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Yongye International, Inc.(NASDAQ:YONG)

Q4 2012 Earnings Call

April 2, 2013 8:30 am ET

Executives

John Capodanno – Investor Relations Advisor-FTI Consulting

Sam Yu – Chief Financial Officer

Kelly Wang – Finance Director, Capital Market

Analysts

Adam Waldo – Lismore Partners, LLC

Jared Cohen – J.M. Cohen & Company

Operator

Good day, ladies and gentlemen. Welcome to the Yongye International Fourth Quarter and Full Year 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As I reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today’s call, Mr. John Capodanno. Mr. Capodanno, please proceed.

John Capodanno

Thank you, operator. Good morning, ladies and gentlemen, and welcome to Yongye International’s fourth quarter and full year 2012 earnings conference call. I am John Capodanno of FTI Consulting, Yongye’s Investor Relations Advisor. With us today are Mr. Sam Yu, Yongye’s Chief Financial Officer and Ms. Kelly Wang, Yongye’s Finance Director.

Before we start, I would like to remind our listeners that management’s prepared remarks in this call contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to such risks as, but not limited to, fluctuations in customer demand, management of rapid growth, intensity of competition from other providers of plant and animal nutrient products and services, general economic conditions, geopolitical events, and regulatory changes and other information detailed from time to time in the Company’s filings and future filings with the United States Securities and Exchange Commission. Although the Company believes that the expectations in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct.

On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable GAAP information can be found in the fourth quarter and full year 2012 earnings release that was distributed yesterday. Any projections as of the Company’s future performance represent management’s estimates as of today, April 2, 2013. Yongye assumes no obligation to update these projections in the future as market conditions change.

Having now stated those formalities, I will now turn the call over to Mr. Sam Yu for a review of the Company’s developments in the fourth quarter and full year 2012.

Sam Yu

Thank you, John. Thank you everyone for joining us on the call today. I have a number of things, I would like to discuss but first, I would like to begin with the brief explanation of the delay in our filing of Form 10-K and the subsequent trading halt implemented by NASDAQ. It was necessary for the Company to delay filing its 10-K as we couldn’t complete company’s information relating to accounts receivable, and the related allowance for doubtful accounts for the year end December 31, 2012. We needed to see more accounts receivable connection from certain distributors, to determine those accounting matters before filing our 10-K.

We initially expect to collect the entire overdue balance by March 18, 2013, which was the original form taken from 10-K filing deadline with the SEC. However, on March 14, 2013, there was still a substantial portion of the overdue amount that was not received. As a result, we didn’t have sufficient subsequent collection information to analyze the realization of the account receivable and established proper amount for the allowance of doubtful accounts and/or bad debt expenses.

On March 15, 2013, we’ve filed a notification of late filing on Form 12b-25 with the SEC, the result of which automatically extended the deadline of filing the Annual Report by 15 days or through April 2, 2013. NASDAQ subsequently a halt in trading on the Yongye’s stock. At that time we had no information as to why NASDAQ elected to implement a trading halt. NASDAQ later provide the Yongye with a written request for additional information relating to the Company’s delay in filing the Form 10-K in connection of the account receivable as of the year end 2012. The current state of the Company’s audit of the financial statements to be included in the Company’s Form 10-K for the year ended December 31, 2012 and the status of the proposed going private transaction returning to the Company.

We have worked diligently to provide NASDAQ with all the necessary information they requested, and on Tuesday, March 26, we provided a full, detailed response to NASDAQ. We have not yet received a response from NASDAQ. We will maintain an open line of communications with NASDAQ, so as to address all of their concerns and ensure compliance with their regulations.

I’d like to thank everyone for their patience through this process.

Now I’d like to provide an overview of our performance during the fourth quarter and full-year 2012. Yongye had achieved an another successful year with the strong top and bottom line growth, which highlights the continued strength of our brand and the success we’re having in traditional and new markets with our sales and distribution strategy. We will remain focus on expanding our distribution networks and deepening our penetration in existing markets.

