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YONG > SEC Filings for YONG > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for YONGYE INTERNATIONAL, INC.



Quarterly Report


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

Company Overview

We are a leading crop nutrient company in China in term of total sales in 2012. We are primarily engaged in the research, development, manufacturing and sales of fulvic acid based crop and animal nutrient products for the agriculture and stock farming industry. We are headquartered in Beijing with production facilities in Hohhot, Inner Mongolia Autonomous Region of China ("Inner Mongolia"). Our products are sold nationwide in 30 provinces, autonomous regions and centrally-administered municipalities across China.


Currently, our principal product is our liquid crop nutrient product, from which we derived substantially all of our sales for the year ended December 31, 2012. We also produce powder animal nutrient product, which is mainly used for dairy cows. In the first quarter of 2012, we launched two crop nutrient products, a crop seed nutrient product and a crop root nutrient product. The crop seed nutrient product helps crop seeds sprout and improves the growth of roots, and the crop root nutrient product improves crop roots' ability to absorb water and fertilizers and enhance crop resistance against drought, freezing, diseases, and stalk leaning. We believe, by using our regular crop nutrient together with our crop seeds and roots products at different stages of crop growth, the combined effectiveness of our products will further enhance crop yield. We market our regular crop and animal products under the trade name "Shengmingsu" ("???" in Chinese means "Life Essential"). Our products for crop seeds and roots are named "Zhongbaosheng" and "Qianggenbao" respectively. We produce our liquid crop nutrient products, including the newly launched crop seed product and crop root product, based on our proprietary formulae utilizing fulvic acid as the primary compound base and combining with various micro nutrients such as zinc and boron, macro nutrients like nitrogen, phosphorous and potassium ("NPK") and other nutrients that are essential for the crop health. Our crop nutrient's core fulvic acid compound improves crop yield by enhancing the absorption of fertilizers and micro nutrients. In addition, the micro nutrients and NPK included in our crop nutrient formula serve as supplements during key growth stages of crops. We believe that our crop nutrient products are particularly well-suited for use in China, which generally has highly degraded farming soil as a result of over-farming, decades of over-use of chemical fertilizers and less advanced farming practices compared with more developed nations. Our regular crop nutrient product is most commonly applied by directly spraying onto leaves of crops after dilution with water, and is typically used at certain critical growth stages of crops in addition to normal fertilizer application. Our crop seed nutrient product is used by soaking the seeds in our product after water dilution. Soaking time and proportions of water to product vary among different crops and users should follow our product specifications. At the time that a seeding crop is transplanted, our crop root nutrient is used by applying the product onto the crop roots after water dilution and blending with soil. After the transplant, the water-diluted crop root product is used to irrigate the crops at the roots. Soaking time and water-product proportions during and after transplanting varies and users should follow our product specifications.

The efficacy of fulvic acid for enhancing crop yield is well-documented by over 20 global research reports published by universities and institutions in the United States, China, Europe and other countries. The Inner Mongolia Autonomous Region Scientific and Technology Bureau ("IMARSTB") conducted an official assessment of our liquid crop nutrient product in 2008 and concluded that our product increases agricultural output, improves the utilization rate of fertilizer, enhances crop resistance to diseases and droughts. In addition, the IMARSTB concluded that large scale experimentation in China has proven that our product can increase overall yields of staple crops, such as wheat and rice by 10-20%, and vegetables and fruits by 15-30%, while also improving product quality. Many other third parties also conducted tests on our product's efficacy on different crops and geographical locations in China, and they have drawn similar conclusions as documented in the IMARSTB assessment.

Our powder animal nutrient product consists of our fulvic acid compound base, additional nutrients and Chinese herbs. Our animal products are currently targeted at and administered to dairy cows through mixture with cow feed.

