UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31,September 30, 2010
 
oTRANSITION REPORT PURSUANT TO SECITON 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ___________________
 
Commission File Number: 000-27557
 
 
YaSheng Group
(Exact name of registrant as specified in its charter)
 
California 33-0788293
(State or Other Jurisdiction of  Incorporation or Organization)   (I.R.S. Employer Identification No.)
 
805 Veterans Blvd., Suite 228, Redwood City, CA94063
(Address of Principal Executive Offices) (Zip Code)
 
(650) 363-8345
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the Registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
x Yes     o No


 
1
 

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).
 
o Yes     o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o
     
Non-accelerated filer o(Do not check if smaller reporting company)     Smaller reporting companyx
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
o Yes     x No
 
State issuer’s revenues for its most recent fiscal year (12/31/09).  $ 739,630,043.
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified dated within the past 60 days.  We are a smaller reporting company as determined pursuant to Rule 12b-2 of the Securities and Exchange Act of 1934 and Regulation S-K thereunder because the public float of our common stock is less than $75 million.

 
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
o Yes     o No

 
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  155,097,355 (12-31-09).





 
2
 

YASHENG GROUP
TABLE OF CONTENTS
 

    
PART IFINANCIAL INFORMATION 
    
Item 1Condensed Consolidated Financial Statements (unaudited)4
    
  Auditor Review Report4
    
  Condensed Consolidated Balance Sheets5
    
  Condensed Consolidated Statements of OperationsIncome6
    
  Condensed Consolidated Statements of Cash Flows7
    
  Notes to Condensed Consolidated Financial Statements8
    
Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations1514
    
Item 3Quantitative and Qualitative Disclosures about Market Risk1917
    
Item 4Controls and Procedures2018
    
PART IIOTHER INFORMATION 
    
Item 1Legal Proceedings2118
    
Item 1ARisk Factors2118
    
Item 2Unregistered Sales of Equity Securities and Use of Proceeds2119
    
Item 3Defaults Upon Senior Securities2119
    
Item 4Submission of Matters to a Vote of Security Holders2119
    
Item 5Other Information2119
    
Item 6Exhibits2219
    
Signatures  2219



 
3
 

PART I    FINANCIAL INFORMATION


Item 1.    Financial Statements
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders Yasheng Group
Redwood City, California
 
We have reviewed the accompanying condensed consolidated balance sheet of Yasheng Group and subsidiaries (the “Corporation”) as of March 31,September 30, 2010, and the related condensed consolidated statements of income, stockholders’ equity, and cash flows for the three-monththree and nine month periods ended March 31,September 30, 2010 and 2009. These interim financial statements are the responsibility of the Corporation’s management.
 
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Yasheng Group and subsidiaries as of December 31, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended and in our report dated April 25,February 26, 2010 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 


 
/S/ Gansu Hongxin CPA
Lanzou, China
 
April 25,November 1, 2010






 
4
 



PART I.
Item 1.    Financial Statements
  YASHENG GROUP
  CONDENSED CONSOLIDATED BALANCE SHEETS
YASHENG GROUP
Condensed Consolidated Balance Sheets (unaudited)
(In US Dollars)
       
  As of 
  September 30,  December 31, 
  2010  2009 
  (unaudited)  (audited) 
ASSETS      
Current assets:      
Cash and cash equivalents  9,962,291   8,010,017 
Accounts receivable, net  74,940,195   71,216,566 
Inventories  92,284,424   75,332,668 
Prepaid and other current assets  4,480,480   4,673,279 
         
Total current assets  181,667,390   159,232,530 
       - 
Equity and other investments  191,704   190,402 
         
Property, plant and equipment, net  400,340,698   393,776,831 
Construction in progress  6,300,228   5,446,595 
Intangible assets, net  979,791,100   958,065,063 
Other long term assets  253,961,661   232,711,379 
         
Total assets  1,822,252,781   1,749,422,800 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued expenses  47,242,535   55,031,294 
Short term loans  15,594,455   19,606,983 
VAT Tax payable  1,041,982   1,142,638 
Current portion of long term debt  8,032,874   9,796,158 
Other current liabilities  851,053   1,170,455 
         
Total current liabilities  72,762,899   86,747,528 
         
Long term debt  2,569,859   3,220,335 
Long term payable  39,417,793   51,643,382 
         
Total liabilities  114,750,551   141,611,245 
         
Stockholders’ equity:        
Common stock, US$1.00 par value        
800,000,000 shares authorized        
155,097,355 shares issued and outstanding  155,097,355   155,097,355 
Accumulated other comprehensive income  271,464,848   240,383,631 
Retained earnings  1,280,940,026   1,212,330,569 
         
Total stockholders’ equity  1,707,502,229   1,607,811,555 
         
Total liabilities & stockholders' equity  1,822,252,780   1,749,422,800 
         
The accompanying notes are an integral part of these consolidated financial statements.
 
