less 95% deemed expenses. In
December 2009, the Company received notice that it is subject to the enterprise
income tax rate of 15% for both full year 2009 and 2010.
Net
Income
Yongye
|
Yongye
|
|||||||||||
International, Inc.
|
International, Inc.
|
|||||||||||
FY2009
|
FY2008
|
Increase/ (decrease)
|
||||||||||
Net
Sales
|
$
|
98,092,842
|
$
|
48,092,271
|
104
|
% | ||||||
Net
Income
|
$
|
2,500,207
|
$
|
14,413,146
|
(83
|
)% | ||||||
Net
Margins
|
3
|
% |
30
|
% |
(90
|
)% | ||||||
EPS-
Basic
|
$
|
0.07
|
0.68
|
(90
|
)% | |||||||
EPS-
Diluted
|
$
|
0.07
|
0.56
|
(88
|
)% |
Net
income for the period ended December 31, 2009 decreased by $11,912,939 to
$2,500,207 from $14,413,146 in the same period ended December 31, 2008, which is
an 83% decrease. This also represented a decrease in the overall percentage of
net income to sales by 27% from 30% in the year ended December 31, 2008 to 3% in
the year ended December 31, 2009. This was primarily due to the non-cash charges
of $24,009,802 in 2009 for the increase in fair value of warrants which were
substantially exercised in 2009.
Both
basic and diluted earnings per share (EPS) for the year ended December 31, 2009,
were $0.07. Basic and diluted earnings per share (EPS) for the year ended
December 31, 2008, were $0.68 and $0.56, respectively. The weighted
average shares outstanding used to calculate basic and diluted EPS for the year
ended December 31, 2009 were 31.3 million and 31.3 million,
respectively. The weighted average shares outstanding used to calculate
basic and diluted EPS for the year ended December 31, 2008 were 19.6
million and 20.1 million, respectively.
Foreign
Currency Translation Gains
The
reporting currency of the Company is the US dollar. Our subsidiary in China
uses the local currency, Renminbi (RMB), as its functional currency.
Results of operations and cash flows are translated at average exchange rates
during the period, and assets and liabilities are translated at
the exchange rate at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the statement of stockholders’ equity and comprehensive income.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations.
38
The value
of the USD versus the RMB increased overall during 2009 and as a result of the
depreciation of the RMB, we recognized a foreign currency translation loss of
$309 for the year ended December 31, 2009 as compared to a translation gain of
$331,100 for the same period in 2008. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations on our future
business, product pricing, and results of operations or financial condition. All
of our revenues and expenses are substantially denominated in RMB. The
income statement accounts were translated at 1 RMB to 0.1462 USD and balance
sheet amounts were translated at 1 RMB to 0.1463 USD as of December 31,
2009.
Liquidity
and Capital Resources
Inner
Mongolia Yongye has historically financed its operations and capital
expenditures principally through shareholder loans, and bank loans. Yongye
Nongfeng, has used collection of sales, the net proceeds of the May
offering and commercial bank loan to finance the purchase of raw materials
and finished inventory from Inner Mongolia Yongye, capital equipment and an
expansion of our facilities and production, including certain productive assets
of Shengmingsu manufacturing business acquired from Inner Mongolia Yongye, build
out of our distribution network through advertising and marketing programs and
their associated expenses. Our December offering has also led to the significant
increase in cash and cash reserves at the end of December 31, 2009. Cash and
Cash Equivalents balance amounted to $65,518,181 and $4,477,477 as of December
31, 2009 and December 31, 2008, respectively.
As is
customary in the industry, we provide payment terms to most of our distributors
which typically exceed the terms that we ourselves receive from our
suppliers. Currently, we typically provide 6 months terms to our key
provincial level customers and ask for all others to make cash payments up front
or upon delivery. Therefore, the Company’s liquidity needs have
generally consisted of working capital necessary to finance receivables and raw
material inventory. We believe that over the next 12 months our existing cash,
cash equivalents and cash flows from operations will be sufficient to meet our
anticipated future cash needs. We may, however, require additional cash
resources due to changing business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. We will
determine how to meet these specific cash flow needs as they arise.
Therefore, there can be no assurance that such additional investment will be
available to us, or if available, that it will be available on terms acceptable
to us.
Financial
Cash Flow Highlights
Yongye
|
Yongye
|
|
||||||||||
International Inc.
|
International Inc.
|
Increase /
|
||||||||||
FY 2009
|
FY 2008
|
(decrease)
|
||||||||||
Net
cash used in operating activities
|
$
|
(2,466,905
|
) |
$
|
(8,666,893
|
) |
(72
|
)% | ||||
Net
cash used in investing activities
|
$
|
(4,832,463
|
) |
$
|
(5,475,572
|
) |
(12
|
)% | ||||
Net
cash provided by financing activities
|
$
|
68,420,351
|
$
|
18,286,765
|
274
|
% | ||||||
Effect
of exchange rate change on cash and cash equivalents
|
$
|
(80,279
|
) |
$
|
325,041
|
(125
|
)% | |||||
Net
increase in cash and cash equivalents
|
$
|
61,040,704
|
$
|
4,469,341
|
1,266
|
% | ||||||
Cash
and cash equivalents at beginning of period
|
$
|
4,477,477
|
$
|
8,136
|
54,933
|
% | ||||||
Cash
and cash equivalents at end of period
|
$
|
65,518,181
|
$
|
4,477,477
|
1,363
|
% |
The
Company’s working capital on December 31, 2009 increased by $93,031,075 to
$116,302,315 from $23,271,240 on December 31, 2008. The increase in working
capital by 400% over the same period in 2008 resulted primarily from the May and
December financings, increased receipts of accounts receivables during the
fourth quarter, and offset by the increase in build up of inventory in
preparation for shipments beginning in Q1 of 2010.
Our
provincial level distributors typically pay us up to 6 months after we
ship products to them. Because we are constrained by the seasonal
forces and the elongated payment terms of the agriculture industry, we slowly
build up accounts receivable starting in the first quarter and more rapidly add
to this throughout the peak season of the second and third quarter. As the end
of the year approaches, we typically have had the ability to collect a great
deal of our receivables so as to start the new year with a much lower
balance.
Because
of the seasonal nature of agriculture industry, the peak season for the sale of
our product is in the second and third quarters of the year. We normally build
up inventory in the first and fourth quarters to prepare for shipments to
customers as they order product for the peak selling season in the second and
third quarters. The significant increase in the balance of inventory we recently
experienced was in line with this business practice.
Accounts
receivable Days Sales Outstanding (“DSO”) is defined as average accounts
receivable for the period divided by net sales per day and for the fiscal year
ended December 31, 2009 decreased 1 day to 17 days at December 31, 2009 from 18
days at December 31, 2008 and Days Sales in Inventory (“DIO”) is defined as
average inventory in the period divided by the cost of sales per day
and increased by 7 days to 249 days at December 31, 2009 from 242 days at
December 31, 2008.
39
For the
year ended December 31, 2009, net cash used in operating activities decreased by
$6,199,988 to $2,466,905 from $8,666,893 for the year ended December 31, 2008.
Reductions in cash used in operating activities were primarily attributable to
the increase of profitability of the Company by $14,215,660 with the growth of
sales. On the other hand, the expansion of our manufacturing
facility resulted in the increase in cash paid for raw materials by
$6,120,366 during the year ended December 2009.
For the
year ended December 31, 2009, net cash used in investing activities decreased by
$643,109 to $4,832,463 from $5,475,572 in the same period in 2008 and was
primarily attributable to decrease in purchase of property and
equipment.
For the
year ended December 31, 2009, gross cash from financing activities increased by
$53,413,981 to $73,196,957 from $19,782,976 for the year ended 2008. This
resulted from our offerings received in May and December 2009. This was offset
by expenses incurred in stock issuance costs of $4,528,456. Net cash
provided from financing activities increased $50,133,586 to $68,420,351 year
ended 2009 from $18,286,765 year ended 2008.
Impact
of inflation
We are
subject to commodity price risks arising from price fluctuations in the market
prices of the raw materials. We have generally been able to pass on cost
increases through price adjustments. However, the ability to pass on these
increases depends on market conditions influenced by the overall economic
conditions in China. We manage our price risks through productivity improvements
and cost-containment measures. We do not believe that inflation risk is material
to our business or our financial position, results of operations or cash
flows.
Off
Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements, and accordingly, no such arrangements
are likely to have a current or future effect on our financial position,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires
management to make judgments, assumptions, and estimates that affect the amounts
reported in the consolidated financial statements. The footnote 2 to the
Company’s financial statements (Summary of Significant Accounting Policies)
describes the major accounting policies and methods used in the preparation of
the financial statements.
The
following are considered to be the Company’s critical accounting
policies:
Accounts receivable and allowance for doubtful
accounts
The
Company maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio. In establishing the required
allowance, management considers historical losses adjusted to take into account
current market conditions and the customers’ financial condition, the amount of
receivables in dispute, and the current receivables aging and current payment
patterns. The Company reviews its allowance for doubtful accounts monthly. Past
due balances are reviewed individually for collectibility. Account balances are
charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered
remote.
Realizability
of inventory
Inventories
are stated at the lower of cost or market. Cost is determined using the weighted
average method. Cost of work in progress and finished goods comprise direct
materials, direct production costs and an allocation of production overheads
based on normal operating capacity.
Fair
value of warrants
The
estimated fair values of the warrants issued to investors were determined
at December 31, 2009 and 2008 using Binominal Option Pricing Model. The
fair values of the warrants are summarized as follows:
April Warrants
|
September Warrants
|
May Warrants
|
||||||||||
Fair value of Warrant per share (US$) at:
|
||||||||||||
Date of issuance
|
1.07 | 2.08 | 0.95 | |||||||||
December 31, 2008
|
0.66 | 0.68 | N/A | |||||||||
December 31, 2009
|
6.78 | 6.81 | N/A |
The key
assumptions adopted in Binominal Option Pricing Model for the estimation of the
fair values of the warrants outstanding as of December 31, 2009 and 2008 were
summarized as follows:
December 31,
2009
|
December 31,
2008
|
|||||||||||||||
April
Warrants
|
September
Warrants
|
April
Warrants
|
September
Warrants
|
|||||||||||||
Expected
volatility
|
61.0 | % | 60.0 | % | 59.5 | % | 58.5 | % | ||||||||
Expected
dividends yield
|
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Time
to maturity
|
3.30
years
|
3.72
years
|
4.30
years
|
4.69
years
|
||||||||||||
Risk-free
interest rate per annum
|
2.218 | % | 2.218 | % | 1.411 | % | 1.411 | % | ||||||||
Fair
value of underlying common shares (per share)
|
8.13 | 8.13 | 1.60 | 1.60 |
40
Consolidated
Financial Statements
The
information required by Item 8 appears after the signature page to this
report.
Not
applicable.
ITEM
9A Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Disclosure
Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and regulations and that such information is
accumulated and communicated to our management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. Our Chief Executive Officer and Chief
Financial Officer evaluated, with the participation of other members of
management, the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rule 15d-15(e)), as of the end of the period covered by
this Annual Report on Form 10-K. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective.
Although
the management of our Company, including the Chief Executive Officer and the
Chief Financial Officer, believes that our disclosure controls and internal
controls currently provide reasonable assurance that our desired control
objectives have been met, management does not expect that our disclosure
controls or internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Management’s
Report on Internal Control over Financial Reporting
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the
supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the effectiveness of
its internal control over financial reporting as of December 31, 2009. The
framework on which such evaluation was based is contained in the report entitled
“Internal Control — Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO Report”). Based on that
evaluation and the criteria set forth in the COSO Report, management concluded
that its internal control over financial reporting was effective as of December
31, 2009. Based on
that evaluation and the criteria set forth in the COSO Report, management
concluded that its internal control over financial reporting was effective as of
December 31, 2009. Through the evaluation process, management identified certain
areas for improvement and is committed to further strengthen these areas by
implementing the following measurements: 1) The Company will continue to
bring in additional qualified financial personnel to the accounting
department to further strengthen its financial reporting function, in
particular in the growing manufacturing business; 2) The Company will
provide more regular trainings, including but not limited to update on U.S.
GAAP, to its financial personnel; 3) The Company will maintain
a more frequent communication and interaction among
its management, audit committee, independent auditors and other external
advisers; 4) The Company has recruited a qualified and experienced Internal
Audit Manager, who commenced to work in March 2010 with primary
responsibility to ensure an effective implementation of the Company's internal
control policies.