Sales and Distribution

We employ a multi-tiered distribution model whereby we primarily sell our products to provincial-level distributors who sell to our end-customers either directly or indirectly through county-level and village-level distributors. We currently have 25 provincial-level distributors. For the most part, each distributor covers a single province, while the rest of them cover either multiple provinces or a portion of one province (in the case of Hebei and Xinjiang). We select our provincial-level distributors based on criteria including experience, reputation, network coverage and financial strength, and we usually enter into multi-year distribution contracts with them. All of our contracts with provincial-level distributors include mutual exclusivity provisions whereby the provincial-level distributors are not allowed to distribute competing products, and we grant the distributor exclusive sales rights in the designated territory. We are careful to ensure that the sales territories of our provincial-level distributors do not overlap.

Our provincial-level distributors sell our products directly to county-level distributors, to key accounts, such as large farms, and farmers through promotional events. County-level distributors sell our products to independently owned Branded Retailers, which serve as village-level retailers of our products ("Branded Retailers"), large farms, and farmers through promotional events. Branded Retailers distribute our products directly to farmers in rural villages and towns. Most of them are privately owned individual agriculture stores while some have common ownership or belong to store chains. None of these Branded Retailers is owned or controlled by us. They are typically small in size and distribute a variety of agriculture-related products, including fertilizer, seeds and pesticides to farmers in the surrounding areas.

The following chart illustrates our multi-tiered distribution model:

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To ensure consistent pricing and channel margins nationwide, Branded Retailers are typically granted exclusive sales rights for our products in their authorized territory at the village or town level. We also provide the Branded Retailers with our distinct signage with the "Yongye Shengmingsu" logo which typically comprises the entire exterior storefront of Branded Retailers. Branded Retailers normally display our products in prominent shelf spaces and they are responsible for providing technical support to farmers and setting up demonstration sites for our products.

As of June 30, 2013, our products were sold in 30 provinces, autonomous regions and centrally-administered municipalities across China. We sell our products to 25 provincial-level distributors, who then sell our products to 810 county-level distributors and 35,409 Branded Retailers. Our multi-tiered distribution model allows us to penetrate the vast and highly fragmented rural area of China by utilizing our internal sales team to manage and leverage thousands of sales personnel at our provincial-level distributors, county-level distributors and Branded Retailers. Our internal sales team actively manages our multi-tier distribution network by participating in major distributor sales activities and providing training presentations and seminars.

Raw Materials and Production

Our product's core compound fulvic acid is extracted from humic acid, which is in turn derived from lignite coal. Our production process primarily involves the extraction of fulvic acid and then blending it with macro and micro nutrients based on our patented formula. The molecular structure of fulvic acid is smaller than humic acid, which enables fulvic acid to be more easily absorbed by crop leaves.

Currently, our key raw materials for fulvic acid are lignite coal and humic acid purchased from third party suppliers, and the prices of lignite coal and humic acid are affected by factors such as market demand, quality and transportation cost. The humic acid we use comes from top grade lignite coal which is mined in Inner Mongolia and is typically sold on a per ton basis. We currently procure lignite coal from independent third party suppliers in Inner Mongolia for our manufacturing needs. Prior to 2011, the key raw material for our products was humic acid, which was procured from third party suppliers. Upon the completion of our Wuchuan Facility at the end of 2010, we have been able to produce the majority of our products by extracting fulvic acid in-house from lignite coal and no longer completely rely on humic acid from intermediaries. Other raw materials used in our products include chemicals used in our extraction and blending processes as well as macro and micro nutrients.

Fluctuations in raw material costs will affect our cost of sales and gross profit margin, and we may not be able to pass such increased costs on to our distributors and then to our end customers.

We have two production facilities in Hohhot City, Inner Mongolia, with one located in Jinshan Industrial Park (the "Jinshan Facility") and one in Wuchuan County (the "Wuchuan Facility"). Prior to the fourth quarter of 2010, the Jinshan Facility was our sole manufacturing facility and the Jinshan Facility uses purchased humic acid as the key raw material to produce our products. Our Wuchuan Facility was completed in the fourth quarter of 2010 and directly utilizes lignite coal as the key raw material to produce fulvic acid and bypasses intermediaries from whom we used to purchase humic acid.

