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Summary

An analysis of "significant customer" disclosures in the SEC filings of Yongye International, Inc (Symbol YONG, CIK 0001398551, CUSIP 98607B106) finds twenty discrepancies and inconsistencies over a period of four years, including misidentified customer locations, mismatched sales within and between periodic filings (ranging from $0.005 million to over $2 million), and miscalculated percentages. The presence of those discrepancies and inconsistencies is evidence of a weakness in Yongye International, Inc 's disclosure controls and of an audit failure. In addition, the discrepancies pertaining to one specific province directly contradict a recent press release by Yongye International, Inc.

Background and Motivation

Yongye International, Inc. is a Chinese "reverse merger." According to the latest 10K filing, the company's "provincial level distributors are [its] main direct customers" and it "only [sells its] products to provincial distributors and [since July 2010,] sub-provincial distributors in the case of Hebei".

The company refuses to disclose the names of its significant customers. In a recent press release, the company claims "there is nothing wrong with" the "decision not to publicize those names ... for competitive reasons." The company also states that asking about the names of its customers is "one of the favorite tactics of the short sellers, or those who conspire with them."

However, Regulation S-K, Item 101(c)(1)(vii) explicitly requires the company to name the customers that represent 10% or more of the company's annual revenues. And, in fact, the Securities and Exchange Commission requested such a disclosure in its Comment 43 in a letter (.pdf) dated 2009/07/08. The company failed to comply.

Interestingly, Mr. Mitchell Nussbaum, the company's counsel, who was copied on the July 2009 SEC letter, recently published an article admitting "gaps in information between what the U.S. investor typically knows about issues such as ... the identity of customers" and that the "facts are difficult to verify." The company's failure to comply with Regulation S-K and disclose the names of its significant customers makes verification of their identity difficult for the U.S. investor, indeed. However, the twenty findings in this analysis show that while difficult, verification is not impossible.

The recent press release also states that the company's "sales figures [in Hebei province] are, in fact, accurate." Findings (12) and (19), however, directly contradict that statement as they show that those figures in the March 2008 and March 2010 quarters are inaccurate, with discrepancies of $0.07 million and $0.8 million, respectively. On a side note, the press release states that "it is the responsibility of the greater-than-5% owner [the former Hebei distributor,] to make the [proper SEC] filing," while in fact Regulation S-K, Item 403(a)(1) requires the company to disclose the identity of any "beneficial owner of more than five percent" who is known to the company [8]. Moreover, a refusal to disclose the identity of a former customer cannot be explained with "competitive reasons."

The rest of the analysis is organized in two sections - the first one, titled "List of Findings," enumerates the twenty discrepancies and inconsistencies in a loosely chronological order, while the second one, titled "Disclosures by Yongye International, Inc.," itemizes the sources used in the findings.

List of Findings

(1) Item 1 contradicts Item 2, as Xinjiang's $6.2 million sales were 47% of total sales, $13,137,406, not 45%, a discrepancy of 2%

(2) According to Item 3, the top five customers represented $10,767,153 of sales in 2007 and no top five customer was in Inner Mongolia. But total sales were $13,137,406 per Item 2, so sales in Inner Mongolia had to be less than $2, 370, 253 ($13,137,406 - $10,767,153), which contradicts Item 1's $2.7M number for Inner Mongolia, a discrepancy of at least $0.3M.

(3) Item 4 shows the sales by the five major customers in 2007 as $10,924,986, or 83% of sales, while Item 3 shows the sales as $10,767,153, or 82% of sales, a discrepancy of $157,833 or 1%.

(4) According to Item 5, five major customers accounted for $11,211,185 of sales in 2007, while Item 3 shows $10,767,153, a discrepancy of $444,032.

(5) According to Item 5, five major customers accounted for 85% and one major customer accounted for 36% of sales in 2007, while Item 3 shows 82% and 29% of sales, respectively, a discrepancy of 3% and 7%.