41
Changes
in Internal Controls over Financial Reporting
There
were no significant changes in our internal controls over financial reporting
identified in connection with this evaluation that occurred during our last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal controls over financial
reporting.
Management
Process to Assess the Effectiveness of Internal Control over Financial
Reporting
To comply
with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the
Company followed a comprehensive compliance process across our major operations
to evaluate our internal control over financial reporting, engaging
employees at all levels of the organization. Our internal control
environment includes a corporate-wide attitude of integrity
and control consciousness. This is exemplified by our ethics education
program that includes long-standing principles and policies on ethical
business conduct that require employees to maintain the highest ethical and
legal standards in the conduct of our business. We have distributed the
Board of Directors approved policy on ethics and code of business conduct to all
employees and required them to study and abide by the policy. We encourage any
employee may report suspected violations of law or our policy. The
internal control system further includes careful selection
and training of supervisory and management personnel, appropriate
delegation of authority and division of responsibility, dissemination of
accounting and business policies throughout the Company, and
an extensive program of internal audits with management follow-up. Our
Board of Directors, assisted by the Audit Committee, monitors
the integrity of our financial statements and financial reporting
procedures, the performance of our internal audit function and independent
auditors, and other matters set forth in its charter.
The Committee, which currently consists of three independent
directors, meets regularly with representatives of management, and with
the independent auditors and the Internal Auditor, with and without
management representatives in attendance, to review their
activities.
ITEM
9B Other Information.
There is
no information required to be disclosed in a report on Form 8-K during the
fourth quarter of the year covered by this Form 10-K but not
reported.
Part
III
ITEM
10. Directors, Executive Officers and Corporate Governance
The
information required by this item relating to our directors and nominees,
regarding compliance with Section 16(a) of the Securities Act of 1934, and
regarding our Audit Committee is included under the captions “Directors and
Executive Officers of the Company” and “Section 16(a) Beneficial Ownership
Reporting Compliance,” and “—Role of the Audit Committee” in our Proxy Statement
related to the 2009 Annual Meeting of Shareholders and is incorporated herein by
reference.
Pursuant
to General Instruction G(3) of Form 10-K, the information required by this item
relating to our executive officers is included under the caption “Executive
Officers of the Company” in Part I of this report.
We have
adopted a code of ethics that applies to our principal executive officer and all
members of our finance department, including the principal financial officer and
principal accounting officer. This code of ethics is posted on our website. The
Internet address for our website is www.yongyeintl.com,
and the code of ethics may be found from our main web page by clicking first on
“Investor Relations” and then on “Corporate Governance” under “Investor
Relations,” next on “The Code of Business Ethics and Conduct” under “Corporate
Governance.”
We intend
to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an
amendment to, or waiver from, a provision of this code of ethics by posting such
information on our website, on the web page found by clicking through to “Code
of Business Ethics and Conduct” as specified above.
ITEM
11 Executive Compensation
The
information appearing under the headings “Director Compensation” and “Executive
Compensation” in our Proxy Statement related to the 2009 Annual Meeting of
Shareholders is incorporated herein by reference.
Changes
in Control
There are
no arrangements known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a change
in control of the Company.
42
ITEM
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information required by this item relating to security ownership of certain
beneficial owners and management is included under the caption “Security
Ownership of Management and Certain Beneficial Owners,” and the information
required by this item relating to securities authorized for issuance under
equity compensation plans is included under the caption “Executive Compensation
– Options and Stock Appreciation Rights,” in each case in our Proxy Statement
related to the 2009 Annual Meeting of Shareholders, and is incorporated herein
by reference.
ITEM
13 Certain Relationships and Related Transactions, Director
Independence
For the
year ended December 31, 2009 and 2008, the Company's subsidiary, Yongye Nongfeng
purchased inventories from Inner Mongolia Yongye amounting to $33,048,126 and
$43,509,906 respectively. In January 2008, upon receiving governmental approval
of its establishment, Yongye Nongfeng entered into an agreement (the
“Agreement”) with Inner Mongolia Yongye, pursuant to which Yongye Nongfeng
agreed to purchase finished products from Inner Mongolia Yongye at a fixed price
of RMB 350 per case for fulvic acid based plant products and RMB 120 per case
for fulvic acid based animal products. The term of the Agreement was
for the period from January 15, 2008 to January 14, 2013. Pursuant to the
Agreement, the Company could terminate the Agreement by giving one month notice
to Inner Mongolia Yongye. Upon Yongye Nongfeng obtaining its own fertilizer
license, the Agreement was terminated in July, 2009.
As of
December 31, 2009 and 2008, accounts payable to related party were $880,026
and $46,739, respectively, and represented the payable for the purchases of
inventories from Inner Mongolia Yongye.
Due from
related party was $192,741 as of December 31, 2008 which represented the payment
the Company made on behalf of Inner Mongolia Yongye for audit fees and research
and development fees for the year ended December 31, 2008.
For the
year ended December 31, 2009, the Company sold fulvic acid plant based products
of $2,221,936 to Hubei Longshangxing Xinnongcun Fuwu Youxiangongsi, which is 51%
owned by Inner Mongolia Yongye.
As of
December 31, 2009, the amount due to a related party was $1,663,191 which mainly
represented the payable for the acquisition of “Shengmingsu manufacturing
business” from Inner Mongolia Yongye. The Company expects to repay the amount
during the year ending December 31, 2010.
For the
year ended December 31, 2008, the Company borrowed $1,617,293 from Yin Ping, the
wife of the CEO, $762,524 from Inner Mongolia Yongye and $10,000 from Kim
McElroy, a director of the Company who resigned in April 2008. The amounts were
repaid in full as of December 31, 2008.
In
October 2009, the Company completed the acquisition of “Shengmingsu
manufacturing business” from Inner Mongolia Yongye (See Note 3 to the
consolidated financial statements).
Yongye
Nongfeng and Inner Mongolia Yongye entered a series of lease-exchange
arrangement to lease land, buildings and equipment to and from each other as
follows:
·
|
On
June 1, 2008, a land lease agreement was entered into in which Yongye
Nongfeng would lease land of 74,153 square meters from Inner Mongolia
Yongye from June 1, 2008 to May 31, 2009. On June 1, 2009, upon the
expiry of this agreement, Yongye Nongfeng and Inner Mongolia Yongye
entered into another lease agreement in which Yongye Nongfeng would lease
a land of 79,920 square meters and a production building from Inner
Mongolia Yongye from June 1, 2009 to October 10,
2009.
|
·
|
On
September 28, 2008, a building lease agreement and an equipment lease
agreement were entered into in which Inner Mongolia Yongye would lease a
building and certain equipment from Yongye Nongfeng from September 28,
2008 to September 27, 2009, which was terminated on June 1, 2009
upon Yongye Nongfeng obtaining the fertilizer license from Ministry
of Agricultural.
|
·
|
On
March 15, 2009, an equipment lease agreement was entered into in which
Inner Mongolia Yongye would lease a set of production equipment from
Yongye Nongfeng from March 15, 2009 to May 31, 2009. On June 1, 2009,
this lease agreement was
terminated.
|
Pursuant
to these agreements, both Yongye Nongfeng and Inner Mongolia Yongye did not
charge any rental to each other for the lease. Additionally, the
estimated rental income to be received and the rental expense to be paid by the
Yongye Nongfeng are not material to the Company’s 2009 and 2008 results of
operations and therefore have not been included.
43
Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons
It is the
Company’s policy that the Company will not enter into transactions required to
be disclosed under item 404 of the SEC’s Regulation S-K unless the audit
committee or another independent body of the board first reviews and approves
the transactions.
Promoters
and Certain Control Persons
We did
not have any promoters at any time during the past five fiscal years. Except as
set forth in our discussion above, none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.
ITEM
14. Principal Accountant Fees and Services
The
information required by this item is included under the captions “Proposal No.
2: Ratification of Appointment of the Independent Public Accountants — Audit
Fees” and “—Pre-Approval Policies and Procedures” in our Proxy Statement related
to the 2009 Annual Meeting of Shareholders and is incorporated herein by
reference.
Part
IV
ITEM
15. Exhibits and Financial Statement Schedules
Exhibit No.
|
Description
|
|
1.1
|
Underwriting
Agreement dated December 17, 2009 (8)
|
|
2.1
|
Share
Exchange Agreement, dated as of April 17, 2008.(1)
|
|
2.2
|
Articles
of Merger with Agreement and Plan of Merger.(6)
|
|
3.1
|
Amended
Articles of Incorporation.(1)
|
|
3.2
|
Articles
of Merger with Agreement and Plan of Merger.(6)
|
|
3.3
|
Bylaws.(5)
|
|
4.1
|
Form
of Investor Warrant (i).(1)
|
|
4.2
|
Form
of Investor Warrant (ii).(1)
|
|
4.3
|
Form
of Placement Agent Warrant.(5)
|
|
4.4
|
Registration
Rights Agreement, dated as of April 17, 2008.(1)
|
|
4.5
|
Registration
Rights Agreement, dated as of September 5, 2008.(2)
|
|
4.6
|
Registration
Rights Agreement, dated as of May 9, 2009.(3)
|
|
10.1
|
Securities
Purchase Agreement, dated as of April 17, 2008.(1)
|
|
10.2
|
Lockup
Agreement, dated as of April 17, 2008.(1)
|
|
10.3
|
Make
Good Escrow Agreement, dated as of April 17, 2008.(1)
|
|
10.4
|
Closing
Escrow Agreement, dated as of April 17, 2008.(1)
|
|
10.5
|
Sales
Agreement, dated April 1, 2008 by and between Inner Mongolia Yongye
Biotechnology Co., Ltd. and Yongye Nongfeng Biotechnology Co., Ltd
.(1)
|
|
10.6
|
Cooperation
Agreement dated January 15, 2008 by and between Inner Mongolia Yongye
Biotechnology Co., Ltd. and Yongye Nongfeng Biotechnology Co.,
Ltd.(1)
|
44
10.7
|
Sino-foreign
Cooperative Joint Venture Contract, dated November 16, 2007 by and between
Inner Mongolia Yongye Biotechnology Co., Ltd. and Asia Standard Oil
Limited.(1)
|
|
10.8
|
Supplemental
Agreement to the Sino-foreign Cooperative Joint Venture Contract by and
between Inner Mongolia Yongye Biotechnology Co., Ltd. and Asia Standard
Oil Limited.(1)
|
|
10.9
|
Securities
Purchase Agreement, dated as of September 5, 2008.(2)
|
|
10.10
|
Make
Good Escrow Agreement, dated as of September 5,
2008.(2)
|
|
10.11
|
Closing
Escrow Agreement, dated as of September 5, 2008.(2)
|
|
10.12
|
Securities
Purchase Agreement, dated as of May 8, 2009.(3)
|
|
10.13
|
Closing
Escrow Agreement, dated as of May 8, 2009.(3)
|
|
10.14
|
Employment
Contract of Zishen Wu, executed April 17, 2008.(1)
|
|
10.15
|
Employment
Contract of Zhao Qiang, executed April 17, 2008.(1)
|
|
10.16
|
Employment
Contract of Larry Gilmore, executed April 17, 2008.(1)
|
|
10.17
|
Employment
Contract of Sam (Yue) Yu, dated March 25, 2009.(4)
|
|
10.18
|
Form
of Non-Independent Director Contract.(5)
|
|
10.19
|
Form
of Independent Director Contract.(5)
|
|
10.20
|
Form
of Vehicle Usage Agreement.**
|
|
14.1
|
Code
of Ethics.(7)
|
|
21.1
|
Subsidiaries
of the Registrant.(5)
|
|
23.1
|
Consent
of KPMG, an independent registered public accounting
firm.*
|
|
23.2
|
Consent
of MSPC.*
|
|
99.1
|
Certificate
of Scientific and Technological Advancements granted by the Inner Mongolia
Autonomous Region Science and Technology Bureau, dated December 8,
2008.**
|
|
99.2
|
Consent
of Scientific and Technological Advancements granted by the Inner Mongolia
Autonomous Region Science and Technology Bureau, dated December 8,
2008.**
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.*
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.*
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed
herewith.*
|
* Filed
herewith.
**
Previously filed.
(1) Incorporated
by reference herein to the Report on Form 8-K filed on April 22,
2008.
(2) Incorporated
by reference herein to the Company’s Registration Statement on Form S-1/A (Reg.
No. 333-150949) filed with the Securities and Exchange Commission on September
9, 2008.
45
(3) Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 8, 2009.
(4) Incorporated
by reference herein to the Company’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on May 7, 2009.
(5) Incorporated
by reference herein to the Company’s Registration Statement on Form S-1 (Reg.