Currently, we procure lignite coal from independent third party suppliers in Inner Mongolia. In March 2010, in order to secure a long-term supply of humic acid, we entered into an agreement to acquire a mineral resource project in Wuchuan County, Inner Mongolia. In August 2011, Yongye Fumin, our wholly-owned subsidiary, obtained a Mineral Resource Exploration Permit for this project site in Wuchuan County, Inner Mongolia, which was issued by the Inner Mongolia Ministry of Land and Resources. Such approval granted us exclusive exploration rights for this project site for an initial period of three years beginning August 2, 2011. We are in the process of applying for the governmental approval for the Mineral Right and are preparing for the relevant reports, including but not limited to a Geological Report and a Geological Exploration Report. In June 2012, we commenced a detailed exploration process to obtain a Geological Exploration Report. We believe the costs to be incurred in completing the remaining administrative procedures and obtaining government approvals are not significant. Upon the granting of the Mineral Right, we will be able to further vertically integrate our operations.

In the third quarter of 2012, our Wuchuan Facility increased its manufacturing capacity. After the capacity expansion, we now have a total of 70,000 tons of combined annual design production capacity at our Wuchuan and Jinshan Facilities. The major production processes for our crop and animal nutrient products are identical, and therefore production capacities for the two lines of products to a large extent are inter-changeable.

Because of the proprietary nature of our products and manufacturing processes, we customized the core production components of our manufacturing facilities to enable capacity flexibility. Our design capacity is calculated by us based on key assumptions, including 300 days of operation in a year and normal manufacturing conditions. Under actual manufacturing conditions and based on the seasonality in our business, our production facilities have the flexibility to adjust actual production to levels higher than our stated theoretical design capacities.

For the six months ended June 30, 2013, our actual production output for liquid crop nutrient product was 23,192 tons and the actual output for powder animal nutrient was 741 tons. We may continue to expand our production capacity as required to respond to increasing demand for our products in the future.

Research and Development

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 will, either alone, or in cooperation 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 market testing. The entire process normally takes anywhere from one to five years, depending on the product.

We are currently researching and market testing various customized products for crop and animals and our research and development expenses mainly consisted of field test expenses for new products, tests on different crops and tests in newly developed markets. We have already officially introduced two products for crop seeds and roots to the market in the first quarter of 2012. One product is to help crop seeds to sprout and grow, and the other is to improve crop roots' ability to absorb water and fertilizers and to enhance crop resistance against drought, freezing, diseases, and stalk leaning. We are also examining market opportunities for introducing crop products specifically targeted at corn, peppers, wheat, rice, cucumbers, tomatoes, cotton, potatoes, sunflowers, grapes, tropical fruits and flowers, though no assurance can be given that we will ultimately bring to market the products that we are currently researching or market testing. As to animal products, we are market testing the products used for pig, chickens and sheep.

Intellectual Property

Our products are based on patented formulae that combine a fulvic acid base with other macro and micro nutrients. Our formulations were designed to enhance crop yield by increasing absorption of fertilizer and micro nutrients and providing key micro nutrients and NPK in key growth stages of crops. In addition, our engineers designed our manufacturing process to overcome technical barriers associated with the extraction of fulvic acid and the blending of our products on an industrial scale so that micro and macro nutrients in our products are water soluble and can be easily absorbed by crops after being sprayed on the leaves. We were granted two 20-year invention patents by the State Intellectual Property Office in the PRC, effective from October 12, 2006 and October 21, 2005 respectively, that cover formulae for our liquid crop nutrient product and powder animal nutrient product, as well as the manufacturing processes for extraction and blending of our products. In addition to seeking patent protection, we maintain proprietary know-how related to extraction and blending processes as trade secrets.

Marketing and Branding

Our end-customers make their purchase decisions primarily based on actual demonstrations of the efficacy of our product, typically over an entire growing season. Accordingly, our sales and marketing strategies primarily focus on local demonstration sites at which locally-grown crops are planted side-by-side with and without our liquid crop nutrient applied. In executing our marketing strategy, Branded Retailers play a key role in setting up these demonstration sites, marketing our products and providing technical support to farmers. Branded Retailers are typically trained by our distributors who receive regular and ongoing guidance from our sales and marketing and research and development teams. In addition, we hold large-scale training programs in various locations annually where we invite Branded Retailers from around China to directly receive product, sales and marketing training.