The fourth quarter is traditionally a slow one for us, and they are the strong demand to our business with 70% to 80% of full-year sales occurring during the second and third quarters annually.

The key highlights for the year is that, we continue the expansion of our branded retailers. And as of December 31, 2012, the number of independently-owned branded retailers reached 35,058 across 30 provinces in China, which meets our previously issued guidance over 35,000 branded retailers by the end of 2012.

I would like to begin by going over some of the key highlights of our financial performance for the full-year 2012. Revenues for the full-year 2012 increased 13.5% to $443.0 million from $390.4 million in 2011, while our shipment increased 33.9% by a mark.

Gross profit increased 14.9% year-over-year to $262.4 million. Income from operations increased 10.7% to $116.9 million. Net income attributable to Yongye increased to 10.4% to $93.7 million or $1.62 per diluted share, compared to $84.9 million or $1.55 per diluted share in the same period of 2011.

Adjusted net income attributable to Yongye, which excludes non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list, a change in the fair value of derivative liabilities, and goodwill impairment charge, was $111.4 million, or $1.94 per diluted share, compared to $93.0 million, or $1.71 per diluted share, in the same period of 2011.

Operating cash outflow was $51.4 million in 2012 compared to an operating cash outflow of $31.2 million in 2011. At the end of the fiscal 2012, the amount of accounts receivable outstanding was $302.6 million, of which $114.9 million was past the Company's six-month credit term. As of March 29, 2013, the Company has collected approximately $225 million from its distributors, including the entire overdue accounts receivable balance as of December 31, 2012.

And for the fourth quarter revenue increased 58.9% to $71.3 million from $44.9 million in the same period of 2011. Gross profit increased 62.2% year-over-year to $38.4 million from $23.7 million in the fourth quarter of 2011. Operating income was $18.7 million, compared to a loss from operations of $7.8 million in the fourth quarter of 2011.

Net income attributable to Yongye was $19.4 million, or $0.32 per diluted share, compared to a net loss of $2.2 million, or a loss of $0.05 per diluted share, in the same period of 2011. Adjusted net income attributable to Yongye, which excludes non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list, a change in the fair value of derivative liabilities, and goodwill impairment charge was $20.4 million, or $0.34 per diluted share in the fourth quarter of 2012, compared to a adjusted net loss of $0.5 million, or a loss of $0.03 per diluted share, in the fourth quarter of 2011.

At the end of the fiscal 2012, the amount of accounts receivable outstanding was $302.6 million, of which $114.9 million was past our six month credit period.

As of March 29, 2013, we have collected approximately $225 million from our distributors, including the entire overdue accounts receivable balance as of December 31, 2012.

Now, I would like to turn over the call to Kelly Wang, our Finance Director to give you an overview of our financial results for the fourth quarter and the full year 2012.

Kelly Wang

Thank you, Sam, and good morning, everyone. Thanks for joining us today to discuss our fourth quarter and full year 2012 results. I will first discuss the numbers for the quarter and then discuss the full year results for 2012. As I take you through the numbers, please note that I will only speaking U.S. dollar terms and if particularly mentioned.

Revenue increased by $26.4 million or 58.9% to $71.3 million in the fourth quarter of 2012 from $44.9 million for the same period of 2011.

During the first quarter of 2012, the number of branded retailers increased from 33.298 to 35,058. Gross profit was $38.4 million in the first quarter of 2012, compared to $23.7 million in the fourth quarter of 2011, an increase of 52.2%.

Gross margin was 53.8% in the fourth quarter of 2012, compared to 52.7% for the same period of 2011. The increase in gross margin was mainly due to the decrease of purchase price of certain raw materials. The Company recorded non-cash expenses of $0.7 million related to the amortization of the acquired Hebei customer list as part of its cost of sales for the fourth quarter of 2012. Excluding the aforementioned non-cash expenses related to the amortization of the acquired Hebei customer list, fourth quarter 2012 adjusted gross profit was $39.1 million, or 54.8% of sales.