No. 333-159892) filed with the Securities and Exchange Commission on June 11,
2009.
(6) Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 24, 2009.
(7) Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 5, 2009.
(8) Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 17, 2009.
46
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
YONGYE
INTERNATIONAL, INC.
|
|||
Date: March
15, 2010
|
By:
|
/s/ Zishen Wu | |
Name:
|
Zishen
Wu
|
||
Title:
|
Chief
Executive Officer
|
||
Date: March
15, 2010
|
By:
|
/s/ Sam Yu | |
Name:
|
Sam
Yu
|
||
Title:
|
Chief
Financial Officer
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this Report has
been signed below by the following person on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: March
15, 2010
|
By:
|
/s/ Zishen Wu |
Name:
Zishen Wu
|
||
Title:
Chief Executive Officer and Chairman
|
||
Date: March
15, 2010
|
By:
|
/s/ Sam Yu |
Name: Sam Yu | ||
Title: Chief Financial Officer | ||
Dated: March
15, 2010
|
By:
|
/s/ Taoran Sun |
Name:
Taoran Sun
|
||
Title:
Vice Chairman
|
||
Dated: March
15, 2010
|
By:
|
/s/ Qiang Zhao |
Name:
Qiang Zhao
|
||
Title: Director
|
||
Dated: March
15, 2010
|
By:
|
/s/ Xiaochuan Guo |
Name:
Xiaochuan Guo
|
||
Title:
Director
|
||
Dated:
March 15, 2010
|
By:
|
/s/ Rijun Zhang |
Name:
Rijun Zhang
|
||
Title:
Director
|
||
Dated:
March 15, 2010
|
By:
|
/s/ Xindan Li |
Name:
Xindan Li
|
||
Title:
Director
|
||
Dated:
March 15, 2010
|
By:
|
/s/ Sean Shao |
Name:
Sean Shao
|
||
Title:
Director
|
47
YONGYE
INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONTENTS
PAGE
|
F-1
– F-2
|
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS.
|
|||
PAGE
|
F-3
|
CONSOLIDATED
BALANCE SHEETS.
|
|||
PAGE
|
F-4
|
CONSOLIDATED
STATEMENTS OF INCOME.
|
|||
PAGE
|
F-5
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME.
|
|||
PAGE
|
F-6
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS.
|
|||
PAGES
|
|
F-7
- F-36
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
|
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Yongye
International, Inc.:
We have
audited the accompanying consolidated balance sheet of Yongye International,
Inc. and subsidiaries (the “Company”) as of December 31, 2009, and the
related consolidated statements of income, stockholders’ equity and
comprehensive income, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Yongye International, Inc.
and subsidiaries as of December 31, 2009, and the results of their
operations and their cash flows for the year then ended, in conformity with
United States generally accepted accounting principles.
KPMG
Hong
Kong, China
March 15,
2010
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Yongye Biotechnology International,
Inc.
We have
audited the accompanying consolidated balance sheet of Yongye Biotechnology
International, Inc. and Subsidiaries as of December 31, 2008 and the related
consolidated statements of income, stockholders' equity and
comprehensive income, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management.
Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Yongye Biotechnology
International, Inc. and Subsidiaries as of December 31, 2008 and the results of
their operations and their cash flows for the year then ended in conformity with
United States generally accepted accounting principles.
MSPC
Certified
Public Accountants and Advisors, P.C.
New York,
New York
March 19,
2009
F-2
YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
Note
|
December 31, 2009
|
December 31, 2008
|
|||||||||
Current
assets
|
|||||||||||
Cash
|
$ | 65,518,181 | $ | 4,477,477 | |||||||
Accounts
receivable, net of allowance for doubtful accounts
|
4
|
6,161,796 | 2,748,042 | ||||||||
Inventories
|
5
|
42,033,261 | 20,708,193 | ||||||||
Prepayments
|
6
|
6,211,896 | 44,051 | ||||||||
Due
from a related party
|
19
|
- | 192,741 | ||||||||
Prepaid
expenses
|
112,879 | 189,478 | |||||||||
Other
receivables
|
383,841 | 680,752 | |||||||||
Total
Current Assets
|
120,421,854 | 29,040,734 | |||||||||
Property,
plant and, equipment, net
|
7
|
9,156,915 | 5,368,074 | ||||||||
Intangible
asset, net
|
8
|
85,058 | 95,453 | ||||||||
Land
use right, net
|
9
|
4,166,987 | - | ||||||||
Other
assets
|
10
|
2,029,012 | - | ||||||||
Goodwill
|
11
|
9,945,862 | - | ||||||||
Total
Assets
|
$ | 145,805,688 | $ | 34,504,261 | |||||||
Current
liabilities
|
|||||||||||
Short-term
bank loan
|
12
|
$ | 2,925,174 | $ | - | ||||||
Long-term
loans - current portion
|
13
|
331,693 | 167,652 | ||||||||
Accounts
payable - related party
|
19
|
880,026 | 46,739 | ||||||||
Accounts
payable - third parties
|
344,774 | - | |||||||||
Income
tax payable
|
16
|
4,082,424 | 219,366 | ||||||||
Advance
from customers
|
29,157 | 1,869,400 | |||||||||
Accrued
expenses
|
479,609 | 583,880 | |||||||||
Due
to a related party
|
19
|
1,663,191 | - | ||||||||
Other
payables
|
553,286 | 774,526 | |||||||||
Derivative
liabilities – fair value of warrants
|
14
|
1,380,205 | 2,107,931 | ||||||||
Total
Current Liabilities
|
12,669,539 | 5,769,494 | |||||||||
Long-term
loans
|
13
|
545,327 | 230,121 | ||||||||
Total
Liabilities
|
13,214,866 | 5,999,615 | |||||||||
Stockholders’
equity
|
|||||||||||
Common
stock: par value $.001; 75,000,000 shares authorized; 44,532,241 shares
issued and outstanding at December 31, 2009 and 26,760,258 shares issued
and outstanding at December 31, 2008
|
14
|
44,532 | 26,760 | ||||||||
Additional
paid-in capital
|
14
|
118,583,308 | 13,633,604 | ||||||||
Subscription
receivable
|
14
|
(8,550,000 | ) | - | |||||||
Retained
earnings
|
15,506,445 | 13,310,794 | |||||||||
Accumulated
other comprehensive income
|
329,139 | 329,445 | |||||||||
Total
Equity of the Company’s Shareholders
|
125,913,424 | 27,300,603 | |||||||||
Noncontrolling
interest
|
6,677,398 | 1,204,043 | |||||||||
Total
Stockholders’ Equity
|
132,590,822 | 28,504,646 | |||||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 145,805,688 | $ | 34,504,261 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
For the Years Ended
|
|||||||||||
Note
|
December 31, 2009
|
December 31, 2008
|
|||||||||
Sales
|
|||||||||||
External
customers
|
$ | 95,870,906 | $ | 48,092,271 | |||||||
Related
party
|
19
|
2,221,936 | - | ||||||||
Total
sales
|
98,092,842 | 48,092,271 | |||||||||
Cost
of sales
|
|||||||||||
External
customers
|
44,966,126 | 23,165,684 | |||||||||
Related
party
|
1,023,260 | - | |||||||||
Cost
of sales
|
45,989,386 | 23,165,684 | |||||||||
Gross
profit
|
52,103,456 | 24,926,587 | |||||||||
Selling
expenses
|
14,720,657 | 8,665,755 | |||||||||
Research
& development expenses
|
1,690,248 | - | |||||||||
General
and administrative expenses
|
4,289,488 | 2,573,017 | |||||||||
Income
from operations
|
31,403,063 | 13,687,815 | |||||||||
Other
expenses/(income)
|
|||||||||||
Interest
expense, net
|
70,101 | 3,135 | |||||||||
Other
(income)/expenses, net
|
(174,152 | ) | 526,039 | ||||||||
Increase/(decrease)
in fair value of derivative liabilities
|
14
|
24,009,802 | (2,118,797 | ) | |||||||
Total
other expenses/(income), net
|
23,905,751 | (1,589,623 | ) | ||||||||
Earnings
before income tax expense
|
7,497,312 | 15,277,438 | |||||||||
Income
tax expense
|
16
|
4,997,105 | 864,292 | ||||||||
Net
income
|
2,500,207 | 14,413,146 | |||||||||
Less:
Net income attributable to the noncontrolling interest
|
304,556 | 1,102,388 | |||||||||
Net
income attributable to Yongye International, Inc.
|
2,195,651 | 13,310,758 | |||||||||
Earnings
per share:
|
|||||||||||
Basic
|
20
|
$ | 0.07 | $ | 0.68 | ||||||
Diluted
|
20
|
$ | 0.07 | $ | 0.56 | ||||||
Weighted
average shares used in computation:
|
|||||||||||
Basic
|
20
|
31,324,830 | 19,599,054 | ||||||||
Diluted
|
20
|
31,324,830 | 20,106,433 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
Years ended December 31, 2009 and 2008
|
|||||||||||||||||||||||||||||||||||||||
Common Stock
|
|||||||||||||||||||||||||||||||||||||||
Note
|
Shares of
Common
Stock
|
Common
Stock
Amount
|
Additional
Paid-in
Capital
|
Subscription
receivable
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Equity of the
Company’s
Shareholders
|
Noncontrolling
Interest
|
Total
Stockholders’
Equity
|
||||||||||||||||||||||||||||||
$
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||||||||||||||||||
Balance
as of January 1, 2008
|
4,960,000 | 4,960 | (6,860 | ) | - | - | - | (1,900 | ) | - | (1,900 | ) | |||||||||||||||||||||||||||
Net
income
|
- | - | - | - | 13,310,758 | - | 13,310,758 | 1,102,388 | 14,413,146 | ||||||||||||||||||||||||||||||
Foreign
currency exchange translation adjustment, net of nil income
taxes
|
- | - | - | - | - | 329,445 | 329,445 | 1,655 | 331,100 | ||||||||||||||||||||||||||||||
Comprehensive
income
|
13,640,203 | 1,104,043 | 14,744,246 | ||||||||||||||||||||||||||||||||||||
Stock
issued to Fullmax Shareholders
|
1
|
11,444,755 | 11,445 | (11,445 | ) | - | 36 | - | 36 | 100,000 | 100,036 | ||||||||||||||||||||||||||||
Stock
issued for cash April 17, 2008
|
14
|
6,495,619 | 6,495 | 6,763,803 | - | - | - | 6,770,298 | - | 6,770,298 | |||||||||||||||||||||||||||||
Stock
issued for cash September 8, 2008
|
14
|
6,073,006 | 6,073 | 4,277,905 | - | - | - | 4,283,978 | - | 4,283,978 | |||||||||||||||||||||||||||||
Warrants
exercised
|
14
|
686,878 | 687 | 2,607,301 | - | - | - | 2,607,988 | - | 2,607,988 | |||||||||||||||||||||||||||||
McElroy
shares cancelled
|
(2,900,000 | ) | (2,900 | ) | 2,900 | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Balance
as of December 31, 2008
|
26,760,258 | 26,760 | 13,633,604 | - | 13,310,794 | 329,445 | 27,300,603 | 1,204,043 | 28,504,646 | ||||||||||||||||||||||||||||||
Net
income
|
- | - | - | - | 2,195,651 | - | 2,195,651 | 304,556 | 2,500,207 | ||||||||||||||||||||||||||||||
Foreign
currency exchange translation adjustment, net of nil income
taxes
|
- | - | - | - | - | (306 | ) | (306 | ) | (3 | ) | (309 | ) | ||||||||||||||||||||||||||
Comprehensive
income
|
2,195,345 | 304,553 | 2,499,898 | ||||||||||||||||||||||||||||||||||||
Common
stock issued for cash May 8, 2009
|
14
|
5,834,083 | 5,834 | 7,907,201 | - | - | - | 7,913,035 | - | 7,913,035 | |||||||||||||||||||||||||||||
Common
stock issued for cash December 22, 2009
|
14
|
8,000,000 | 8,000 | 56,300,000 | - | - | - | 56,308,000 | - | 56,308,000 | |||||||||||||||||||||||||||||
Common
stock issued for cash December 31, 2009
|
14
|
1,200,000 | 1,200 | 8,548,800 | (8,550,000 | ) | - | - | - | - | - | ||||||||||||||||||||||||||||
Warrants
exercised
|
14
|
2,737,900 | 2,738 | 25,532,505 | - | - | - | 25,535,243 | - | 25,535,243 | |||||||||||||||||||||||||||||
Transfer
of equity interest of a non-wholly owned subsidiary to non-controlling
interest
|
3
|
- | - | 9,461,196 | - | - | - | 9,461,196 | 2,368,804 | 11,830,000 | |||||||||||||||||||||||||||||
Capital
contribution to a non-wholly owned subsidiary
|
1
|
- | - | (2,799,998 | ) | - | - | - | (2,799,998 | ) | 2,799,998 | - | |||||||||||||||||||||||||||
Balance
as of December 31, 2009
|
44,532,241 | 44,532 | 118,583,308 | (8,550,000 | ) | 15,506,445 | 329,139 | 125,913,424 | 6,677,398 | 132,590,822 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the Years Ended
|
|
|||||||
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$
|
2,500,207
|
$
|
14,413,146
|
||||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
578,511
|
118,104
|
||||||
Loss
on sale of property, plant and equipment
|
5,995
|
-
|
||||||
(Reversal
of bad debt provision)/provision for bad debts
|
(305,338)
|
305,338
|
||||||
Increase/(decrease)
in fair value of derivative liabilities
|
24,009,802
|
(2,118,797)
|
||||||
Changes
in operating assets and liabilities (net of effect of an acquisition in
2009):
|
||||||||
Accounts
receivable
|
(3,099,156)
|
(3,053,380)
|
||||||
Inventories
|
(21,262,135)
|
(20,708,193)
|
||||||