In addition, our internal sales team frequently organizes presentations and seminars targeted at provincial-level and county-level distributors in order to convey our sales strategy effectively to them. We also designed a series of incentive programs to motivate our distributors to drive performance and enhance their loyalty to our Company, including sending selected distributors to a Yongye-sponsored executive training program at Tsinghua University, one of China's most prestigious academic institutions.

At the national level, we have been conducting a variety of marketing and branding campaigns to enhance our brand recognition among not only our end-customers but also our existing and potential distributors and Branded Retailers. We are amongst the very few companies in our industry that actively sponsor CCTV (China's national TV channel) agricultural programs. We also use local TV stations, agricultural publications and newspapers to carry our advertisements. In addition, we are currently working with a national celebrity, Wang Baoqiang, as our spokesperson, to enhance our product image.

Recent Developments

On July 19, 2011, we and certain of our officers and directors were named in a derivative suit filed in the First Judicial District Court of the State of Nevada and Carson City alleging, among other things, that such directors and officers breached their fiduciary duties to us, misrepresented our earnings, wasted corporate assets and unjustly enriched themselves at the expense of us.
The derivative complaint also alleged that we, at the direction of or with the approval of our directors, failed to implement an adequate system of internal and financial controls. After we filed a motion to dismiss the complaint, Plaintiff voluntarily dismissed the action without prejudice on September 6, 2012. The Court signed the stipulation of dismissal and closed the case on September 7, 2012.

In the third quarter of 2012, we completed a capacity expansion project at the Wuchuan Facility. We now have a total of 70,000 tons of combined annual design production capacity at the Wuchuan Facility and the Jinshan Facility.

On October 15, 2012, the Board of Directors received a preliminary, non-binding proposal letter from (i) Mr. Zishen Wu ("Mr. Wu"), the Company's Chairman and Chief Executive Officer, (ii) Full Alliance International Limited ("Full Alliance"), (iii) MSPEA Agriculture Holding Limited ("MSPEA"), and (iv) Abax Global Capital (Hong Kong) Limited, on behalf of funds managed and/or advised by it and its nominee entities and its and their affiliates (collectively, "Abax," together with Mr. Wu, Full Alliance and MSPEA, the "Buyer Parties"), to acquire all of the outstanding shares of common stock of the Company not currently owned by the Buyer Parties in a going private transaction for $6.60 per share of common stock in cash, subject to certain conditions (the "Proposed Transaction").

A special committee (the "Special Committee") of the Board of the Directors, consisting of Mr. Sean Shao, Mr. Xiaochuan Guo and Mr. Xindan Li, was formed to consider certain potential transactions involving the Company (including the Proposed Transaction).

The Special Committee has been in discussions with the Buyer Parties regarding the Proposed Transaction and such discussions are continuing.

On April 1, 2013, the Buyer Parties confirmed to the Special Committee that they remain interested in pursuing the Proposed Transaction set forth in their proposal. On the same day, the Special Committee was provided an amended and restated financing commitment letter issued by Abax to Full Alliance, pursuant to which Abax has extended the expiration of its $35 million conditional mezzanine financing commitment to the earliest of (i) April 15, 2013, if the common stock of the Company has not resumed trading on NASDAQ by 4 p.m. (New York City time) on such date, (ii) April 30, 2013, (iii) the date of definitive documentation for which such financing becomes effective and (iv) the date the acquisition agreement for the Proposed Transaction becomes effective. Additionally, Abax' s commitment is subject to a number of conditions, including among others, Abax's completion of its review of and satisfaction in all respect with, the audited financial statements of the Company for the fiscal year ended December 31, 2012.