Selling expenses increased by $2.8 million, or 24.1%, to $14.3 million in the fourth quarter of 2012, from $11.5 million for the same period of 2011. The increase in selling expense was primarily due to advertising costs associated with branding programs and the commercials.

G&A expenses decreased by $15.1 million, or 84.1%, to $2.9 million in the fourth quarter of 2012, from $18.0 million for the same period of 2011. The decrease in G&A expenses was mainly due to the impact of bad debt expenses $15.0 million for the year of the 2011.

R&D expenses were $2.5 million in the fourth quarter of 2012, compared to $2.0 million for the same period of 2011. The R&D expenses mainly consisted of field test expenses for new and existing products on various crops and in different geographic markets.

Net income attributable to Yongye was $19.4 million, or $0.32 per diluted share in the fourth quarter of 2012, compared to a net loss of $2.2 million, or a loss of $0.05 per diluted share in the same period of 2011. The Company recorded a non-cash expenses related to a change in the fair value of derivative liabilities of $0.2 million in the fourth quarter of 2012. Excluding the impact of non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list, a change in the fair value of derivative liabilities, and goodwill impairment charge.

Adjusted net income attributable to Yongye for the fourth quarter of 2012 was $20.4 million, or $0.34 per diluted share compared to adjusted net loss of $0.5 million or a loss of $0.03 per diluted share, in the same period of 2011.

Revenue for the full-year increased by $52.6 million or 13.5%, to $443.0 million from $390.4 million for the same period of 2011. For the full-year the Company derived $438.4 million, or 99.0% of total sales, from liquid crop nutrient, and derived $4.6 million, or 1.0% of total sales, from powder animal nutrient. For the liquid crop nutrient, the regular crop nutrient contributed $367.6 million, or 83.8% of total liquid crop nutrient, while the two new products for crop seeds and roots contributed $70.8 million, or 16.2% of total liquid crop nutrient sales. During the year, the number of branded retailers reached 35,058, compared to 30,086 as of December 31, 2011, an increase of 16.5%.

Gross profit was $262.4 million for the year ended December 31, 2012, compared to $228.3 million for the year ended December 31, 2011, an increase of 14.8%. Gross margin were 59.2% for the year ended December 31, 2012, compared to 58.5% for the same period of 2011. The increase in gross margin was mainly due to the decrease of purchase price of certain raw materials. The Company recorded non-cash expenses of $2.9 million related to amortization of the acquired Hebei customer list as part of its cost of sales for the full year 2012. Excluding the aforementioned non-cash expenses related to the amortization of the acquired Hebei customer list, full year 2012 adjusted gross profit was $265.3 million, or 59.9% of sales.

Selling expenses increased by $30.1 million to $104.0 million for the year ended December 31, 2012. As a percentage of sales for the year ended December 31, 2012, selling expenses increased 4.6% to 23.5% as compared to 18.9% of sales at the year ended December 31, 2011. The increase in selling expense was primarily due to an increase in advertising and promotion expense and distributors' seminar expenditure of $28.9 million relating to marketing and promotional activities for original and the newly launched products in our markets.

G&A expenses decreased by $21.6 million, or 60.4%, to $14.1 million for the full year of 2012, from $35.7 million in 2011. The decrease in G&A expense was mainly due to the bad debt expense amounting to $15.0 million for the year of 2011, and a reversal of allowance for doubtful accounts of $6.3 million, which was recorded in the first quarter of 2012, as well as a decrease in management equity compensation expense for the year ended December 31, 2012.

Research and development expenses were $16.6 million for the full year, compared to $13.1 million in 2011. The increase in R&D expenses mainly consisted of field testing expenses for new and existing products on various crops and in different geographic markets.

Operating income was $116.9 million, or 26.4% of sales for the year ended December 31, 2012, compared to $105.6 million, or 27.0% of sales, in the same period of 2011. Excluding non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list. The goodwill impairment charge full year of 2012 adjusted operating income was $134.3 million or 30.3% of sales.