  March 31,  December 31, 
  2010  2009 
  (Unaudited)  (Audited) 
ASSETS      
Current assets      
Cash and cash equivalents $7,515,967  $8,010,017 
Accounts receivable  72,655,144   71,216,566 
Inventories  74,952,639   75,332,668 
Prepaid and other current assets  4,491,316   4,673,279 
         
Total current assets  159,615,066   159,232,530 
         
Equity and other investments  188,188   190,402 
         
Property, plant and equipment, net  384,690,585   393,776,831 
Construction in progress  5,806,724   5,446,595 
Intangible assets, net  975,181,998   958,065,063 
Other long term assets  231,070,623   232,711,379 
         
Total assets $1,756,553,185  $1,749,422,800 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
Accounts payable and accrued expenses $54,265,164  $55,031,294 
Short term loans  17,884,066   19,606,983 
VAT payable  1,127,758   1,142,638 
Current portion of long term debt  8,934,867   9,796,158 
Other current liabilities  1,162,488   1,170,455 
         
Total current liabilities  83,374,508   86,747,529 
         
Long term debt  2,941,933   3,220,335 
Long term payable  44,839,698   51,643,382 
         
Total liabilities  131,156,139   141,611,245 
         
Stockholders’ equity:        
Common stock, No par        
 800,000,000 shares authorized        
 155,097,355 shares issued and outstanding  155,097,355   155,097,355 
Accumulated other comprehensive income  237,830,306   240,383,631 
Retained earnings  1,229,468,550   1,212,330,569 
         
Total stockholders’ equity  1,622,396,211   1,607,811,555 
         
Total liabilities & stockholders' equity $1,753,552,185  $1,749,422,800 
         
The accompanying notes are an integral part of these condensed consolidated financial statements.
 



 
5
 


  YASHENG GROUP
   CONDENDSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
YASHENG GROUP
Condensed Consolidated Statements of Operations (unaudited)
(In US Dollars)
             
  For The Three Months Ended September 30,  For The Nine Months Ended September 30, 
  2010  2009  2010  2009 
             
Net sales  235,590,303   181,586,179   595,195,334   539,785,348 
                 
Cost of goods sold  201,799,361   156,336,430   521,839,375   475,133,393 
                 
Gross profit  33,790,941   25,249,750   73,355,959   64,651,955 
                 
Operating expenses:                
Sales and marketing  440,610   350,411   1,091,290   997,927 
General and administrative  961,450   754,587   2,534,914   2,318,793 
Total operating expenses  1,402,060   1,104,997   3,626,204   3,316,720 
                 
Operating profit  32,388,882   24,144,753   69,729,754   61,335,235 
                 
Interest expense  528,775   611,743   1,752,114   1,847,242 
                 
Other income (expense)  -208,513   473,807   631,816   1,314,950 
                 
Income before income tax expense  31,651,593   24,006,817   68,609,457   60,802,943 
Income tax expense                
                 
Net income  31,651,593   24,006,817   68,609,457   60,802,943 
                 
Basic earnings per share  0.20   0.15   0.44   0.39 
Weighted average number of shares  155,097,355   155,097,355   155,097,355   155,097,355 
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
  
Three Months Ended
 March 31,
 
  2010  2009 
       
Net sales $168,319,589  $168,078,088 
         
Cost of goods sold  149,876,123   149,665,504 
         
Gross profit  18,443,467   18,412,584 
         
Operating expenses:        
Sales and marketing  325,243   324,762 
General and administrative  773,825   772,415 
Total operating expenses  1,099,068   1,097,177 
         
Operating income  17,344,399   17,315,407 
         
Interest expense  623,012   622,294 
         
Other income  416,594   415,903 
         
Net income $17,137,981  $17,109,017 
         
Basic and Diluted Earnings Per Share $0.11  $0.11 
Weighted average number of shares  155,097,355   155,097,355 
         
         
         
Net Income $17,137,981  $17,109,017 
Other Comprehensive Income:        
  Foreign currency translation adjustment  (2,553,325)  (290,447)
Total Comprehensive Income $14,584,656  $16,818,570 
         
         
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 

 
6
 


  YASHENG GROUP
   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
YASHENG GROUP
Condensed Consolidated Statements of Cash Flows (unaudited)
(In US Dollars)
       
  For The Nine Months Ended September 30, 
  2010  2009 
       
Cash flows from operating activities:      
Net income  68,609,457   60,802,943 
Adjustments to reconcile net income to net cash provided by operating activities:     
     Depreciation and amortization  6,618,559   13,186,036 
     Allowance for doubtful accounts  124,625   305,629 
     Others  -13,205,110   -25,762,146 
Changes in assets and liabilities:        
     Accounts receivable  -2,497,486   -6,124,821 
     Inventories  -15,522,919   -3,792,559 
     Prepaid and other current assets  281,437   182,811 
     Accounts payable  -8,825,168   -8,040,279 
     Tax payables  -122,328   -76,712 
     Accrued expenses and other current liabilities  -348,974   -209,611 
Net cash provided by operating activities  35,112,093   30,471,290 
         
Cash flows from investing activities:        
     Purchase of assets  -26,854,794   -8,497,959 
     Investments  2,309   286 
Net cash used in investing activities  -26,852,485   -8,497,674 
         
Cash flows from financing activities:        
     Issuance of common stock        
     Dividends paid        
     Increase (decrease) in debt  -7,045,059   -21,892,507 
Net cash provided by financing activities  -7,045,059   -21,892,507 
         
Effect of exchange rate change on cash and cash equivalents  1,231,775   32,109 
         
     Net increase (decrease) in cash and cash equivalents  2,446,323   113,219 
         
Cash and cash equivalents at beginning of period  7,515,968   7,880,338 
Cash and cash equivalents at end of period  9,962,291   7,993,557 
         
Supplemental Disclosures:        
Cash paid for interest  1,752,113   1,847,242 
Cash paid for income taxes        
         
The accompanying notes are an integral part of these consolidated financial statements.