Prepayments
|
(6,107,924)
|
(44,051)
|
||||||
Due
from a related party
|
-
|
(192,741)
|
||||||
Prepaid
expenses
|
77,013
|
(189,478)
|
||||||
Other
receivables
|
298,444
|
(680,752)
|
||||||
Other
assets
|
(1,751,395)
|
-
|
||||||
Accounts
payable- related party
|
832,723
|
46,739
|
||||||
Accounts
payable- third parties
|
344,589
|
-
|
||||||
Income
tax payable
|
3,860,435
|
219,366
|
||||||
Advance
from customers
|
(1,843,898)
|
1,869,400
|
||||||
Accrued
expenses
|
(105,659)
|
583,880
|
||||||
Other
payables
|
(222,593)
|
764,526
|
||||||
Net
Cash Used in Operating Activities
|
(2,190,379)
|
(8,666,893)
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Proceeds
from sale of property, plant and equipment
|
12,425
|
-
|
||||||
Purchase
of property, plant and equipment
|
(1,560,587)
|
(5,475,572)
|
||||||
Payment
for the acquisition of Shengmingsu manufacturing business
|
(2,834,676)
|
-
|
||||||
Net
Cash Used in Investing Activities
|
(4,382,838)
|
(5,475,572)
|
||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
from bank loans
|
2,923,600
|
432,325
|
||||||
Repayment
of bank loans
|
(248,150)
|
(34,552)
|
||||||
Proceeds
from common stock and warrants issued
|
69,547,206
|
19,350,651
|
||||||
Payment
for common stock and warrants issuance costs
|
(4,528,456)
|
(1,461,659)
|
||||||
Net
Cash Provided by Financing Activities
|
67,694,200
|
18,286,765
|
||||||
EFFECT
OF FOREIGN EXCHANGE RATE CHANGES ON CASH
|
(80,279)
|
325,041
|
||||||
NET
INCREASE IN CASH
|
61,040,704
|
4,469,341
|
||||||
Cash
and cash equivalent at beginning of year
|
4,477,477
|
8,136
|
||||||
Cash
and cash equivalent at end of year
|
$
|
65,518,181
|
$
|
4,477,477
|
||||
Supplemental
cash flow information:
|
||||||||
Cash
paid for income taxes
|
1,136,670
|
648,331
|
||||||
Cash
paid for interest expense
|
77,342
|
11,301
|
||||||
Noncash
investing and financing activities:
|
During
the year ended December 31, 2008, the non-controlling shareholder of Yongye
Nongfeng contributed a patent of $100,000 to Yongye Nongfeng. During the
year ended December 31, 2009, the Company acquired certain property, plant and
equipment of $449,625 and other assets of $276,526 by assuming long-term
loans.
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
YONGYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE 1
-ORGANIZATION AND DESCRIPTION OF BUSINESS
A.
Organization
Yongye
International, Inc. (the “Company”, formerly known as “Golden Tan, Inc.” or
“Yongye Biotechnology International, Inc.”) was incorporated in the State of
Nevada on December 12, 2006. On April 17, 2008, the Company entered into a share
exchange agreement (the “Exchange Agreement”) with Fullmax Pacific Limited
(“Fullmax”), a privately held investment holding company organized on May 23,
2007 under the laws of the British Virgin Islands and all the shareholders of
Fullmax (the “Fullmax Shareholders”). Pursuant to the terms of the Exchange
Agreement, the Fullmax Shareholders transferred to the Company all of their
shares in exchange for 11,444,755 shares of the Company’s common shares (the
“Share Exchange”). As a result of the Share Exchange, Fullmax became a
wholly-owned subsidiary of the Company and the Fullmax Shareholders received
approximately 84.7% of the Company’s issued and outstanding common shares.
Immediately prior to the date of the Share Exchange, the Company was a publicly
listed shell entity with no operations and a nominal amount of cash and,
Fullmax, through its wholly-owned subsidiary, Asia Standard Oil Limited (“ASO”)
and indirect subsidiary, Yongye Nongfeng Biotechnology (“Yongye Nongfeng”), was
engaged in the sale of fulvic acid based liquid and powder nutrient compounds
for plant and animal feed used in the agriculture industry. The Share Exchange
was accounted for as a reverse recapitalization, equivalent to the issuance of
stock by Fullmax for the net monetary assets of the Company accompanied by a
recapitalization.
In
November 2007, ASO entered into a Sino-Foreign cooperative joint venture
contract with Inner Mongolia Yongye Biotechnology Co., Ltd. (“Inner Mongolia
Yongye”) to form Yongye Nongfeng, pursuant to which, Inner Mongolia Yongye and
ASO were to own 10% and 90% of the equity interests in Yongye Nongfeng,
respectively. Inner Mongolia Yongye was formed on September 16, 2003 in the
People’s Republic of China (the “PRC”). Mr. Zishen Wu, Chief Executive Officer,
President and Chairman of the Company, owns a controlling 91.67% of the equity
interest in Inner Mongolia Yongye. Inner Mongolia Yongye is engaged in the
research, manufacturing, and sale of biochemical products for use in plants and
animal growth. Inner Mongolia Yongye is located in the City of Hohhot,
Inner Mongolia Autonomous Region PRC.
On
January 4, 2008, the incorporation and establishment of Yongye Nongfeng was
approved by the Inner Mongolia Department of Commerce and the Inner Mongolia
Administration for Industry and Commerce. The scope of business of Yongye
Nongfeng is the research and development, manufacturing, distribution and sale
of fulvic acid based liquid and powder nutrient compounds used in the
agriculture. The period of the cooperative joint venture is ten years and
may be extended by a written application submitted to the relevant government
authority for approval no less than six months prior to the expiration of the
cooperative joint venture. Prior to the legal establishment of Yongye Nongfeng,
both Fullmax and ASO were non-substantive holding companies with no assets and
operations and were primarily designed and used as legal vehicles to facilitate
foreign participation in the business conducted by Inner Mongolia
Yongye.
F-7
In May
2008, upon the agreement among Inner Mongolia Yongye, ASO and Yongye Nongfeng,
the ownership of Yongye Nongfeng was revised, pursuant to which Inner Mongolia
Yongye and ASO became 0.5% and 99.5% equity interest owner of Yongye Nongfeng,
respectively.
In
October, 2009, the Company completed the Acquisition (See Note 3). The
consideration paid for the Acquisition consisted of cash of $4.7 million and
4.5% equity interests in Yongye Nongfeng. After the Acquisition, Inner Mongolia
Yongye and ASO became 5% and 95% equity interest owner of Yongye Nongfeng,
respectively.
During
the year ended December 31, 2009, ASO made a capital contribution of $55,999,965
into Yongye Nongfeng, which did not result in a change in its ownership interest
in Yongye Nongfeng. The change in the noncontrolling interest of $2,799,998 that
resulted from the capital contribution was accounted as an adjustment to
additional paid-in capital in the consolidated statements of stockholders’
equity and comprehensive income.
B. Nature
of Business
The
Company, through its primary operating subsidiary, Yongye Nongfeng, is engaged
in the manufacturing, research and development and sale of fulvic acid based
liquid and powder nutrient compounds used in the agriculture industry in the
PRC.
F-8
NOTE 2
-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION
The
accompanying consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
of America (“GAAP”) and include the financial statements of the Company and its
subsidiaries. The accompanying consolidated balance sheet as of December 31,
2009, and the related consolidated statement of income, stockholders’ equity and
comprehensive income and cash flows for the year ended December 31, 2009 include
Yongye International, Inc. and its subsidiaries namely Fullmax, ASO and Yongye
Nongfeng. The accompanying consolidated balance sheet as of December 31,
2008 consists of the financial position of the Company, Fullmax,
ASO and Yongye Nongfeng and the consolidated statements of income, stockholders’
equity and comprehensive income and cash flows for the year ended December 31,
2008 consist of the financial results and cash flows of Yongye Nongfeng for the
year ended December 31, 2008 and the financial results and cash flows of Fullmax
and ASO from the period April 17, 2008 to December 31, 2008. For the
period from January 1, 2008 to April 17, 2008, the financial results and cash
flows of Fullmax and ASO were not material.
All
significant intercompany transactions and balances are eliminated on
consolidation.
USE OF
ESTIMATES
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Significant items subject to such estimates and assumptions include
the useful lives of fixed assets; the allowance for doubtful accounts; the fair
value determination of financial and equity instruments, the realizability of
deferred tax assets and inventories; the recoverability of goodwill, intangible
asset, land use right and property, plant and equipment; and accruals for income
tax uncertainties and other contingencies. The current economic environment has
increased the degree of uncertainty inherent in those estimates and
assumptions.
CASH AND
CASH EQUIVALENTS
The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio. In establishing the required
allowance, management considers historical losses adjusted to take into account
current market conditions and the customers’ financial condition, the amount of
receivables in dispute, and the current receivables aging and current payment
patterns. The Company reviews its allowance for doubtful accounts monthly. Past
due balances are reviewed individually for collectibility. Account balances are
charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered
remote.
F-9
INVENTORIES
Inventories
are stated at the lower of cost or market. Cost is determined using the weighted
average method. Cost of work in progress and finished goods comprise direct
materials, direct production costs and an allocation of production overheads
based on normal operating capacity.
PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment are stated at cost. Depreciation on property, plant and
equipment other than leasehold improvements is calculated on the straight-line
method over the estimated useful lives of the assets. Amortization on leasehold
improvements is calculated on the straight-line method over the estimated useful
life or lease period, whichever is shorter. Estimated useful lives are as
follows:
Buildings
|
30
years
|
Machinery
and equipment
|
10
years
|
Office
equipment and furniture
|
5
years
|
Vehicles
|
10
years
|
Software
|
10
years
|
Leasehold
improvements
|
3
years
|
When
items are retired or otherwise disposed of, income is charged or credited for
the differences between the net book value of the item disposed and proceeds
received thereon.
LAND USE
RIGHT
Land use
right represent the exclusive right to occupy and use a piece of land in the PRC
for a specified contractual term. Land use right is carried at cost, less
accumulated amortization. Amortization is calculated using the straight-line
method over the life of the right of 48 years.
REVENUE
RECOGNITION
The
Company recognizes revenue when products are delivered and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable. Written sales agreements specify price, products and
quantity, are used as evidence of an agreement. Customer acceptance is evidenced
by acceptance note with customer’s signature.
OPERATING
LEASE
The
Company leases office premises under non-cancelable operating leases.
Payments made under operating leases are charged to the consolidated statements
of income on a straight-line basis over the lease term.
F-10
ADVERTISING
COSTS
Advertising
costs are expensed as incurred and included in selling expenses. Advertising
costs for the years ended December 31, 2009 and 2008 was $10,384,724 and
$5,109,502, respectively.
RESEARCH
AND DEVELOPMENT COSTS
Research
and development costs are expensed as incurred. Research and development costs
for the years ended December 31, 2009 and 2008 was $1,690,248 and $0,
respectively.