Net income attributable to Yongye was $93.7 million or $1.62 per diluted share for the year ended December 31, 2012, compared to a net income of $84.9 million, or $1.55 per diluted share, in the same period of 2011. The Company recorded a non-cash income related to a change in fair value of derivative liabilities of $0.3 million in the full year of 2012.

Excluding the impact of non-cash expenses related to share-based compensation for management and independent directors, amortization of the acquired Hebei customer list, a change in the fair value of derivative liabilities, and a goodwill impairment charge, adjusted net income attributable to Yongye for the full year 2012 was $111.4 million, or $1.94 per diluted share, compared to $93.0 million, or $1.71 per diluted share in the same period of 2011.

Turning to our balance sheet now, as of December 31, 2012, we had $44.6 million in cash and restricted cash, compared to $81.2 million as of December 31, 2011. You may recall from our third quarter conference call that our Wuchuan Facility increase is manufacturing capacity and we now have a total of 70,000 tons of combined annual design production capacity at our Wuchuan and Jinshan Facilities. We may continue to expand our production capacity as required to respond to increasing demand for our products in the future.

Working capital was $383.3 million, compared to $270.4 million at the end of 2011. As of December 31, 2012, we had a $50.9 million in short-term bank loan and $12.4 million in long-term debt. Stockholders’ equity totaled $436.3 million as of December 31, 2012, compared to $331.9 million at the end of 2011.

As Sam mentioned earlier, we had a very high accounts receivable balance for the year ended December 31, 2012. Before cutting into specifics, I’d like to provide some color around our accounts receivable. As you are all aware, there is a strong signality to our business, this 70% to 80% of full year sales occurring during the second and the third quarter annually.

Receivables from our provincial level distributors increased significantly along with sales during the peak season. We also provide our approval distributor six months credit term. Accounts receivable increased by $140 million on a year-over-year base. This significant increase of accounts receivable was primarily due to our continued business growth and the longer collection days from certain distributors. Some of our distributors also conduct a business in distribution of nitrogen, potash and the phosphor and NPK fertilizer.

In addition to our nutrient product, NPK fertilizer suppliers normally give distributors less still local credit term due to the significantly low margin of NPK fertilizer business. At the same time it is not easy for our distributor to obtain financing from financial institution.

At the year end, we are ordering NPK fertilizer for peak spring season use. Some of our distributor took a full advantage of and even went over our six month credit term, so that they could pay for their NPK fertilizer order.

As of March 29, 2013 we have collected approximately $225 million from our distributor, including the entire overdue accounts receivable balance at December 31, 2012. Cash used in operating activities was $51.4 million for the year ended December 31, 2012, compared to cash flow used in operating activities of $31.2 million at the year ended December 31, 2011. The increase in cash used in operating activities in year ended December 31, 2012 compared to the same period of 2011 was primarily due to the increase of $25.7 million in working capital employed. That was primarily driven by the increase of accounts receivable and inventory.

Turning to our business outlook, according to our revenue recognition policy, certain distributors’ revenue is being recognized on a cash basis rather than a shipment basis. In addition, our distributors’ payment cycle has been longer in 2012 compared to prior years. As a result, we have difficulty knowing what our revenue will be with specificity until cash collection is completed.

We will continue to provide expectations on shipments, which is not impacted by the revenue recognition issue mentioned above. We expect total shipments in 2013 to be in the range of $650 million to $680 million, representing growth of 20% to 25% over 2012. We also expect that our branded retailer network will be expanded to 36,000 by the end of 2013, which represents a 3% increase over the 2012 year-end.

Sam Yu

Thank you, Kelly. Before concluding, I’d like to integrate a few points before I open up to questions. Despite the recent trading halt by NASDAQ, U.S. business fundamentals remain strong and we continue to demonstrate meaningful growth in both our branded retailer network and the shipment of our products.