  
Three Months Ended
 March 31,
 
 Cash flow from operating activities: 2010  2009 
Operating activities:      
Net income $17,137,981  $17,109,017 
         
Adjustments to reconcile net income to net cash provided by operating activities:        
 Depreciation and amortization  2,171,088   7,576,509 
 Allowance for doubtful accounts  74,514   (67,861)
 Others  (5,282,145)  (6,943,840)
Changes in assets and liabilities:        
 Accounts receivable  (1,493,270)  1,359,949 
 Inventories  400,996   1,406,875 
 Prepaid and other current assets  183,263   95,228 
  Accounts payable  (2,683,998)  (3,188,907)
 Tax payable  (15,198)  (72,320)
 Accrued expenses and other current liabilities  (9,977)  (95,789)
Net cash provided by operating activities  10,483,256   17,178,861 
         
Investing activities:        
 Purchase of fixed assets  (7,787,828)  (13,966,540)
Investments  2,267   5,714 
Net cash used in investing activities  (7,785,562)  (13,960,826)
         
Financing activities:        
 Increase (decrease) in debt  (3,193,973)  (3,375,612)
Net cash used in financing activities  (3,193,973)  (3,375,612)
         
Effect of exchange rate change on cash and cash equivalents  2,230   (1,499)
         
Net increase (decrease) in cash and cash equivalents  (494,050)  (159,075)
         
Cash and cash equivalents at beginning of period  8,010,017   7,880,338 
Cash and cash equivalents at end of period $7,515,968  $7,721,263 
         
Supplemental disclosures:        
 Cash paid for interest $623,012  $622,294 
 Cash paid for income taxes  -   - 
         
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
7
 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.Basis of Presentation, Organization and Business

The accompanying unaudited condensed consolidated financial statement (statements)statements (“statements”) have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for the period are not necessarily indicative of the results that may be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Yasheng Group's Form 10-K. The statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP)(“US GAAP”). This basis differs from that used in the statutory accounts of the Company, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the People's Republic of China (PRC)(“PRC”). All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

Yasheng Group (“The Company”) is a California corporation with primary operations in China. The Company produces and markets high-quality farming and sideline products including livestock and poultry. It also designs, develops and markets new technologies related to agriculture.

Product offerings include 30+ major agriculture goods under 6 major product categories which include: field crops: cotton, corns, barley, wheat, flax, alfalfa; vegetables: onions, potatoes, beet, and peas; fruit trees: apples, pears, apricots; specialty crops: hops, wolfberries, cumin, liquorices; seeds: black melon seeds, sunflower seeds, corn seeds, flax seeds; poultry: eggs.  ;

Yasheng sells its products through an extensive nationwide sales and distribution network covering 16 provinces and over 100 cities in China. Products are also sold directly to food processors as well as processed internally by the company and then resold to supermarkets or other distributors, or further processed for retail food distribution. The Company also sells many of its products fresh within Gansu province as well as nationally to food processors and distributors, or directly to supermarkets. Customers are based primarily in China and include national and international leading companies. Products are also sold as feed for livestock, ingredients for Chinese traditional medicines as well as other important ingredients in the food industry.
 
2.Summary of Significant Accounting Policies

(a)Accounting standards

The consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of operations of the Company in accordance with accounting principles generally accepted in the United States of America.

(b)Fiscal year

The Company’s fiscal year ends on the 31st of December of each calendar year.

(c)Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated.

(d)Use of estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying va luesvalues of assets and liabilities that are not readily apparent from other sources. ActualAct ual results may differ from these estimates under different assumptions or conditions.

8
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
Summary of Significant Accounting Policies - continued
(e)Revenue recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.


8
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.
Summary of Significant Accounting Policies- continued
(f)CostCosts of goods sold

Direct and indirect productions costs are recorded in Cost of goods sold including, shipping and handling for products sold such as outward freight, purchasing, and receiving.

(g)Cash and cash equivalents

Cash and cash equivalents include cash on hand, demand deposits held by banks, and securities with maturities of three months or less. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are composed primarily of investments in money market accounts stated at cost, which approximates fair value.

(h)Inventories

Inventories are recorded using the weighted average method and are valued at the lower of cost or market.

(i)Accounts receivable, net

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, the Company considers many factors in estimating its general allowance, including aging analysis, historical bad debt records, customer credit analysis and any specific known troubled accounts.

(j)Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is calculated on a straight-line basis over the life of the asset or the term of the lease, whichever is shorter. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to property and equipment used in production is reported in cost of sales. Property and equipment are depreciated over their es timated useful lives as follows:

Buildings and improvements 20 - 40 years
Farming facilities 10 years
Machinery and equipment 7 years
Transportation and other facilities 3 years

The detail of the property, plant and equipment is as follows:

  9/30/10  9/30/09 
       
Buildings and Improvements $92,898,537  $92,735,509 
Farming Facilities  86,576,419   84,494,131 
Machinery and Equipment  13,306,834   10,934,251 
Transportation  267,486,921   269,793,603 
Total  460,268,711   457,957,494 
Less: Accumulated Depreciation and Amortization  (59,928,013)  (64,180,663)
Net Amount $400,340,698  $393,776,831 
Long-term assets of the Company are reviewed annually to assess whether the carrying value has become impaired, according to the guidelines established in Statement of Accounting Standards (SFAS) No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." The Company also evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. No impairment of assets was recorded in the periods reported.
 