F-11
IMPAIRMENT
OF LONG-LIVED ASSETS
In
accordance with Impairment or Disposal of Long-Lived Assets Subsections of
FASB ASC Subtopic 360-10, Property, Plant, and Equipment -
Overall, (FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), long-lived assets, such as property,
plant and equipment, and purchased intangible asset subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If circumstances
require a long-lived asset or asset group be tested for possible impairment, the
Company first compares undiscounted cash flows expected to be generated by that
asset or asset group to its carrying value. If the carrying value of the
long-lived asset or asset group is not recoverable on an undiscounted cash flow
basis, an impairment is recognized to the extent that the carrying value exceeds
its fair value. Fair value is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary. No impairment of long-lived
assets was recognized for the years ended December 31, 2009 and
2008.
GOODWILL
Goodwill
represents the excess of the cost of an acquisition over the fair value of the
net assets acquired. Goodwill is not amortized, but is instead tested for
impairment. Goodwill is reviewed for impairment annually in accordance with the
provisions of FASB ASC Topic 350, Intangibles - Goodwill and
Other (Statement No. 142, Goodwill and Other Intangible
Assets). The
goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value (including
goodwill). If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit and
the enterprise must perform step two of the impairment test (measurement). Under
step two, an impairment loss is recognized for any excess of the carrying amount
of the reporting unit’s goodwill over the implied fair value of that goodwill.
The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit in a manner similar to a purchase price allocation and the
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Fair value of the reporting unit is determined using a
discounted cash flow analysis. If the fair value of the reporting unit exceeds
its carrying value, step two does not need to be performed.
The
Company performs its annual impairment review of goodwill at each December 31,
and when a triggering event occurs between annual impairment tests. No
impairment loss was recorded for the year ended December 31, 2009.
INCOME
TAXES
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and tax loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the consolidated statements of income in the period that includes the enactment
date. A valuation allowance is provided to reduce the amount of deferred tax
assets if it is considered more likely than not that some portion or all of the
deferred tax assets will not be realized.
F-12
ASC
740-10-25 clarifies the accounting for uncertain tax positions and requires that
an entity recognizes in the consolidated financial statements the impact of a
tax position, if that position is more likely than not of being sustained upon
examination, based on the technical merits of the position. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely
of being realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. The Company has elected to
classify interest and penalties related to unrecognized tax benefits, if and
when required, as a component of income tax expense in the consolidated
statements of income.
EMPLOYEE
BENEFIT PLANS
Pursuant
to relevant PRC regulations, Yongye Nongfeng is required to make contributions
to various defined contribution plans organized by municipal and provincial PRC
governments. The contributions are made for each PRC employee at rates ranging
from 40.8% to 42.8% on a standard salary base as determined by the local social
security bureau. Contributions to the defined contribution plans are charged to
the consolidated statements of income when the related service is provided. For
the years ended December 31, 2009 and 2008, contributions to the defined
contribution plans was $133,367 and $31,053, respectively.
The
Company has no other obligation for the payment of employee benefits associated
with these plans beyond the contributions described above.
F-13
FOREIGN
CURRENCY TRANSLATION AND TRANSACTIONS
The
financial position and results of operations of the Company’s subsidiaries in
the PRC are measured using the Renminbi as the functional currency, while the
Company’s reporting currency is the US dollar. Assets and liabilities of the
subsidiaries are translated at the prevailing exchange rate in effect at each
period end. Income statement accounts are translated at the average rate of
exchange during the period. Translation adjustments are included in the
cumulative translation adjustment account in the consolidated statements of
stockholders’ equity and comprehensive income.
FAIR
VALUE MEASUREMENTS
The
Company applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for
fair value measurements of financial assets and financial liabilities and for
fair value measurements of nonfinancial items that are recognized or disclosed
at fair value in the financial statements. ASC Subtopic 820-10 also
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.
ASC
Subtopic 820-10 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be
recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
ASC
Subtopic 820-10 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels
of inputs that may be used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to
measurements involving significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
·
|
Level
1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access at the
measurement date.
|
·
|
Level
2 inputs are inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or
indirectly.
|
·
|
Level
3 inputs are unobservable inputs for the asset or
liability.
|
The level
in the fair value hierarchy within which a fair value measurement in its
entirety falls is based on the lowest level input that is significant to the
fair value measurement in its entirety.
The
Company did not have any nonfinancial assets and liabilities that are measured
at fair value on a recurring basis as of December 31, 2009 and
2008.
EARNINGS
PER SHARE
Basic
earnings per share is computed by dividing net income attributable to the
Company by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that would
occur upon the exercise of outstanding warrants. Common share equivalents are
excluded from the computation of the diluted earnings per share when their
effect would be anti-dilutive.
F-14
SEGMENT
REPORTING
The
Company has one operating segment, which is the manufacture and sales of fulvic
acid based liquid and powder nutrient compounds. Substantially all of the
Company’s operations and customers are located in the PRC. Consequently, no
geographic information is presented.
The
Company manufactures and sells two principal products which are plant product
and animal product. Sales of plant product were $91,172,988 and $44,842,062 for
the years ended December 31, 2009 and 2008, respectively. Sales of animal
product were $6,919,854 and $3,250,209 for the years ended December 31, 2009 and
2008, respectively.
CONTINGECIES
In the
normal course of business, the Company is subject to loss contingencies, such as
legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations and tax
matters. An accrual for a loss contingency is recognized when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated.
F-15
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Subtopic 605-25
In
September 2009, the FASB amended the FASB ASC Subtopic 605-25 which applies to
multiple-deliverable revenue arrangements. FASB ASC Subtopic 605-25
requires an entity to allocate revenue in a multiple-deliverable arrangement
using vendor-specific objective evidence (“VSOE”), if it exists, otherwise
third-party evidence of selling price (“TPE”). If neither VSOE nor TPE exists,
the entity shall use its best estimate of the selling price for the
deliverables. As a result, the use of the residual method is eliminated
and, instead, an entity is required to allocate revenue using the relative
selling price method. FASB ASC Subtopic 605-25 also expands disclosure
requirements with respect to multiple-deliverable revenue arrangements. FASB ASC
Subtopic 605-25 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Alternatively, an entity can elect to adopt the
provisions of these issues on a retrospective basis. Management is currently
evaluating the potential impact, if any, of adopting FASB ASC Subtopic 605-25 on
the Company’s financial position and results of operations.
NOTE 3 –
ACQUISITION OF SHENGMINGSU MANUFACTURING BUSINESS
In
connection with the September Offering (See Note 14), the Company entered into
agreements to acquire the productive assets of Shengmingsu manufacturing
business from Inner Mongolia Yongye (“Acquisition”). In October 2009, the
Company completed the Acquisition. Management has determined that the
acquisition date of the Acquisition was the closing date or October, 2009, when
all conditions precedent to the closing were met, including obtaining all the
required licenses and permits from the PRC government to operate these
productive assets acquired, obtaining approvals from the PRC government,
and on which the Company legally transferred the 4.5% equity interest in Yongye
Nongfeng to Inner Mongolia Yongye. The reason for the Acquisition was to expand
the Company’s manufacturing business. The operating results of Shengmingsu
manufacturing business have been included in the consolidated financial
statements since that date. The transaction costs of the Acquisition were not
material, and have been recorded in general and administrative
expenses.
The
Acquisition has been accounted for under ASC 805 using the acquisition method
whereby the Company recognized the identifiable assets acquired (including any
intangible assets) and any liabilities assumed. The excess of the cost of the
acquisition over the fair value of net assets acquired has been recognized as
goodwill. The acquired goodwill is not deductible for tax purpose.
The
following summarize the fair value of the total consideration
transferred.
Consideration
|
Fair value
|
|||
Cash
|
$ | 4,692,265 | ||
4.5%
equity interest in Yongye Nongfeng
|
11,830,000 | |||
Total
consideration
|
$ | 16,522,265 |
The
estimated fair value of the 4.5% equity interest in Yongye Nongfeng was
determined by an independent valuer by using discount cash flow
model.
The
difference between the fair value of 4.5% equity interest transferred and the
amount by which noncontrolling interest is adjusted due to the transfer is
recognized in additional paid-in capital and amounted to
$9,461,196.
F-16
The fair
value of the total consideration transferred was allocated as
follows:
Fair value
|
Useful life
|
|||||
Property,
plant and equipment
|
||||||
-
Buildings
|
$ | 1,443,489 |
30
years
|
|||
-
Machinery and equipment
|
577,191 |
10
years
|
||||
-
Vehicles
|
351,161 |
10
years
|
||||
-
Office equipment and furniture
|
13,280 |
5
years
|
||||
Total
property, plant and equipment
|
2,385,121 | |||||
Land
use right
|
4,188,750 |
48
years
|
||||
Goodwill
|
9,948,394 | |||||
Total
consideration
|
$ | 16,522,265 |
The
goodwill of $9,948,394 arising from the Acquisition consists largely of the
synergies and cost reductions through economies of scale.
Unaudited
supplemental pro forma financial information
The
following unaudited supplemental pro forma financial information represents the
consolidated results of operations of the Company as if the Acquisition had
occurred as of the beginning of January 1, 2009 and 2008. The unaudited
supplemental pro forma financial information is not necessarily indicative of
what the Company’s consolidated results of operations actually would have been
had it completed the acquisition at the beginning of the period. In addition,
the unaudited supplemental pro forma financial information does not attempt to
project the future results of operations after the Acquisition.
For
the Years Ended
|
||||||||
December
31, 2009
|
December
31, 2008
|
|||||||
Revenues
|
$ | 98,092,842 | $ | 48,092,271 | ||||
Net
income
|
2,654,684 | 12,332,325 | ||||||
Net
income per share attributable to Yongye International,
Inc.
|
||||||||
Basic
|
$ | 0.07 | 0.58 | |||||
Diluted
|
0.07 | 0.46 |
Since the
acquisition date, the revenues from Shengmingsu manufacturing business, which
were all inter-company sales, were eliminated in the consolidated financial
statements.
NOTE 4 –
ACCOUNTS RECEIVABLE
Accounts
receivable at December 31, 2009 and 2008 consisted of the
following:
December 31, 2009
|
December 31, 2008
|
|||||||
Accounts
receivable
|
$ | 6,161,796 | $ | 3,053,380 | ||||
Less:
allowance for doubtful accounts
|
- | (305,338 | ) | |||||
Total
|
$ | 6,161,796 | $ | 2,748,042 |
F-17
As of
December 31, 2008, an allowance for doubtful accounts of $305,338 was provided
against an accounts receivable that management believed to be uncollectible at
that time. The allowance for doubtful accounts of $305,338 was reversed during
the year ended December 31, 2009 as the total amount of the accounts receivable
was repaid by the customer during the year ended December 31, 2009. No allowance
for doubtful accounts was recorded during the year ended December 31, 2009 as
management believes no accounts are uncollectible as of December 31,
2009.
Currently,
the Company’s normal credit terms to customers with well-established
trading records are up to six months while the Company generally requests
other customers to pay either in advance or upon delivery.
F-18
NOTE 5 –
INVENTORIES
Inventories
at December 31, 2009 and 2008 consisted of the following:
December
31, 2009
|
December
31, 2008
|
|||||||
Finished
goods
|
$ | 31,734,252 | $ | 20,664,930 | ||||
Work
in progress
|
6,024,323 | - | ||||||
Raw
materials
|
3,771,366 | - | ||||||
Consumables
and packing supplies
|
503,320 | 43,263 | ||||||
Total
|
$ | 42,033,261 | $ | 20,708,193 |
NOTE 6 –
PREPAYMENTS
In order
to secure stock supplies of lignite coal and other raw materials, the Company
makes prepayments to certain suppliers. As of December 31, 2009, the prepayments
to suppliers amounted to $6,070,458.
NOTE 7 –
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment at December 31, 2009 and 2008 consisted of the
following:
December 31, 2009
|
December 31, 2008
|
|||||||
Buildings
|
$ | 5,644,213 | $ | 3,656,992 | ||||
Machinery
and equipment
|
1,535,189 | 673,480 | ||||||
Office
equipment and furniture
|
356,560 | 85,087 | ||||||
Vehicles
|
2,037,130 | 824,013 | ||||||
Software
|
17,199 | 17,156 | ||||||
Leasehold
improvements
|
219,388 | 218,844 | ||||||
9,809,679 | 5,475,572 | |||||||
Less:
Accumulated depreciation
|
652,764 | 107,498 | ||||||
Total
|
$ | 9,156,915 | $ | 5,368,074 |
Depreciation
expense for the years ended December 31, 2009 and 2008 was $545,887 and
$107,498, respectively.