I would also like to address the recent going-private offer that Yongye received in October. We understand that many shareholders have may have questions surrounding this proposal and I would like to provide an update. On Sunday, March 31, the Buyer Parties confirmed to the Special Committee that their proposal remains outstanding and they remain interested in pursuing the proposed transaction. In connection with this, the Special Committee was provided an amended and restated financing commitment letter issued on April 1, 2013 from Abax, pursuant to which Abax has extended the expiration of its $35 million conditional mezzanine financing commitment one month until April 30 subject to certain conditions that we provide in detail earnings release yesterday.

No decisions have been made by the Special Committee with respect to the company’s response to the proposal. It is worth noting that there can be no assurance a transaction will be approved or consummated and we will provide an update to the market in due course. We thank you for your understanding at this point. Beyond this update we’re not in a position to comment at this time, but did want to reiterate that the Special Committee has been in discussions with the Buyer Parties regarding the proposed transaction and such discussions are continuing.

In terms of NASDAQ trading halt, I would just like to reiterate to you what I mentioned at the start of the call that we have worked diligently to provide NASDAQ with all the necessary information they requested, and on Tuesday, March 26 we provided a full, detailed response to NASDAQ. We have not yet received a response from them and we are not in a position to speculate whether or not NASDAQ will be satisfied with our response it’s inquire or if they will request further information. We also cannot predict when NASDAQ were resume trading our stock, but can assure you that we will maintain an open line of communications with NASDAQ so as to address all of their concerns and ensure compliance with their regulations.

We thank you for your patience through this process. With that, I would like to open this call up to questions. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Adam Waldo from Lismore Partners. Please ask your question.

Adam Waldo – Lismore Partners, LLC

Yes. Good day. Adam Waldo, Lismore Partners, LLC. Several questions. With respect to yesterday’s 2012 Form 10-K filing with the U.S. SEC, have you been contacted by NASDAQ regarding ending the trading halt on your shares and are you aware of any further questions that NASDAQ has outstanding at this time? They have remained unanswered following your response letter at March 26. Then I have a couple of follow-ups.

Sam Yu

We filed our Form 10-K yesterday U.S. time, and the disclosure about our (inaudible) with NASDAQ was most up-to-date in our, yeah, announcing just now.

Adam Waldo – Lismore Partners, LLC

So would it be fair to day that it sounds like NASDAQ would be reviewing the filings of yesterday, but you’ve not been contacted by them subsequent to the filings of yesterday?

Sam Yu

We cannot speak for NASDAQ, but our 10-K was just filed yesterday. Yeah.

Adam Waldo – Lismore Partners, LLC

Okay. But again you’ve not been contacted by NASDAQ subsequent. As of this moment you’ve not been contacted by NASDAQ in response to your Form 10-K filing of yesterday. Is that correct or is that not correct?

Sam Yu

All the information that is currently available regarding this issue has been disclosed.

Adam Waldo – Lismore Partners, LLC

Okay. Do you have any update on how long the committed bank debt financing from China Development Bank will remain in place for the outstanding going private offer of $6.60 per share?

Sam Yu

We actually don’t have authorization from the [company] to talk upon this issue and you can’t go to the Buyer Parties of 13D to check their filing on this issue or you can send an e-mail to our Special Committee to get it from them.

Adam Waldo – Lismore Partners, LLC

As it relates to the China Development Bank debt financing…

Sam Yu

And it’s a reality before you drive any project.

Adam Waldo – Lismore Partners, LLC

Any issues regarding the going product. Fair enough. Finally with respect to your 2013 outlook, you implicitly or you’ve given guidance for 20% to 25% inventory shipments growth in 2013 relative to 2012. If we assume for the moment that your 2013 revenue growth rate would be at least similar to that with no improvement in the DSO in 2013 relative to 2012, which were very long in 2012 versus historic levels, should we think about an incremental net income margin on incremental revenue in 2013 such that your implicit earnings per share outlook for 2013 would be in the range of $2.20 to $2.30 or should we be thinking about management having a higher implicit outlook for 2013 earnings per share then the $2.20 to $2.30 you’ve put forth?