 
9
 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued
 
(j)
Property, plant and equipment - continued
  2010  2009 
       
Buildings and improvements $91,673,879  $92,735,509 
Farming facilities  83,573,768   84,494,131 
Machinery and equipment  11,135,293   10,934,251 
Transportation  264,029,246   269,793,603 
Total  450,412,186   457,957,494 
Less: Accumulated Depreciation and amortization  (65,721,601)  (64,180,663)
Net $384,690,585  $393,776,831 

(k)Intangible assets

IntangibleThe carrying amounts of long-lived assets consistare reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of land use rightsan asset may not be recoverable. Recoverability of assets to be held and are recorded at cost. Under PRC’s current property rights regime, use rights for specified periods (e.g., 40used is evaluated by a comparison of the carrying amount of assets to 70 years) canfuture undiscounted net cash flows expected to be obtained from the state through the up-front payment of land use fees. The fees are determinedgenerated by the location, type and densityassets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the proposed development. This separationassets exceed the fair value of land ownership and use rights allows the tradingassets. Assets to be disposed of land use rights while maintaining state ownershipare reported at the lower of land.  The Company has over 250,000 acres of arable land that are utilized for grazing, cultivation, and reclamation, of which 50,000 acres are under cultivation using the latest scientific technologiescarrying amount or fair value less cost to produce a wide variety of agricultural products.sell.

(l)Impairment of long-lived assets

The carrying amounts of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

(m)Investments

Investments consist primarily of less than 20% equity positions in non-marketable securities and are recorded at lower of cost or market.

(n)Foreign currency translation

The accompanying financial statements are presented in United States (US) dollars. The functional currency is the Renminbi (RMB). The financial statements are translated into US dollars from RMB at year-endthe exchange rates in effect at the balance sheets date for assets and liabilities, and the weighed average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

Gains and losses resulting from foreign currency translation are recorded in a separate component of shareholders’ equity. Foreign currency translation adjustments are included in accumulated other comprehensive income in the consolidated statements of shareholders’ equity for the years presented.

RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.

10
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
Summary of Significant Accounting Policies - continued
(o)Income taxes

As ana state-owned agricultural enterprise, the Company and all of its agricultural subsidiaries are exempted from enterprise income taxes with approval from the Gansu Provincial Bureau of Local Taxation. The only non-agricultural subsidiary, Baiyin Cement Plant, has suffered net loss for the years shown and therefore has no applicable taxable income. Because of the uncertainty of future profits, no deferred tax assets have been set up at this time.

(p)Earnings per share

Basic earnings per share are computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed using the weighted average number of common and, if dilutive, potential common shares outstanding during the year. The Company has no potentially dilutive shares for the periods shown.

(q)Economic and Political Risks

The Company faces a number of risks and challenges as a result of having primary operations and markets in the PRC. Changing political climates in the PRC could have a significant effect on the Company's business.

(r)Advertising expense

The Company recordsexpenses advertising expenses in the periodas incurred.

10
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.
Summary of Significant Accounting Policies- continued
(s)Comprehensive income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income, as presented on the accompanying consolidated balance sheets, consists of mainly the cumulative foreign currency translation adjustment.

(t)Value added tax (VAT)

Value added tax is a consumption tax levied on value added. While the standard VAT rate in PRC is 17%, the Company's agricultural subsidiaries enjoy a reduced VAT rate of 4%.

(u)Inventories

The major classes of inventory: raw materials, packaging materials, products in process, finished goods, stocks, low-value consumable goods, materials in transit as well as others.

The following is a breakdown of the major categories of inventories.
  9/30/10  9/30/09 
Raw Material  17,685,801   14,910,866 
Finished Goods  48,247,079   39,620,483 
Low-value Consumable Goods  12,053,041   10,167,090 
Packaging Material  8,725,609   6,964,229 
Maintenance Material  5,572,893   3,670,000 
         
Total  92,284,424   75,332,668 
(v)Other long term assets

The Company invests every year in windbreaks and sand-breaks to provide shelterbelts for many of the farms located near the Gobi Desert. These investments are recorded as other long term assets.

(w)China contribution plan

The Company’s subsidiaries in China participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company’s subsidiaries to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond its monthly contribution.

(x)Profit appropriation

Pursuant to the laws applicable to China’s Foreign Investment Enterprises, each of the Company’s subsidiaries in China must make appropriations from its after-tax profit to non-distributable reserve funds as determined by the Board of Directors. These reserve funds include a (i) general reserve, (ii) enterprise expansion fund and (iii) staff bonus and welfare fund. The general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP) until these reserves equal 50% of the amount of paid-in capital; the other fund appropriations are at the Company’s discretion.

(y)Concentration of risks

The operations of the Company are substantially located in the PRC and accordingly, investing in the shares of the Company is subject to among others, the PRC’s political, economic and legal risks.

11
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
Summary of Significant Accounting Policies- continued
(z)Income taxes

The Company and all of its agricultural subsidiaries are exempt from income taxes in the PRC. The Company has not filed an income tax return in the US.

(a)Debt

The Company obtains secured lending from the banks using the following two types of arrangements, collateral and guarantee. Collateral is loans secured against the assets of the Yasheng Group, while guarantee is loans provided with the guarantee from a third party.