As of
December 31, 2009, vehicles with an original carrying amount of $1,227,056 were
pledged as security for the long-term banks loans of $754,110 provided by the
banks for the purchase of the vehicles (See Note 13). As of December 31, 2009,
an apartment with an original carrying value of $103,687 was pledged as security
for a long-term bank loan of $72,376 provided by the bank for the purchase of
the apartment (See Note 13).
As of
December 31, 2009, buildings with an original carrying amount of $2,718,269 were
pledged as security for the short-term bank loan of $2,925,174 (See Note
12).
As of
December 31, 2008, vehicles in the amount of $692,982 were pledged for the
long-term bank loans of $438,563 which were received for purchasing those
vehicles (see Note 13).
F-19
NOTE 8 –
INTANGIBLE ASSET
Intangible
asset at December 31, 2009 and 2008 represented a patent as
follows:
December 31, 2009
|
December 31, 2008
|
|||||||
Patent
|
$ | 106,323 | $ | 106,059 | ||||
Less:
Accumulated amortization
|
21,265 | 10,606 | ||||||
Total
|
$ | 85,058 | $ | 95,453 |
Amortization
expense for the years ended December 31, 2009 and 2008 was $10,627 and $10,606,
respectively. The estimated annual amortization expense for intangible asset in
each of the next five years is $10,623.
F-20
NOTE 9 –
LAND USE RIGHT
As of
December 31, 2009, land use right represented.
December 31, 2009
|
||||
Land
use right
|
$ | 4,188,995 | ||
Less:
Accumulated amortization
|
22,008 | |||
Total
|
$ | 4,166,987 |
As of
December 31, 2009, the land use right was pledged as security for the short-term
bank loan of $2,925,174 (See Note 12).
NOTE 10 –
OTHER ASSETS
During
the year ended December 31, 2009, the Company entered into agreements with
certain distributors, including sub-distributors (the “Distribution Agreement”),
pursuant to which the Company will give the distributor a free vehicle in
exchange for the distributor agreeing to comply with certain sale conditions
during the term of the agreement of five years. The sales conditions
included (1) meeting the annual sales target set by the Company; (2) not selling
the products at a price lower than the price stipulated by the Company; and (3)
selling the products only in Company’s approved territories. To the
extent the distributor fails any one of these conditions during the term of the
agreement, the Company has the right to have the vehicles return back to the
Company.
The cost
of these vehicles has been recorded as “Other assets” which is expensed over a
five years period.
NOTE 11 –
GOODWILL
The
goodwill as of December 31, 2009 represents the excess of the consideration paid
by the Company over the fair value of the net identifiable assets acquired in
the Acquisition (See Note 3).
NOTE 12 –
SHORT-TERM BANK LOAN
On
October 9, 2009, Yongye Nongfeng obtained a short-term bank loan of $2,925,174
from China Citic Bank that bears a fixed annual interest rate of 5.31% and is
due on September 26, 2010. The interest expense for the year ended December 31,
2009 was $35,727. The short-term loan was pledged by the land use right and
buildings with an original carrying amount of $4,188,995 and $2,718,269,
respectively.
NOTE 13 –
LONG-TERM LOANS
As of
December 31, 2009 and 2008, the long-term loans consisted of the
followings:
December 31, 2009
|
December 31, 2008
|
|||||||
Vehicle
loans-employees
|
$ | 532,425 | $ | 397,773 | ||||
Mortgage
loan
|
71,618 | - | ||||||
Vehicle
loans-distributors
|
272,977 | - | ||||||
Total
|
$ | 877,020 | $ | 397,773 |
F-21
From
August to December 2008, the Company financed the purchase of eleven cars with
bank loans of $438,563. The Company pledged those eleven cars with an
initial value of $692,982 to the loans. The loans have three years terms
and are paid in monthly installments. Interest rates on the loans range from
5.45% to 14.54% annually, and are subject to the change of the base interest
rate prescribed by People’s Bank of China. As of December 31, 2009, the
Company’s bank loans of $532,425 were secured by twenty-six vehicles with
initial carrying amount of $1,227,056. The loans have three to five years terms
and are paid in monthly installments. Interest rates on the loans range from
5.40% to 13.21% annually, and are subject to the change of the base interest
rate prescribed by People’s Bank of China. These bank loans were initially
obtained by individual employees of the Company after the Company made the
initial down payment of the purchase price of the vehicles. The Company and the
individual employees entered into trust agreements whereby even though the
vehicles used by the employees are legally registered under the individuals’
name, the Company is subject to the full risks and
rewards of ownership of the vehicles, including the rights of official
use and the rights to retain the legal title of the vehicles at the time of
termination of the employment relationship with the individual. Under the trust
agreements, the Company assumes the risk of loss, damage, penalty and other
obligations related to the operation and ownership of the vehicle, including
repairs and maintenance and, and is required to repay the bank loans. The
individuals have no right to sell, lease, lend or pledge the vehicles to any
other person or entity. Consequently, the Company has recognized the cost of the
vehicles as assets and the bank loans as liabilities in its consolidated balance
sheet.
As of
December 31, 2009, the Company had loans of $272,977 that were initially
provided to individual distributors by banks. The
distributors obtained the loans by securing their vehicles that were
registered under the distributors’ name. In connection with entering
into the Distribution Agreement (see note 10), the Company and the distributors
entered into agreements, pursuant to which the Company would repay the full
amount of bank loans on behalf of these distributors. Accordingly, the Company
recorded the long-term loans in the accompanying consolidated balance sheets.
These loans have three years terms and are paid in monthly installments.
Interest rates on the loans range from 5.40% to 13.00% annually, subject to the
change of the base interest rate prescribed by People’s Bank of
China.
The
following table sets out the remaining contractual maturities at the balance
sheet date of the Company’s loans, which are based on contractual undiscounted
cash flows (including interest payments computed using contractual rates or, if
floating, based on prevailing rates current at the balance sheet date) and the
earliest date the Company would be required to repay:
2010
|
$ | 389,806 | ||
2011
|
345,824 | |||
2012
|
156,949 | |||
2013
|
18,484 | |||
2014
and thereafter
|
92,681 | |||
Total
|
1,003,744 | |||
Less:
Amount representing interest
|
(126,724 | ) | ||
Total
at present value
|
$ | 877,020 |
F-22
NOTE 14 -
CAPITAL STOCK
Capital
stock
Concurrent
with the Share Exchange, the Company entered into a securities purchase
agreement on April 17, 2008 with certain investors (the “April Investors”) for
the sale in a private placement of an aggregate of 6,495,619 shares of the
Company’s common stock, par value $0.001 per share (the “April Investor Shares”)
and 1,623,905 warrants (See below) for aggregate gross proceeds equal to
$10,000,651 (the “April Offering”).
On
September 5, 2008, the Company entered into a securities purchase agreement with
certain investors (the “September Investors”), for the sale in a private
placement of an aggregate of 6,073,006 shares of the Company’s common
stock, par value $0.001 per share (the “September Investor Shares”) and
1,518,253 warrants (See below) for aggregate gross proceeds equal
to approximately $9,350,000 (the “September Offering”).
F-23
On May 8,
2009, the Company entered into a securities purchase agreement with certain
investors (the “May Investors”), for the sale in a private placement of an
aggregate of 5,834,083 shares of the Company common stock, par value $0.001 per
share (the “May Shares”) for aggregate gross proceeds equal to $8,984,595
(the “May Offering”).
In
connection with the May Offering, the Company entered into a registration rights
agreement with the May Investors, pursuant to which the Company agreed to file a
registration statement with the United States Securities and Exchange Commission
(“SEC”) for the resale of the shares, including the shares to be issued under
the warrants (see below), within 45 calendar days of the closing date of the May
Offering, and to use its best efforts to have the registration statement
declared effective within 180 calendar days of the closing date of the May
Offering. The Company is obligated to pay liquidated damages of 1% of
the dollar amount of the shares sold in the May Offering per month, payable in
cash, up to a maximum of 10%, if the registration statement is not filed and
declared effective within the foregoing time period. The Company did not
pay any liquidated damages in 2009 and 2008.
On
September 26, 2009, the Company entered into an underwriting agreement with
Roth Capital Partner, LLC (“Roth”) and Oppenheimer and Company Inc. (the
“Underwriters”), pursuant to which the Company agreed to issue and sell
8,000,000 shares of common stock (the “Firm Stock”), par value $0.001 per share,
to the Underwriters at a price per share of $7.50 (the ”December Offering”). The
sale of the Firm Stock was consummated on December 17, 2009 and closed on
December 22, 2009. The aggregate proceeds from the offering were $60,000,000.
Underwriting discounts and commissions and offering expenses were $3,692,000 and
were recorded as a reduction of additional paid-in capital.
In
addition to the sale of shares above, the Company also granted the Underwriters
an option to purchase up to an additional 1,200,000 shares to cover
over-allotments, if any, at the same price as the Firm Stock. On December 31,
2009 the underwriters agreed to purchase the over-allotment for gross proceeds
of $9,000,000, which after net of commissions and discounts of $450,000 was
received on January 4, 2010. The subscription receivable of $8,550,000 was
recorded as a contra equity item within stockholders’ equity.
Warrants
Concurrent
with the April Investor Shares, the Company issued 1,623,905 warrants to
purchase 1,623,905 shares of the Company’s common stock (the “April Warrants”)
to the April Investors as an inducement to the April Offering. The warrants
issued have a five years exercise period with an initial exercise price of
$1.848. In addition, 649,562 warrants were issued to Roth as the placement agent
with terms and exercise price identical to the warrants issued to the April
Investors.
Concurrent
with the September Investor Shares, the Company issued 1,518,253 warrants to
purchase 1,518,253 shares of the Company’s common stock (the “September
Warrants”) to the September Investors as an inducement to the September
Offering. The warrants issued have a five years exercise period with an initial
exercise price of $1.848. In addition, 607,301 warrants were issued to Roth as
the placement agent with terms and exercise price identical to the warrants
issued to the September Investors.
F-24
On
September 12, 2008, Roth executed an irrevocable cashless exercise of its
warrants and was issued 686,878 shares of common stock of the Company. In
exchange for the issuance of 354,987 shares, Roth surrendered 649,562 warrants
received in the April Offering; and in exchange for the issuance of 331,891
shares, Roth surrendered 607,301 warrants received in the September
Offering.
Concurrent
with the offering of the “May Shares”, the Company issued to Roth as the
placement agent, 246,224 warrants (“May Warrants”). The warrants have
a five years exercise period and an initial exercise price of $1.848. On
November 9, 2009, Roth executed an irrevocable cashless exercise of all the “May
Warrants”. The Company issued 198,247 shares of common stock of the Company in
exchange for the surrender of all the May Warrants.
During
the year ended December 31, 2009, 2,939,183 “April Warrants” and “September
Warrants” were exercised by several “April Investors” and “September
Investors”. In connection with the exercises, the Company issued 2,539,653
shares of common stock and received $526,611 from warrant holders that cash
exercised.
According
to the terms of these warrants, the Company could be required to pay cash to the
warrant holders under certain events that are not within the control of the
Company. Specifically, upon the occurrence of certain “fundamental
transactions” as defined, the warrant holders (but not the shareholders of the
Company’s common stock) are entitled to receive cash equal to the value of the
warrants to be determined based on an option pricing model and certain specified
assumptions set forth in the warrant agreement. In addition, the
terms of the warrants include a “down-round” provision under which the exercise
price could be affected by future equity offerings undertaken by the
Company. If the Company issues any common stock or common stock
equivalents, as defined, at any time the warrants are outstanding, at an
effective price less than the then warrant exercise price, the exercise price of
warrants will be reduced to the effective price of newly issued common stock or
common stock equivalents. In the “May Offering”, the Company issued
new common stock at a price of $1.54 per share and accordingly, the exercise
price of the April Warrants and the September Warrants was reduced to $1.54 per
share. The exercise price of the May Warrants ($1.848) was not
affected but is also subject to potential down-round adjustments in future
periods. As of December 31, 2009, there were 202,975 warrants outstanding, of
which 81,190 and 121,785 warrants will expire if unexercised by April 2013 and
September 2013, respectively. As of December 31, 2008, there are 3,142,158
warrants outstanding with a weighted average exercise price of
$1.848. Of this total, 1,623,905 expire in April 2013 and 1,518,253
expire in September 2013.
The
potential cash payments and the down-round provision preclude the classification
of these warrants as equity classification. Accordingly, the warrants
are accounted for as a liability and adjusted to fair value through earnings at
each reporting date. The loss resulting from the increase in fair value of
warrants was $24,009,802 for the year ended December 31, 2009. The gain
resulting from the decrease in fair value of warrants was $2,118,797 for the
year ended December 31, 2008.