(6) Sales for the largest customer (in Xinjiang) dropped from $4,266,516 for the nine months ended September 2007, per Item 6, to $3,853,891 for the year, per Item 3, implying negative sales of $412,625 for the customer in Xinjiang in the December 2007 quarter.

(7) A top five customer (in Dalian, Liaoning province) had $1,295,166 of sales for the nine months ended September 2007, per Item 6, but just $1,216,097 for the year, per Item 3, implying negative sales of $79,069 in the December 2007 quarter.

(8) A customer in Inner Mongolia had $816,336 in sales for the nine months ended September 2007, per Item 6, but less than $740,251 for the year, per Item 3, implying negative sales of at least $76,085 in the December 2007 quarter.

(9) Item 7 shows that each of the top five customers in 2008 was in a different province, while according to Item 8 those five customers were in a total of just 4 provinces (meaning, two major customers were in the same province).

(10) In 2008, customers who were not among the top five accounted for a total of $3,982,458 of sales ($48,092,271 - $44,109,813 ), per Item 7 and Item 9. There was only one top five customer in Xinjiang and it had $6,886,624 of sales, per Item 7. So, customer(s) in Xinjiang accounted for no more than $10,869,082 ($6,886,624 + $3,982,458) of sales. That number contradicts the $13,177,694 number for Xinjiang province in Item 10, a discrepancy of at least $2,308,612. Note also that the $13,177,694 number for Xinjiang province in Item 10 actually equals the sum of the sales of the top customers in Gansu and Xinjiang (see Item 7).

(11) According to Item 10, sales in Gansu province were $5,663,011 in 2008, however Item 7 shows that a customer in Gansu had $6,291,070 in sales, implying that some other customer(s) in Gansu had negative sales of $628,059.

(12) Per Item 12, a customer in Hebei accounted for $5,264,759 of sales in the March 2008 quarter (implied from the difference of first half and June 2008 sales, or $7,045,357- $1,780,598). But per Item 11, that number was $5,194,640, a discrepancy of $70,119.

(13) Per Item 12, a customer in Inner Mongolia accounted for $1,766,584 of sales in the March 2008 quarter ($2,806,820 - $1,040,236). But per Item 11, that number was $1,007,885, a discrepancy of $758, 699.

(14) Per Item 12, a customer in Xinjiang accounted for $2,715,614 of sales in the March 2008 quarter ($5,334,140 - $2,618,526). But per Item 11, that number was $2,720,548, a discrepancy of $4,934.

(15) According to Item 12, another customer in Xinjiang had sales of $3,980,159 in the June 2008 quarter, but just $3,922,162 in the six months ended June 2008, implying negative sales of $57,997 in the March 2008 quarter.

(16) Per Item 12, a customer in Gansu accounted for $316,923 of sales in the March 2008 quarter ($4,960,050- $4,643,127). But per Item 11, that number was $379,941, a discrepancy of $63,018.

(17) Item 7 shows that a customer in Xinjiang accounted for $6,886,624 of sales in 2008. Item 14 shows that the customer that accounted for $6,886,624 of sales in 2008 also accounted for $9,950,840 of sales in 2009. Therefore, a customer in Xinjiang accounted for $9,950,840 of sales in 2009, according to Item 7 and Item 14. Customer C from Item 14 is either in Xinjiang province or not. If Customer C from Item 14 were in Xinjiang, then sales in Xinjiang province would have been at least $26,695,996 in 2009 ($9,950,840 + $16,745,156), which contradicts Item 13's $16.7 million number for Xinjiang province. Alternatively, if Customer C from Item 14 were not in Xinjiang but in another province, then that other province would have accounted for at least $16,745,156 of sales, and thus, would have been a top three province, right after Hebei and Inner Mongolia, contradicting Item 13's placing Xinjiang, rather than that other province, as the third largest province by revenue in 2009. Therefore, Items 7, 13, and 14 cannot be reconciled.