(b)Employee benefit plans

The Company provides the following benefits for all employees:

A. Employee Welfare Fund: An amount equal to 14% of payroll is set aside by the Company for standard employee benefits. This fund is managed and controlled by the Company. All required payments current.

B. Open Policy Pension: The Company pays to national and community insurance agents an amount equal to 20% of payroll. This insurance continues to cover the employee subsequent to retirement.

C. Unemployment Insurance: The Company pays to the national employment administrative entities an amount equal to 1% of payroll. Any dismissed employee thereby receives a specified amount of family-support funds for a designated period.

D. Housing Surplus Reserve: The Company pays to the national housing fund administrative entities an amount equal to 10% of payroll for deposit into the employees' future housing allowance accounts.

The aforesaid items are for employee's benefits and should be accounted for as the Company's expenses.

(c)RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification (the “Codification” or “ASC”) as the source of authoritative accounting principles in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification superseded all existing non-SEC accounting and reporting standards, with limited exceptions to allow recently issued standards to be incorporated into the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. After the September  15, 2 0092009 effective date of the Codification, all new FASB standards will be in the form of Accounting Standards Updates (“ASU”), which will update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. The Codification was not intended to change U.S. GAAP and did not affect the company’s accounting methods, but it did change the way the accounting standards are organized and presented, particularly in descriptions of significant accounting policies.


11
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
Summary of Significant Accounting Policies - continued
(u)
RECENTLY ISSUED ACCOUNTING STANDARDS - continued
New accounting standards that could significantly affect the company’s Consolidated Financial Statements are summarized as follows and are not anticipated to have a material effect on the Company’s results of operations.

Date Issued Description Effective Date for the Company Impact
January 2010 Clarified accounting requirements for the deconsolidation of a subsidiary or a group of assets and expanded the related disclosure. Deconsolidation occurs when the parent ceases to have a controlling interest and any resulting gain or loss is calculated as the fair value of the consideration received plus the fair value of any retained interest less the carrying value. Retrospectively, beginning January 1, 2010. None.
January 2010 Expanded disclosures for fair value measurements Prospectively, beginning January 1, 2010. Will expand disclosure.
January 2010 Expanded disclosures for Level 3 fair value measurements to include purchases, sales, issuances and settlements. Prospectively, beginning January 1, 2011. Will expand disclosure.
June 2009 Amended the evaluation criteria to identify the primary beneficiary of a variable interest entity and required ongoing reassessments of whether the company is the primary beneficiary. Prospectively, beginning January 1, 2010. None.

12
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
Summary of Significant Accounting Policies- continued
May 2009 Created standards of accounting and disclosure for events that occur after the balance sheet date but before financial statements are issued. Prospectively, beginning June 30, 2009. Expanded disclosure.
April 2009 Created new accounting standards for the initial recognition and measurement, subsequent measurement and accounting, and disclosure of contingent assets and contingent liabilities assumed in a business combination. Prospectively, beginning January 1, 2009. None.
December 2008 Expanded annual disclosure of plan assets of a defined benefit pension or other postretirement plan, including fair value disclosures. Prospectively, beginning December 31, 2009. Was not material.
November 2008 Clarified the accounting for certain transactions and impairment considerations involving equity-method investments. Prospectively, beginning January 1, 2009. Was not material.
June 2008 Created new accounting standards for determining whether an option or warrant on an entity’s own shares, such as in the company’s Convertible Notes, is eligible for equity classification. Prospectively, beginning January 1, 2009. None.
 

12
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.Inventories

The major classes of inventory: raw materials, packaging materials, products in process, finished goods, stocks, low-value consumable goods, materials in transit as well as others.
The following is a breakdown of the major categories of inventories.

  March 31, 2010  December 31, 2009 
       
Raw material $14,869,885  $14,910,866 
Finished Goods  39,282,785   39,620,483 
Low-value consumable goods  10,061,685   10,167,090 
Packaging material  6,986,445   6,964,229 
Supplies and other  3,751,839   3,670,000 
Total $74,952,639  $75,332,668 

4.Other long term assets

The Company invests every year in windbreaks and sand-breaks to provide shelterbelts for many of the farms located near the Gobi Desert. These investments are recorded as other long term assets.

5.China contribution plan

The Company’s subsidiaries in China participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company’s subsidiaries to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond its monthly contribution.

6.Profit appropriation

Pursuant to the laws applicable to China’s Foreign Investment Enterprises, each of the Company’s subsidiaries in China allow make appropriations from its after-tax profit to non-distributable reserve funds as determined by the Board of Directors. These reserve funds include a (i) general reserve, (ii) enterprise expansion fund and (iii) staff bonus and welfare fund. The general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP) until these reserves equal 50% of the amount of paid-in capital; the other fund appropriations are at the Company’s discretion. Payment to the statutory general reserve fund is at the Company discretion.  Allocations to these statutory reserve funds can only be us ed for specific purposes and are not transferable to us in the form of loans, advances or cash dividends.

7.Concentration of risks

The operations of the Company are substantially located in the PRC and accordingly, investing in the shares of the Company is subject to among others, the PRC’s political, economic and legal risks.

8.Income taxes

The Company and all of its agricultural subsidiaries are exempt from income taxes in the PRC. The Company has not filed an income tax return in the US.