The
estimated fair values of the warrants issued to April Investor and September
Investor were determined at December 31, 2009 and 2008 using Binominal
Option Pricing Model with Level 2 inputs. The following table sets forth,
by level within the fair value hierarchy, the Company’s financial liabilities
that were measured at fair value on a recurring basis as of December 31,
2009 and 2008.
Fair Value Measurements Using:
|
||||||||||||||||
Quoted Prices in
Active Markets for
Identical Financial
Assets and Liabilities
|
Significant Other
Observable Inputs
|
Significant
Unobservable Inputs
|
||||||||||||||
December
31, 2009
|
Total
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
Liabilities
at fair value:
|
||||||||||||||||
Derivative
liabilities—warrants
|
1,380,205 | — | 1,380,205 | — |
F-25
Fair Value Measurements Using:
|
||||||||||||||||
Quoted Prices in
Active Markets for
Identical Financial
Assets and Liabilities
|
Significant Other
Observable Inputs
|
Significant
Unobservable Inputs
|
||||||||||||||
December 31, 2008
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
Liabilities
at fair value:
|
||||||||||||||||
Derivative
liabilities—warrants
|
2,107,931 | — | 2,107,931 | — |
The fair
values of the warrants are summarized as follows:
April Warrants
|
September Warrants
|
May Warrants
|
||||||||||
Fair value of Warrant per share (US$) at:
|
||||||||||||
Date
of issuance
|
1.07 | 2.08 | 0.95 | |||||||||
December
31, 2008
|
0.66 | 0.68 | N/A | |||||||||
December
31, 2009
|
6.78 | 6.81 | N/A |
The fair values of the
warrants outstanding as of December 31, 2009 and 2008 were determined based on
the Binominal option pricing model, using the following key
assumptions:
December
31,
2009
|
December
31,
2008
|
|||||||||||||||
April
Warrants
|
September
Warrants
|
April
Warrants
|
September
Warrants
|
|||||||||||||
Expected
volatility
|
61.0 | % | 60.0 | % | 59.5 | % | 58.5 | % | ||||||||
Expected
dividends yield
|
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Time
to maturity
|
3.30
years
|
3.72
years
|
4.30
years
|
4.69
years
|
||||||||||||
Risk-free
interest rate per annum
|
2.218 | % | 2.218 | % | 1.411 | % | 1.411 | % | ||||||||
Fair
value of underlying common shares (per share)
|
8.13 | 8.13 | 1.60 | 1.60 |
F-26
Escrow
shares
In
connection with the April Offering, the Company entered into an escrow agreement
with Roth as a representative of the April Investors, Tri-State Title &
Escrow LLC (the “Escrow Agent”) and Full Alliance, one of the Company’s
shareholders (the “April Escrow Agreement”), pursuant to which 2,000,000 shares
of the Company held by Full Alliance (the “April Escrow Shares”) were delivered
to the Escrow Agent. The April Escrow Shares are released back to Full Alliance
upon the Company’s achievement of $10,263,919 after tax net income (“ATNI”) for
the year ended December 31, 2008 (the “2008 Net Income Threshold”). The ATNI
threshold was achieved and the Escrow Shares were released to Full Alliance in
May 2009.
In
connection with the September Offering, the Company entered into an escrow
agreement with Roth, the Escrow Agent and Full Alliance (the “September Escrow
Agreement”), pursuant to which 4,000,000 shares of the Company issued to Full
Alliance in the Share Exchange (the “September Escrow Shares”) were delivered to
the Escrow Agent. Of the September Escrow Shares, 2,000,000 shares (the “Make
Good Escrow Shares”) are held and released back to Full Alliance upon the
Company’s achievement of both 2008 and 2009 financial targets.
The
Company achieved the 2008 financial targets which were (i) the 2008 Net Income
Threshold, and (ii) fully diluted earnings per share reported in the
Company’s 2008 Annual Report on Form 10-K/A filed with the SEC (the “2008 Annual
Report”) of no less than $0.42 (the “2008 Guaranteed EPS”). The Make Good Escrow
Shares are retained with the Escrow Agent for the 2009 financial targets which
are described in the following sentence. In the event that (i) the 2009
ATNI is less than $12,649,248, or the fully diluted earnings per share reported
in 2009 Annual Report on Form 10-K filed with the SEC (the “2009 Annual Report”)
is less than $0.42, all of the 2,000,000 Make Good Escrow Shares shall be
distributed to the September Investors on a pro-rata basis, (ii) the 2009 ATNI
equals or exceeds $12,649,248 and is less than $15,811,560, or the fully diluted
earnings per share reported in the 2009 Annual Report, equals or exceeds $0.42
and is less than $0.53, then the Make Good Shares equal to the product
of (i)(A) $15,811,560 minus the 2009 ATNI, divided by (B)
$15,811,560, and (ii) the Make Good Escrow Shares, shall be transferred to the
September Investors on a pro-rata basis, and the remaining share shall be
returned to Full Alliance, (iii) the 2009 ATNI exceeds $15,811,560, the
2,000,000 Make Good Escrow Shares will be released back to Full Alliance.
Pursuant to both April Escrow Agreements and September Escrow Agreements, for
purposes of determining whether or not the ATNI has been met, certain items,
such as any accounting charges for issuing warrants, shall not be deemed to be
an expense, charge, or any other deduction from revenues even though GAAP may
require contrary treatment or the Annual Report for the respective fiscal years
filed with the SEC by the Company may report otherwise. No other exclusions
shall be made for any non-recurring expenses of the Company, including
liquidated damages under the Transaction Documents (as defined in the April
Escrow Agreement and September Escrow Agreement), in determining whether any of
the 2008 and 2009 ATNI, and 2008 and 2009 EPS has been achieved.
The
remaining 2,000,000 escrow shares were held for the timely approval obtained
from Ministry of Agriculture of Inner Mongolia in relation to the transfer of
fertilizer license to Yongye Nongfeng from Inner Mongolia Yongye and completion
of Yongye Nongfeng’s restructuring (the “Restructuring Make Good Shares”). The
Yongye Nongfeng’s restructuring refers to the “Acquisition”, which is disclosed
in Note 3. The fertilizer license is issued by the Ministry of Agriculture and
provides the holder the right to manufacture and sell fertilizer products in the
PRC.
F-27
In the
event that (1) the fertilizer license was not issued to Yongye Nongfeng by June
30, 2009, or such later date as agreed to by the Company and the September
Investors holding a majority of the September Investor Shares at such time (the
“License Grant Date ”), or (2) the fertilizer license was issued by the License
Grant Date, but the Yongye Nongfeng restructuring was not completed by the
Restructuring Completion Date, the Restructuring Make Good Shares would be
transferred in accordance with the September Escrow Agreement to the September
Investors on a pro-rata basis for no consideration. The “Restructuring
Completion Date” was set as 132 calendar days after the License Grant Date. The
fertilizer license was issued on June 1, 2009 by the Ministry of Agriculture to
Yongye Nongfeng. In October 2009, the Company completed the Yongye Nongfeng
restructuring (See Note 3).
The
purpose of the April Escrow Arrangement and September Escrow Arrangement was an
inducement made to facilitate the respective offerings, and not part of a
compensatory arrangement to management. The escrow shares will not be released
or cancelled due to the discontinued employment of any management of the
Company.
NOTE 15 –
STATUTORY RESERVE
Yongye
Nongfeng is required to allocate at least 10% of its after tax profits as
determined under generally accepted accounting principal in the PRC to a
statutory surplus reserve until the reserve balance reaches 50% of its
registered capital. For the years ended December 31, 2009 and 2008, Yongye
Nongfeng made appropriations to this statutory reserve of $2,723,445 and
$1,342,125, respectively. The accumulated balance of the statutory reserve of
Yongye Nongfeng as of December 31, 2009 and 2008 was $4,065,570 and
$1,342,125, respectively.
F-28
In
accordance with the PRC laws and regulations, Yongye Nongfeng is restricted in
its ability to transfer a portion of its net assets to the Company in the form
of dividends, which amounted to $3,862,292, representing the amount of
accumulated balance of statutory reserve of Yongye Nongfeng attributable to the
Company, as of December 31, 2009.
NOTE 16 –
INCOME TAXES
The
Company and its subsidiaries file separate income tax returns.
The
United States of America
Yongye
International, Inc. is incorporated in the State of Nevada in the U.S., and
is subject to a gradual U.S. federal corporate income tax of 15% to 35%. The
State of Nevada does not impose any corporate state income tax.
British
Virgin Islands
Fullmax
is incorporated in the British Virgin Islands. Under the current laws of the
British Virgin Islands, Fullmax is not subject to tax on income or capital
gains. In addition, upon payments of dividends by Fullmax, no British Virgin
Islands withholding tax is imposed.
Hong
Kong
ASO is
incorporated in Hong Kong. ASO did not earn any income that was derived in Hong
Kong for the years ended December 31, 2008 and 2009 and therefore was not
subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong
companies are not subject to any Hong Kong withholding tax.
PRC
Effective
from January 1, 2008, the PRC’s statutory income tax rate is 25%. According to
the approval from the tax authority in the city level of Hohhot in Inner
Mongolia Autonomous Region, Yongye Nongfeng was assessed to use the deemed
profit method to determine the amount of income tax provision for the period
from April 1, 2008 to December 31, 2008. Under the deemed profit method,
Yongye Nongfeng is subject to income tax at 25% on its deemed profit which is
determined based on its revenue less 95% deemed expenses. According to an
approval from the Inner Mongolia Autonomous Region National Tax Authority on
December 11, 2009, Yongye Nongfeng, being a foreign investment enterprise
located in the Western Region of the PRC, is entitled to a preferential
income tax rate of 15% for the years ended December 31, 2009 and
2010.
The
components of earnings (losses) before income taxes are as follows:
For
the Years Ended
|
||||||||
December
31, 2009
|
December
31, 2008
|
|||||||
PRC,
excluding Hong Kong
|
$ | 32,231,552 | $ | 14,285,546 | ||||
U.S.
|
(24,009,820 | ) | 1,421,735 | |||||
Others
|
(724,420 | ) | (429,843 | ) | ||||
Total
|
$ | 7,497,312 | $ | 15,277,438 |
F-29
Income
tax expense for the years ended December 31, 2008 and 2009 represents PRC
current income taxes.
Reconciliation
between income tax expense and the amounts computed by applying the PRC
statutory tax rate of 25% to earnings before income taxes is as
follows:
For
the Years Ended
|
||||||||
December
31, 2009
|
December
31, 2008
|
|||||||
Computed
expected tax expense
|
$ | 1,874,328 | $ | 3,819,360 | ||||
Non-taxable
income
|
- | (943,164 | ) | |||||
Non-deductible
expenses
|
7,912,923 | - | ||||||
Tax
rate differential
|
(5,322,463 | ) | (2,392,626 | ) | ||||
Change
in valuation allowance
|
532,317 | 380,722 | ||||||
Income
tax expense
|
$ | 4,997,105 | $ | 864,292 |
The PRC
tax rate has been used because the majority of the Company’s consolidated
pre-tax earnings arise in the PRC.
F-30
The
Company had deferred tax assets of approximately $389,303 and $921,620 as of
December 31, 2008 and 2009, respectively that consisted of tax loss
carryforwards. The Company had no other temporary differences as of December 31,
2009 and 2008. As of December 31, 2008 and 2009, full valuation allowances were
provided against the deferred tax assets. The increase in the valuation
allowance during the years ended December 31, 2008 and 2009 was $380,722
and $532,317, respectively.
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets depends on
the generation of future taxable income during the periods in which the tax loss
carryforwards are utilized. The Company considers projected future taxable
income and tax planning strategies in making its assessment. As of December 31,
2009, for United States federal income tax purposes, the Company had gross tax
loss carryforwards of approximately $25,238, $1,119,771 and $1,565,638 which
would expire on December 31, 2027, 2028 and 2029, respectively. Management
determines it is more likely than not that the deferred tax asset will not be
realized, and therefore, full valuation allowance was provided as of
December 31, 2009.
According
to the prevailing PRC income tax law and its relevant regulations, PRC-resident
enterprises are levied withholding tax at 10% on dividends to their
non-PRC-resident corporate investors for earnings accumulated beginning on
January 1, 2008, and undistributed earnings generated prior to January 1, 2008
are exempt from such withholding tax. The Company has not provided deferred
income taxes of $1,111,095 and $3,476,062 relating to the PRC withholding tax on
accumulated earnings of $11,110,954 and $34,760,624 as of December 31, 2008 and
2009, respectively, since these earnings are intended to be permanently
reinvested.