(18) According to Item 16, Xinjiang province accounted for $16.0 million of sales in 2009, which contradicts Item 13 where sales in that province are shown as $16.7 million, a discrepancy of $0.7 million. Also, given total sales were $98,092,842 in 2009 (per Item 15), $16.0 million amounts to 16% of total sales, not the 17% number in Item 16, a discrepancy of 1%.

(19) Item 18 shows that a customer had $5,209,290 of sales in the March 2010 quarter. However, according to Item 17 the top province in the quarter (Hebei) accounted for only $4.4 million, a discrepancy of $0.8 million.

(20) Item 18 shows that the top three customers accounted for 55% of sales (21% + 18% + 16%) in the March 2010 quarter, which exceeds the 41% number from Item 17 by 14%.

Disclosures by Yongye International, Inc.

Item 1: Inner Mongolia Yongye [Yongye International, Inc.'s predecessor] ’s top 3 provinces by revenue [in 2007] represented 80% of sales and were Xinjiang at $6.2M (45%), Inner Mongolia at $2.7M (20%), and Hebei at $2M (15%).

Source: page 19, Prospectus filed 2008/09/12

Item 2: Inner Mongolia Yongye's sales in 2007 were $13,137,406.

Source: page 34, 10K filed 2009/03/24

Item 3: Sales by the five largest customers in 2007 were as follows:

Source: page F-18, 10K filed 2009/03/24

Item 4: Sales by the top customers in 2007 were as follows:

Source: page S-20, Prospectus filed 2009/12/17

Item 5: Five major customers accounted for 85% and one major customer accounted for 36% of the net revenue for the years [sic] ended December 31, 2007. Total sales to these customers were $11,211,185 for the years [sic] ended December 31, 2007.

Source: page 20, 8K/A filed 2010/01/04

Item 6: Sales by the five largest customers for the nine months ended September 2007 were as follows:


Source: page 14, 10Q filed 2008/11/13

Item 7: Sales by the five largest customers in 2008 were as follows:

Source: page F-18, 10K filed 2009/03/24

Item 8: For the year ended December 31, 2008, we sold our products primarily through 5 major distributors in our top 4 provinces.

Source: page 9, Prospectus filed 2009/10/20

Item 9: Sales revenue for the year ended December 31, 2008 was $48,092,271

Source: page 36, 10K filed 2009/03/24

Item 10: Yongye’s top 3 provinces by revenue for 2008 represented 82% of sales and were Hebei at $20,541,267 (43%), Xinjiang at $13,177,694 (27%) and Gansu at $ 5,663,011 (12%).

Source: page 17, 10Q/A filed 2009/10/20

Item 11: Sales by the five largest customers in the March 2008 quarter were as follows:

Source: page F-31, Prospectus filed 2009/08/13

Item 12: Sales by the five largest customers in the June 2008 quarter and the first half of 2008 were as follows:

Source: page 19, 10Q/A filed 2009/10/20

Item 13: 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%).

Source: page 33, 10K filed 2010/03/15

Item 14: Sales by the five largest customers in 2008 and 2009 were as follows:

Source: page F-36, 10K filed 2010/03/15

Item 15: Yongye International, Inc.'s sales in 2009 were $98,092,842

Source: page 50, 10K filed 2011/03/14

Item 16: Yongye’s top 3 provinces by revenue for 2009 represented 66% of sales and were Hebei at $29 million (30%), Inner Mongolia at $18.5 million (19%) and Xinjiang at $16.0 million (17%).

Source: page 20, 10Q filed 2010/05/12

Item 17: Yongye’s top 3 provinces by revenue for the first quarter of 2010 represented 41% of sales and were Hebei at $4.4 million (18%), Hubei at $2.9 million (12%) and Shandong at $2.8 million (11%).

Source: page 19, 10Q filed 2010/05/12

Item 18: Sales by the five largest customers in the March 2010 quarter were as follows:

Source: page 17, 10Q filed 2010/05/12

Source: Yongye's Top Customers: Discrepancies and Inconsistencies