9.Debt

The Company obtains secured lending from the banks using two types of arrangements, collateral and guarantee. Collateral are loans secured against the assets of the Yasheng Group, while guarantee are loans provided with the guarantee from a third party.

13
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10.Employee benefit plans

The Company provides the following benefits for all employees:

A. Employee Welfare Fund: An amount equal to 14% of payroll is set aside by the Company for standard employee benefits. This fund is managed and controlled by the Company. All required payments current.

B. Open Policy Pension: The Company pays to national and community insurance agents an amount equal to 20% of payroll. This insurance continues to cover the employee subsequent to retirement.

C. Unemployment Insurance: The Company pays to the national employment administrative entities an amount equal to 1% of payroll. Any dismissed employee thereby receives a specified amount of family-support funds for a designated period.

D. Housing Surplus Reserve: The Company pays to the national housing fund administrative entities an amount equal to 10% of payroll for deposit into the employees' future housing allowance accounts.
The aforesaid items are for employee's benefits and should be accounted for as the Company's expenses.

11.(d)Operating leases

The Company has no operating leases for the periods shown.

 
 
 
 
 

 
 
1413
 

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following is a discussion of our financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with our audited financial statements and the notes thereto included elsewhere in this Form 10-Q and with our annual report for the year ended December 31, 2009

Some of the statements under "Description of Business," "Risk Factors," "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this Report and in the Company's periodic filings with the Securities and Exchange Commission constitute forward-looking statements.  These statements involve known and unknown risks, significant uncertainties and other factors what may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward- looking statements.  Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this Report.

In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "intends," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology.

The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties.  Such forward-looking statements are based on assumptions that the Company will obtain or have access to adequate financing for each successive phase of its growth, that there will be no material adverse competitive or technological change in condition of the Company's business, that the Company's President and other significant employees will remain employed as such by the Company, and that there will be no material adverse change in the Company's operations, business or governmental regulation affecting the Company.  The foregoing assumptions are based on judgments with respect to, among other things, further economic, competitive and market conditions, and future business decisions, all of wh icho f which are difficult or impossible to predict accurately and many of which are beyond the Company's control.

Although management believes that the expectations reflected in the forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance or achievements.  Moreover, neither management nor any other persons assumes responsibility for the accuracy and completeness of such statements.

GENERAL

Yasheng Group (“The Company”) is a California corporation with primary operations in China. The Company designs, develops, manufactures and markets high-quality farming and sideline products including livestock and poultry. It also designs, develops and markets new technologies related to agriculture and genetic biology

RESULTS OF OPERATIONS (unaudited) 

(unaudited)

　 Three Months Ended 　 Three Months Ended 
　 March 31, 2010 　 March 31, 2009 
　 Dollars  % of Sales 　 Dollars  % of Sales 
  
(000's)　
    　 
(000's)　
    
              
Net Sales $168,319   100.0%  $168,078   100.0%
Costs of Goods Sold  149,876   89.0 　  149,665   89.0 
Gross profit  18,443   11.0 　  18,412   11.0 
Sales and marketing expenses  325   0.2 　  325   0.2 
General and administrative expenses 774   0.5 　 
772　
   0.4 
Interest expense  623   0.4 　  622   0.3 
Other income  417   0.3 　  416   0.3 
Net income $17,138   10.2 　 $17,109   10.2 
  Three Months Ended  Three Months Ended 
  September 30, 2010  September 30, 2009 
  Dollars  % of Sales  Dollars  % of Sales 
  
(000's)　
     
(000's)　
    
Net sales  235,590,303   100.00%  181,586,179   100.00%
Cost of goods sold  201,799,361   85.66%  156,336,430   85.97%
Gross profit  33,790,941   14.34%  25,249,750   13.88%
Sales and marketing  440,610   0.19%  350,411   0.19%
General and administrative  961,450   0.41%  754,587   0.41%
                                                            

  Nine Months Ended  Nine Months Ended 
  September 30, 2010  September 30, 2009 
  Dollars  % of Sales  Dollars  % of Sales 
  
(000's)　
     
(000's)　
    
Net Sales $595,195,334.00   100.00% $539,785,348.00   100.00%
Costs of Goods Sold  521,839,375.00   87.68%  475,133,393.00   88.02%
Gross profit  73,355,959.00   12.32%  64,651,955.00   11.98%
Sales and marketing expenses  1,091,290.00   0.18%  997,927.00   0.18%
General and administrative expenses  2,534,914.00   0.43%  2,318,793.00   0.43%
Interest expense  1,752,114.00   0.29%  1,847,242.00   0.34%
Other income  631,816.00   0.11%  1,314,950.00   0.24%
Net income $68,609,457.00   11.53% $60,802,943.00   11.26%

15

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
RESULTS OF OPERATIONS - continued
The functional currency for the Company is the RMB which is translated into US Dollars for financial reporting purposes. The average exchange rates for the periods presented remained generally unchanged and were 6.8277changed from 6.8318RMB to 1 USD for the nine months ended September 30, 2009 to 6.7477 RMB to 1 USD for the threenine months ended March 31, 2010 and 6.8283 RMB to 1 USD for the three months ended March 31, 2009.
September 30, 2010.