Sam Yu

As we said, we currently have some difficulty giving prediction regarding U.S. GAAP based revenue and profitability numbers because [plus one] distributors we cannot look at revenue until we receive cash from them. So it’s very difficult to give a prediction on the betting number, but we are thrilled back to improve our collection so that all the distributors kind of get back to the normal recognition method upon achievement. And at this moment, just don’t know that U.S. GAAP net income number yet.

Adam Waldo – Lismore Partners, LLC

Okay. Can you make any disclosures with respect to where the company’s corporate cash balance, accounts receivables balance and inventory balance were at March 31, 2013, or do we need to wait for the 10-Q filing for that?

Sam Yu

[Regardless] of 10-Q, we just filed 10–K yesterday.

Adam Waldo – Lismore Partners, LLC

Okay. Thank you very much.

John Capodanno

Thank you.

Operator

Thank you for your question. Your next question comes from the line of Jared Cohen from J.M. Cohen & Company. Please ask your question.

Jared Cohen – J.M. Cohen & Company

Yeah, just a quick question. Can you justify me; define to me what the subsidiary income is on your income statement?

Sam Yu

Jad, which section or which page do you have that information?

Jared Cohen – J.M. Cohen & Company

I guess it’s either in your press release or and/or in your 10-K. I guess it’s $9.5 million you reported for the 2012 and other years. I forget what it was. It was I think $4.5 million in 2011 or…

Sam Yu

You mean the subsidy?

Jared Cohen – J.M. Cohen & Company

Yes, subsidy. Yes, that’s what I…

Sam Yu

Okay, okay. It’s some tax we found from the local government.

Jared Cohen – J.M. Cohen & Company

Okay. All right. Thank you very much.

Sam Yu

Thank you.

Operator

Thank you for your question. Your next question comes from the line of (inaudible). Please ask your question.

Unidentified Analyst

Hello Sam.

Sam Yu

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Sam Yu

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Sam Yu

[Foreign Language] Because please help us understand that the backlog of the Company’s policy to reference revenue based on shipment, based on cash as the shipment for the distributors. So, I will answer the question in English first, I assume most of the participants in this call are English speaking and I will explain Chinese after the English conversion.

We reference revenue based on four lead principles, number one; when you have a persuasive additives of an agreement, which is evidenced by sign a distributor sales contract. And also we need to make sure that the delivery of the product has occurred and accepted by its customers, which is evidenced by good signals send by the customers. According to contract between our distributors and us. The risk there was an ownership of products you transfer to the customers upon the issuance of a good receipt note. And they have no right to return that may be exercised at will by the customers other than for defective products. After the good received note last time, the Company have no remaining obligation that affects the customer expect delivery product. In our case for the year ending December 31, 2012, 2011, 2010, there was no sales return from our customers.

In other criteria is that the selling price distributes best price in our contract with the distributors, and the selling price may be fixed. And our distribution sales contract upon the sales of the product of the customers and the issuance of good received note. We have a legal enforcement right to receive a full payment of the sales of March. The customer’s obligation to pay us is not dependent on the customers selling the product or collecting cash from their customers or end users.

The next criteria is that, we have some issue, the collectability at the time of delivery of our sales is reasonably assured to an extend, the Company determines that try to be this not reasonably assured at the time of delivery over the product to the distributors. Revenue is not recognized until we determine that collectability is reasonably assured until that time product sales are recognizing revenue when cash is received with the Yongye products, as another the business practice, we provide credit term over six month to our distributors with the (inaudible) reports.

So in our case some of distributors actually they paid us later than the credit term we will give to them. So we determined that their collectability of our system upon delivery is question of that time. So that is causing our changing regular condition from shipments to cash basis. Actually this discussion is in our reference statements with details.

[Foreign Language]

Operator

Thank you for your question. Your next question comes from the line of [Peter Sirrus] from (inaudible). Please ask your question.

Unidentified Analyst

Hey, Sam, how are you?

Sam Yu

Good thanks, Pete, how are you?