As of
January 1, 2007 and for the years ended December 31, 2007, 2008 and 2009,
the Company and its subsidiaries did not have unrecognized tax benefits, and
therefore no interest or penalties related to unrecognized tax benefits were
accrued. It does not expect that the amount of unrecognized tax benefits will
change significantly within the next 12 months.
The
Company and its subsidiaries mainly file income tax returns in the United States
and PRC. The Company is subject to U.S. federal income tax examination by tax
authorities for tax years beginning in 2007. According to the PRC Tax
Administration and Collection Law, the statute of limitations is three years if
the underpayment of taxes is due to computational errors made by the taxpayer or
the withholding agent. The statute of limitations is extended to five years
under special circumstances where the underpayment of taxes is more than
RMB100,000 ($15,000). In the case of transfer pricing issues, the statute of
limitation is ten years. There is no statute of limitation in the case of tax
evasion. The PRC tax returns for the Company’s PRC subsidiary are open to
examination by the PRC state and local tax authorities for the tax years
beginning in 2008.
F-31
NOTE 17 –
FAIR VALUE MEASUREMENTS
2009
|
2008
|
|||||||||||||||
Carrying
|
Carrying
|
|||||||||||||||
amount
|
Fair value
|
amount
|
Fair value
|
|||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
|
$ | 65,518,181 | 65,518,181 | 4,477,477 | 4,477,477 | |||||||||||
Accounts
receivable
|
6,161,796 | 6,161,796 | 2,748,042 | 2,748,042 | ||||||||||||
Due
from a related party
|
— | — | 192,741 | 192,741 | ||||||||||||
Other
receivables
|
383,841 | 383,841 | 680,752 | 680,752 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Short-term
bank loan
|
$ | 2,925,174 | 2,925,174 | — | — | |||||||||||
Long-term
loans - current portion
|
331,693 | 331,693 | 167,652 | 167,652 | ||||||||||||
Accounts
payable - related party
|
880,026 | 880,026 | 46,739 | 46,739 | ||||||||||||
Accounts
payable - third parties
|
344,774 | 344,774 | — | — | ||||||||||||
Accrued
expenses
|
479,609 | 479,609 | 583,880 | 583,880 | ||||||||||||
Due
to a related party
|
1,663,191 | 1,663,191 | — | — | ||||||||||||
Other
payables
|
553,286 | 553,286 | 774,526 | 774,526 | ||||||||||||
Derivative
liabilities
|
1,380,205 | 1,380,205 | 2,107,931 | 2,107,931 | ||||||||||||
Long-term
loans
|
545,327 | 545,327 | 230,121 | 230,121 |
F-32
The fair
values of the financial instruments shown in the above table as of December 31,
2009 and 2008 represent the estimated amounts that would be received to sell
those assets or that would be paid to transfer those liabilities in an orderly
transaction between market participants at that date. Those fair value
measurements maximize the use of observable inputs. However, in situations where
there is little, if any, market activity for the asset or liability at the
measurement date, the fair value measurement reflects the Company’s own
judgments about the assumptions that market participants would use in pricing
the asset or liability. Those judgments are developed by the Company based on
the best information available in the circumstances, including expected cash
flows and appropriately risk-adjusted discount rates, available observable and
unobservable inputs.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
Cash,
accounts receivable, net of allowance for doubtful accounts, due from a related
party, other receivables, short-term bank loan, long-term bank loans – current
portion, accounts payables, accrued expenses, due to a related party and other
payables: The carrying amounts, at face value or cost plus accrued interest,
approximate fair value because of the short maturity of these
instruments.
Derivative
liabilities: The method and assumptions used to estimate the fair value of
derivative liabilities are set out in Note 14.
Long-term
loans: The fair value of the Company’s long-term loans is estimated by
discounting future cash flows using current market interest rates offered to the
Company and its subsidiaries for debts with substantially the same
characteristics and maturities.
NOTE 18 –
LEASE COMMITMENTS
The
Company entered into an operating lease for an office space in Beijing, PRC for
the period from January 1, 2008 to December 31, 2010. The lease expense for
the Beijing office was $223,403 and $227,606 for the years ended December 31,
2009 and 2008, respectively. Future minimum lease payments under non-cancellable
operating lease agreement as of December 31, 2009 are $231,769 which the Company
is committed to pay during the year ended December 31, 2010.
NOTE 19 –
RELATED PARTY TRANSACTIONS AND BALANCES
For the
years ended December 31, 2009 and 2008, Yongye Nongfeng, purchased inventories
from Inner Mongolia Yongye amounting to $33,048,126 and $43,509,906,
respectively. In January 2008, upon receiving governmental approval of its
establishment, Yongye Nongfeng entered into an agreement (the “Agreement”)
with Inner Mongolia Yongye, pursuant to which Yongye Nongfeng agreed to purchase
finished products from Inner Mongolia Yongye at a fixed price of RMB 350 per
case for fulvic acid based plant products and RMB 120 per case for fulvic acid
based animal products. The term of the Agreement was for the period
from January 15, 2008 to January 14, 2013. Pursuant to the Agreement, the
Company could terminate the Agreement by giving one month notice to Inner
Mongolia Yongye. Upon Yongye Nongfeng obtaining its own fertilizer license, the
Agreement was terminated in July, 2009.
As of
December 31, 2009 and 2008, accounts payable to related party were $880,026
and $46,739, respectively, and represented the payable for the purchase of
inventories from Inner Mongolia Yongye.
F-33
Due from
related party was $192,741 as of December 31, 2008 and represented the payments
made by the Company on behalf of Inner Mongolia Yongye for audit fees and
research and development fees for the year ended December 31, 2008.
For the
year ended December 31, 2009, the Company sold fulvic acid plant based products
of $2,221,936 to Hubei Longshangxing Xinnongcun Fuwu Youxiangongsi, which is 51%
owned by Inner Mongolia Yongye.
As of
December 31, 2009, the amount due to a related party was $1,663,191 which mainly
represented the payable for the Acquisition from Inner Mongolia Yongye (See Note
3). The Company expects to repay the amount during the year ending December 31,
2010.
For the
year ended December 31, 2008, the Company borrowed $1,617,293 from Yin Ping, the
wife of the CEO, $762,524 from Inner Mongolia Yongye and $10,000 from Kim
McElroy, a director of the Company who resigned in April 2008. The amounts were
repaid in full as of December 31, 2008.
F-34
Yongye
Nongfeng and Inner Mongolia Yongye entered a series of lease arrangements to
lease land, buildings and equipment to and from each other as
follows:
·
|
On
June 1, 2008, a land lease agreement was entered into in which Yongye
Nongfeng would lease land of 74,153 square meters from Inner Mongolia
Yongye from June 1, 2008 to May 31, 2009. On June 1, 2009, upon the
expiry of this agreement, Yongye Nongfeng and Inner Mongolia Yongye
entered into another lease agreement in which Yongye Nongfeng would lease
a land of 79,920 square meters and a production building from Inner
Mongolia Yongye from June 1, 2009 to October 10,
2009.
|
·
|
On
September 28, 2008, a building lease agreement and an equipment lease
agreement were entered into in which Inner Mongolia Yongye would lease a
building and certain equipment from Yongye Nongfeng from September 28,
2008 to September 27, 2009. The agreements were terminated on June 1,
2009 upon Yongye Nongfeng obtaining the fertilizer license from Ministry
of Agricultural.
|
·
|
On
March 15, 2009, an equipment lease agreement was entered into in which
Inner Mongolia Yongye would lease a set of production equipment from
Yongye Nongfeng from March 15, 2009 to May 31, 2009. The equipment
lease agreement was not renewed upon
expiration.
|
Pursuant
to these agreements, both Yongye Nongfeng and Inner Mongolia Yongye did not
charge any rental to each other for the lease. Additionally, the
estimated rental income to be received and the rental expense to be paid by the
Yongye Nongfeng are not material to the Company’s 2009 and 2008 results of
operations and therefore have not been included.
NOTE 20 -
EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted income per share
for the periods indicated:
For
the Years Ended
|
||||||||
December
31, 2009
|
December 31, 2008
|
|||||||
Numerator
used in basic net income per share:
|
||||||||
Net
income attributable to Yongye International, Inc.
|
$ | 2,195,651 | $ | 13,310,758 | ||||
Decrease
in fair value of derivative liabilities
|
- | (2,118,797 | ) | |||||
Numerator
used in diluted net income per share
|
2,195,651 | 11,191,961 | ||||||
Shares
(denominator):
|
||||||||
Weighted
average ordinary shares outstanding-basic
|
31,324,830 | 19,599,054 | ||||||
Plus:
weighted average incremental shares from assumed exercise of
warrants
|
- | 507,379 | ||||||
Weighted
average ordinary shares outstanding used in computing
diluted net income per ordinary share
|
31,324,830 | 20,106,433 | ||||||
Net
income per ordinary share-basic
|
0.07 | 0.68 | ||||||
Net
income per ordinary share-diluted
|
$ | 0.07 | $ | 0.56 |
As of
December 31, 2009, the Company had 202,975 warrants outstanding that could
potentially dilute basic earnings per share in the future, but excluded in the
computation of diluted earnings per share as their effect would have been
anti-dilutive.
NOTE 21 -
CONCENTRATIONS AND CREDIT RISKS
At
December 31, 2009 and 2008, the Company held cash in banks of approximately
$65,518,181 and $4,477,477, respectively that is uninsured by the government
authority. To limit exposure to credit risk relating to deposits, the Company
primarily places cash deposits only with large financial institution in the PRC
with acceptable credit rating.
F-35
Five
major customers accounted for 82% and one major customer accounted for 30% of
the Company’s total revenue for the year ended December 31, 2009. Five major
customers accounted for 92% and one major customer accounted for 43% of the
Company’s total revenue for the year ended December 31, 2008. The Company’s
total sales to five major customers were $80,274,006 and $44,109,814 for the
years ended December 31, 2009 and 2008, respectively. In addition, all these
major customers are distributors in the PRC agriculture industry.
For the
year ended December 31, 2009
|
For
the year ended December 31, 2008
|
||||||||||||||||
Largest
Customers
|
Amount of
Sales
|
% Total
Sales
|
Largest
Customers
|
Amount of
Sales
|
% Total
Sales
|
||||||||||||
Customer A
|
29,004,998 | 30 | % |
Customer A
|
20,541,267 | 43 | % | ||||||||||
Customer
B
|
18,534,320 | 19 | % |
Customer
D
|
6,886,624 | 14 | % | ||||||||||
Customer
C
|
16,745,156 | 17 | % |
Customer
F
|
6,291,070 | 13 | % | ||||||||||
Customer
D
|
9,950,840 | 10 | % |
Customer
B
|
5,663,011 | 12 | % | ||||||||||
Customer
E
|
6,038,692 | 6 | % |
Customer
G
|
4,727,842 | 10 | % | ||||||||||
Total
|
80,274,006 | 82 | % |
Total
|
44,109,814 | 92 | % |
Three
major suppliers accounted for 94% ($62,501,054) and one major supplier accounted
for 50% ($33,048,126) of the Company’s inventory purchase for the year ended
December 31, 2009. Inner Mongolia Yongye was the Company’s only vendor who
provided 100% ($43,509,906) of the Company’s purchased finished goods for
the year ended December 31, 2008. If these suppliers terminate their supply
relationship with the Company, the Company may be unable to purchase sufficient
raw material on acceptable terms, and finally the Company’s financial results
may be adversely affected.
The
Company’s operations are carried out 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’s economy. The business may be influenced 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.
NOTE 22 –
SUBSEQUENT EVENTS
On
February 4, 2010, Yongye Nongfeng repaid the $2,925,174 principal of short-term
bank loan to China Citic Bank and the corresponding interest up to the repayment
date. The buildings and land use right pledged for the loan were released
accordingly.
On March
1, 2010, Yongye Nongfeng entered into an asset purchase agreement with Wuchuan
Shuntong Humic Acid Commercial Company Ltd. (the “Wuchuan Shuntong”), pursuant
to which Yongye Nongfeng will acquire from Wuchuan Shuntong the right to develop
certain lignite coal resources in Wuchuan area for a cash consideration of
approximately $35 million. As of March 15, 2010, Yongye Nongfeng has paid
approximately $19 million to Wuchuan Shuntong, and the legal procedures for the
transfer of the right was in process.
The
Company has evaluated subsequent events from the balance sheet date through
March 15, 2010, the date at which the financial statements were available to be
issued, and determined there are no other items to disclose.
F-36