Net Sales. Sales are generated primarily from our farming operations in China and related side line products. Net sales for the three months ended March 31,September 30, 2010 increased marginally by $241,000,$54 million or 0.1%29.7%, to $168.3$235.6 million as compared to $168.1$181.6 million for the three months ended March 31,September 30, 2009. Net sales for the nine months ended September 30, 2010 increased $55.4 million or 10.3%, to $595.2 million as compared to $539.8 million for the nine months ended September 30, 2009. The firstoverall increases in Net sales are primarily a result of price soaring attributable to the general economics in China. These comparisons show that our sales in the third quarter have grown more significantly than the previous quarter.  T his is due primarily to the renewal of the yearour fixed price contracts that we had in place for the Company is an off season quarter. As expectedfirst half of 2010. We are able to enjoy this increased market price of our products with the business volumes duringrenewed the contracts. What’s more, most of our products are harvested in the third quarter, remained relatively constantand a large part of them are sold out in comparison tothis quarter, and we can benefit from the comparable prior period and there was no meaningful effect from applicable foreign exchange rates.price soaring. 
14
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- continued
RESULTS OF OPERATIONS (unaudited) - continued
 
Cost of Goods Sold. Our cost of goods sold consists of the direct production costs such as raw materials, direct labor, overhead and miscellaneous other supplies. Cost of goods sold for the three months ended March 31,September 30, 2010 increased by a marginal $211,000$45.5 million or 0.1%29.1%, to $149.9$201.8 million from $149.7$156.3 million for the three months ended March 31,September 30, 2009. Cost of goods sold for the nine months ended September 30, 2010 increased $46.7 million or 9.8%, to $521.8 million from $475.1 million for the nine months ended September 30, 2009. Costs were in line with sales due to continued heightened focus on cost control exercised throughout production.  Our production has been adversely affected by heavy snow storms from January through May of this year in northwest China.  T his has disrupted our planting and as a consequence has increased production costs.
 
Gross Profit and Gross Margin. Our gross profit for the three months ended March 31,September 30, 2010 increased $31,000$8.6 million or 0.1%34.1% to $18.5$33.8 million from $18.4$25.2 million for the three months ended March 31,September 30, 2009. Our gross profit for the nine months ended September 30, 2010 increased $8.7 million or13.6% to $73.4 million from $64.6 million for the nine months ended September 30, 2009. Operating margins remained constantrose greatly due to continuedthe great increase in the price of the products, and also the heightened focus on cost control exercised throughout production.
 
Sales and Marketing Expenses. Our sales and marketing expenses for the three months ended March 31,September 30, 2010 remained level at $325,000 asincreased $90,199 or 25.7%, to $440,610, compared to $350,411 for the prior three months ended March 31, 2009September 30, 2009. Our sales and marketing expenses for the nine months ended September 30, 2010 increased $93,363 or 9.4%, to $1,091,290, compared to $997,927 for the prior nine months ended September 30, 2009.The sales and marketing expense increased due principally to management’s continued heightened focus on controlling costs.the rising in the sales.
 
General and Administrative Expenses. Our general and administrative expenses remained relatively consistent at $774,000 and $772,000, respectivelyincreased marginally by $206,862 or 27.4%, to $961,450 for the three months ended March 31,September 30, 2010 as compared to $754,587 for the three months ended March 31,September 30, 2009. Our general and administrative expenses increased marginally by $216,121 or 9.3%, to $2.5 Million for the nine months ended September 30, 2010 as compared to $2.3 Million for the nine months ended September 30, 2009. General and administrative expenses remained relatively consistentincreased due principally to management’s continued heightened focus on controlling costs.the great rising in the sales.
 
Interest Expenses and Other Income. Our interest expense of $623,000 and other income of $417,000decreased $82,968, or 13.6%, to $528,775, for the three months ended March 31,September 30, 2010, remained relatively consistent when compared to $611,743 for the three months ended March 31,September 30, 2009. Our interest expense decreased $95,128, or 5.2 %, to $1.75 million, for the nine months ended September 30, 2010, compared to $1.85 million for the nine months ended September 30, 2009. The decrease of the interest expense is mainly due to the decrease of short term loans and the long term debt. Our other income is $-208,513 for the three months ended September 30, 2010, compared to $473,807 the three months ended September 30, 2009.  Our other income is $631,816 for the nine months ended September 30, 2010, compar ed to $1,314,950 the nine months ended September 30, 2009.

Liquidity and Capital Resources

As of March 31,September 30, 2010, we had cash and cash equivalents of $7.5$9.9 million and working capital of $76.2$108.9 million. This compared to cash and cash equivalents of $8.0 million and working capital of $72.5 million as of December 31,September 30, 2009. The following table provides information about our net cash flows for the operating results presented in this report (amounts in thousands of USD).
  
Three Months Ended
March 31,
 
  2010  2009 
       
Net cash provided by operating activities
 
$
10,483
  
$
17,179
 
Net cash used in investing activities
  
(7,785
)
  
(13,961
)
Net cash used in financing activities
  
(3,193
)
  
(3,376
)
Effect of foreign currency translation on cash and cash equivalents
  
2
   
(1
)
Cash and cash equivalents at beginning of the period
  
8,010
   
7,880
 
Cash and cash equivalents at end of period
  
7,516
   
7,721
 

16
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
RESULTS OF OPERATIONS - continued
  Nine Months Ended  Three Months Ended 
  September 30  September 30 
  2010  2009  2010  2009 
  　  　       
Net cash provided by operating activities $35,112.00  $30,471.00  $13,063.83  $9,483.25 
Net cash used in investing activities  (26,852.00)  (8,498.00)  (7,867.13)  (3,312.28)
Net cash used in financing activities  (7,045.00)  (21,893.00)  (3,512.33)  (6,205.76)
Effect of foreign currency translation on cash and cash equivalents  1,232.00   32.00   1,098.67   18.98 
Cash and cash equivalents at beginning of the period  7,516.00   7,880.00   (494.02)  - 
Cash and cash equivalents at end of period  9,962.00   7,994.00   2,288.02   (15.81)
 