Unidentified Analyst

Good, I have a couple of questions that I don’t completely understand. The first is, why the Hebei customer list, how come you took a write down on that one?

Sam Yu

It’s not a write down we’ve amortized the entire adds in over time year period. So for every year, we write off approximately $33 million using the straight line to every quarter you see impact of roughly $700,000.

Unidentified Analyst

Not, but there was a goodwill impairment?

Sam Yu

A goodwill impairment, actually that was a different matter. In the third quarter of 2012, our annual goodwill impairment test we decided that the goodwill we booked during the 2009 restructure project need to be write-off. Per U.S. GAAP, we perform a two step process for this issue, the fair value of the reporting only the first step one was determined based on the income approach and which also continue the quality of the market price of the Company’s common stock. The first step of the path concluded that the carrying value along the reporting unit exceed its fair value. As a result, we perform the second step of the goodwill impairment test. We determine that we try to have goodwill was nil. And therefore goodwill impairment loss of roughly $10.8 million was recognized.

The business of backlog of this issue is that back in 2009, during the restructure project we acquired certain manufacturing asset with the consideration of certain equity of our operating paid in China.

The goodwill amount incurred at that time part of the value over the staffs our stock price during the third quarter of 2009 as you know that our stock price have not been very strong in 2010 and 2011, and so the value of that goodwill actually decline. So in September 2012 we decided to write down that [to the west].

Unidentified Analyst

Okay. The second question, I have is on the MSPEA make goods, with the right hand of the goodwill you missed the got the make good combination according to my estimates for 2011 and ‘12 combined. Is that correct? And then MSPEA has owed some additional stock?

Sam Yu

Well, we just completed our financial reporting for 2012. We haven’t had a chance to calculate detail of it yet. We haven’t confirmed the MSP yet, but according to our understanding first, we think that goodwill impairment would not be included in the calculation of our performance since this is a non-cash expense, and this is the extraordinary expense outside of the scope of the come to normal business and there is not real liability…

Unidentified Analyst

Okay

Sam Yu

Of the company, and so based on rough calculation we should be close to that…

Unidentified Analyst

Five

Sam Yu

Yes, yes

Unidentified Analyst

Now just following up on that, because you changed your accountant year revenue recognition policy, it tends to push some earnings from one year into the next depending on when you collect. So, for the 2013 make good to the combination of ‘11, ’12 and ’13, in terms of the make goods, are you still working on the make goods with the current way of reporting or are you working with the make goods based on the original way of reporting?

Sam Yu

Our agreement with the Morgan Stanley Private Equity Asia that time may goes are based on U.S. GAAP numbers. And for this year, you said earlier we have, at this moment we have some difficulty predicating why our U.S. GAAP revenue (inaudible). It will depends on our connection status, and for management perspective, our focus is on the operation side, and whether meeting the make good at this moment is not a big priority for us from an operating perspective, want to make sure that…

Unidentified Analyst

Okay

Sam Yu

Is the strong side.

Unidentified Analyst

But just so, I understand if you miss the make goods, if, let’s say, you supposed to make 399, I think for the comp three years, if you make 330 or some number like that, how much extra stock is MSPEA get.

Same Yu

There is no particular formula on MSPEA’s conversion price it really depends on the timing of their conversion and the company performance at that time. The base scenario is, it currently meets the performance target the commission price will be $8.8 per share and we will increase the target at the commission price will be lower according to the formula, and also there is another scenario, if we beat that target, the commission price will be higher than $8.8 per share.

Unidentified Analyst

And is there place to find that formula is, in the filings with, I’ll look for it, thanks.

Same Yu

Yes, (inaudible) one the deal was complete in fact…

Unidentified Analyst

When the deal is?

Sam Yu

Yeah, yes.

Unidentified Analyst

Okay, last question can you just give us an update on what’s happening with coal mine?