On April 16, 2013, the Special Committee was provided a letter ("Amendment") amending an amended and restated financing commitment letter (the "Commitment Letter") issued by Abax to Full Alliance on April 1, 2013. Pursuant to the Amendment, the Commitment Letter was amended to (i) include an additional condition precedent that the common stock of the Company has resumed trading on NASDAQ, but without any requirement that the resumption must occur by a specified date, and (ii) extend the expiration of the commitment to the earliest of (A) May 15, 2013, (B) the date the definitive documentation for such financing becomes effective and (C) the date the acquisition agreement for the proposed going private transaction is terminated. Abax's commitment remains subject to a number of other conditions, including Abax's completion of its review of, and satisfaction in all respect with, the audited financial statements of the Company for the fiscal year ended December 31, 2012.

On May 16, 2013, the Special Committee was provided a letter (the "Letter") issued by Abax to Full Alliance. The Letter, dated as of May 15, 2013, informs Full Alliance that Abax remains interested in pursuing the proposed going private transaction described in the proposal letter delivered to the Board of Directors on October 15, 2012, on the terms and conditions as outlined in the amended and restated financing commitment letter issued by Abax to Full Alliance on April 1, 2013, and as amended on April 16, 2013, which expired on May 15, 2013. According to the Letter, Abax continues to be focused on this transaction and will re-engage in the going private transaction as soon as the trading suspension is lifted.

On June 17, 2013, the Buyer Parties confirmed with the Special Committee that they remain interested in pursuing the proposed going private transaction described in the proposal letter delivered to the board of directors on October 15, 2012.

The Special Committee is still considering and evaluating the proposal by the Buyer Parties, but it has not made any decision regarding the Proposed Transaction and there can be no assurance that any definitive agreement will be executed or that any transaction will be approved or consummated.

Factors affecting our operating results

Market Potential for Crop Nutrient Products in China

The long-term market growth of crop nutrient products in China is primarily driven by the need to improve crop yield to ensure sufficient food supply in view of limited and shrinking per capita arable land in China. Currently, with only approximately 9% of the world's arable land, China needs to feed 1.3 billion people, or approximately 21% of the world's population. According to the National Population and Family Planning Commission of China, China's population will reach 1.5 billion by 2030. Therefore, the country faces the challenge of producing additional food to feed the additional 200 million people within the next 20 years. This puts great pressure on China's agricultural system to increase production output.

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Over-farming, decades of overuse of chemical fertilizers and less advanced farming practices have led to degraded soil quality in China. Although, according to FAO (Food and Agriculture Organization), China leads the world in fertilizer consumption, applying more fertilizers than the world average on a per hectare basis, nevertheless, the crop yield lags behind most developed countries. This creates a huge demand for crop nutrient products that can help improve fertilizer utilization and increase crop yield. Fulvic acid based crop nutrients are particularly well suited for the market, as it can allow crops to more effectively absorb fertilizers and minerals from the degraded soils.

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The market for our crop nutrient product is large and has attractive long-term growth prospects. China has 1.8 billion mu (each mu is equivalent to approximately 667 square meters) of arable land in total. Typically, each mu of arable land requires at least 300 ml of our liquid crop nutrient product for one growing season. For the year of 2012, our crop nutrient product is estimated to have been used in approximately 5% of the arable land in China, assuming there is one and half growing season per annum on average for all the arable land across China.

Agriculture Sector

The agriculture industry in China enjoys favorable government policies. In past five years, the PRC government spent an aggregate of RMB4.47 trillion (US$709 billion) on agriculture, rural areas and farmers, at an average annual increase rate of 23.5%. In 2013, the government plans to spend RMB1.38 trillion (US$219 billion) on agriculture, rural areas and farmers, 11.4% higher than the amount in 2012. According to the 12th Five-Year National Economic and Social Plan (2011-2015) of China, the PRC government will continue to support the agriculture industry. Increasing agricultural production capacity and developing high-yield, high-quality and high-efficiency agriculture are the focus of the PRC government. Given our product's ability to improve fertilizer utilization, increase crop yield, improve product quality, and enhance drought-resistance, we expect that we will further benefit from the PRC government's agricultural policy.

In addition, agriculture continues to be a heavily invested sector in China. Brand name investors continue to invest into China's agriculture industry . . .

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