Sam Yu

We obtain the exploration right back in August 2011 and we’ve started exploration work in 2012, and we’re making some progress, while the exploration work has not yet finished yet that will continue to complete the exploration work in 2013. And there is some challenges for us, it seems no working, feasible working time in (inaudible) winter comes, get really cold in winter, that was the factor delay in the progress…

Unidentified Analyst

Great, thanks Sam.

Sam Yu

Thanks Peter.

Operator

Thank you for your question. Your next question is a follow-up question from the line of Adam Waldo from Lismore Partners. Please ask your question.

Adam Waldo – Lismore Partners, LLC

Yes. In response to my earlier questions around communications on the buy out, you indicated that the appropriate (inaudible) for shareholders would be to contact the Board Special Committee by e-mail given that you couldn’t answer a couple of my questions at this time. How would shareholders contact the Board Special Committee by e-mail, could you disclose that please?

Sam Yu

Sure. We have a corporate e-mail address ir@yongyeintl.com. So we’ll make sure that every e-mail that is addressed to Special Committee will be forwarded to them.

Adam Waldo – Lismore Partners LLC

Okay. And that’s iryonge@...

Sam Yu

Ir@yongyeintl.com.

Adam Waldo – Lismore Partners LLC

Okay.

Sam Yu

The address, it is in our news release. All right. Thank you very much.

Adam Waldo – Lismore Partners LLC

Okay. Thank you. I’ll get it from there. Thank you.

Sam Yu

You’re welcome.

Operator

Thank you for your question. (Operator Instructions) Your next question comes from the line of [Lloyd Fischer]. Please ask your question.

Unidentified Analyst

Yes. With the substantial increase in collections of $225 million and an existing cash balance on December 31 of, I think, around $45 million, would it be fair to say that currently Yongye has a fairly substantial cash balance as of March 31?

Sam Yu

Our cash balance has definitely improved from the year-end. At the same time we do have significant working capital needs to make sure we have enough inventory to get ready for the peak season for this year.

Unidentified Analyst

Well, I understand that, but the first quarter has typically been a high watermark for cash and with this shift of sales into the first quarter, which I assume should substantially increase revenues and profit for the first quarter and also a substantial increase in cash in the first quarter at the same time when you have potential going private transaction that may consummate before we see first quarter results and can only rely on the December 31 results. Can you disclose the cash balance on the December 31? I mean, you are a finance person. You know what your cash balances are. As long as you are disclosing it in public forum like this it should be no problem, and then we can understand that you have working capital needs, but can you disclose the cash balances now?

Sam Yu

I cannot comment on the going private issue.

Unidentified Analyst

This isn’t about the going private transaction. It’s about your cash balance.

Sam Yu

For the cash balance…

Unidentified Analyst

Will you disclose your cash balance?

Sam Yu

For the cash balance, at end of Q1, we are not ready to do that yet. Yes, as I said earlier, we just finished our reporting for last year. I will need some time.

Unidentified Analyst

It’s a simple number. It’s a simple number. It’s the cash balance. Is there any reason why it can’t be disclosed?

Sam Yu

Well, it’s just not the right time yet to discuss, to talk about the Q1 financials.

Unidentified Analyst

And this isn’t about Q1 financials. It’s people are going to be required, shareholders are going to be required to make assessments about the potential transaction and part of that assessment is understanding where the Company is in terms of its cash balance, and in terms of its sales and profitability, which of course should be substantially improved in the first quarter, if a number of collectables that have occurred and haven’t been recorded as of 2012, are recorded in the first quarter. So, if you are just not going to disclose that numbers, Sam what are you saying?

Sam Yu

I understand your question, I fear at this moment we not ready to discuss Q1 results including the cash balance, yes.

Operator

Thank you for your question. Thank you ladies and gentlemen, unfortunately we have run out of time for any further questions. I would now like to hand the conference back to Mr. Sam Yu. Please continue.

Sam Yu

Thank you everybody for participating in this call. 2012 is another strong year for Yongye in terms of both growth in top line and bottom line. The Company is committed to grow our business in the existing markets and in new markets. We will continue to work very hard to grow our business into Greater China. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you participating. You may all disconnect.

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