Net cash provided by operating activities was $10.5$35.1 million for the threenine months ended March 31,September 30, 2010 as compared to $17.2$30.5 million for the threenine months ended March 31,September 30, 2009. Net cash used in investing activities was 7.79$26.9 million for the threenine months ended March 31,September 30, 2010 as compared to $14.0$8.5 million for the threenine months ended March 31,September 30, 2009. Net cash used in financing activities was $3.2$7.0 million for the threenine months ended March 31,September 30, 2010 as compared with $3.4to $21.9 million for the threenine months ended March 31,September 30, 2009.
 
We believe our cash on hand and cash flows from operations will meet our expected capital expenditures and working capital needs for the next 12 months. In addition, we may, in the future, require additional cash resources due to changed business conditions, implementation of our strategy to expand our production capacity or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financ ingFi nancing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
15
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- continued
Liquidity and Capital Resources - continued
 
Off-Balance Sheet Arrangements
 
As of March 31,September 30, 2010 and for the threenine months then ended, we were not party to transactions, obligations or relationships that could be considered off-balance sheet arrangements and we do not have off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.
 
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation.

Segments

With the exception of Baiyin Cement Plant, all other subsidiaries of the Company are agricultural enterprises. As the construction materials represent less than one percent of sales, the Company actually has only one segment, that of agriculture.  This segment is shown in the Statement of Operations.Income.

RECENTLY ISSUED ACCOUNTING STANDARDS
 
Statement No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.  This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option is available to all entities. Most of the provisions in FAS 159 are elective; however, an amendment to FAS 115 Accounting for Certain Investments in Debt and Equity Securities applies to all entities with available for sale or trading securities. Some requirements apply differently to entities that do not report net income. SFAS No. 159 is effective as of the beginning of an entity’s first fisc alfiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157 Fair Value Measurements. 
 
Statement No. 141 (revised 2007) – Business Combinations
 
In December 2007, the FASB revised SFAS No. 141 (revised 2007), Business Combinations.  This revision changes the way the minority interest in a company is measured, recorded and reported in the parent company’s financial statements to the end that a statement user can better evaluate the nature and financial effects of the business combination.  The Company adopts this statement beginning March 1, 2009.

17
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
RECENTLY ISSUED ACCOUNTING STANDARDS - continued
 
It is not believed that this will have an impact on the Company’s consolidated financial position, results of operations or cash flows.
 
Statement No. 160 – NoncontrollingNon-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51
 
In December 2007, the FASB issued SFAS No. 160, NoncontrollingNon-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.  A noncontrollingnon-controlling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements related to the noncontrollingnon-controlling or minority interest.
 
The Company adopts this statement beginning March 1, 2009. It is not believed that this will have an impact on the Company’s consolidated financial position, results of operations or cash flows.
  
Statement No. 161 – Disclosures about Derivative Instruments and Hedging Activities—an amendment to FASB No. 133
 
In March 2008, the FASB, issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.  This standard requires companies to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.

The Company has not yet adopted the provisions of SFAS No. 161, but does not expect it to have a material impact on its consolidated financial position, results of operations or cash flows.
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- continued
RECENTLY ISSUED ACCOUNTING STANDARDS - continued
 
Statement No. 162 – The Hierarchy of Generally Accepted Accounting Principles
 
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles.  SFAS No. 162 sets forth the level of authority to a given accounting pronouncement or document by category. Where there might be conflicting guidance between two categories, the more authoritative category will prevail. SFAS No. 162 will become effective 60 days after the SEC approves the PCAOB’s amendments to AU Section 411 of the AICPA Professional Standards.

SFAS No. 162 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.
 
Statement No. 163 – Accounting for Financial Guarantee Insurance Contracts – and interpretation of FASB Statement No. 60
 
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts-and interpretation of FASB Statement No. 60.  SFAS No. 163 clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claims liabilities. This statement also requires expanded disclosures about financial guarantee insurance contracts.  SFAS No. 163 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those years.
 
SFAS No. 163 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.
 
 
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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our financial statements and accompanying notes are prepared in accordance with U.S.US GAAP.  Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses.  These estimates and assumptions are affected by management’s application of accounting policies.  Critical accounting policies for us are revenue recognition and foreign currency translation.

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectability is reasonably assured.  Most of the sales occur within the PR China.

The accompanying financial statements are presented in United States (US) dollars. The functional currency is the Renminbi (RMB). The financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

Gains and losses resulting from foreign currency translation are recorded in a separate component of shareholders’ equity.  Foreign currency translation adjustments are included in accumulated other comprehensive income in the consolidated statements of shareholders’ equity for the past years presented.

RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee that RMB amounts could have been, or could be, converted into US dollars at rates used in translation.
 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our international sales accounted for very little of our net sales from 2006 through 2007.   As a result, we have exposure to foreign exchange risk with respect to a minor portion of our sales.  Fluctuations in exchange rates, particularly in the U.S. dollar to yuan (RMB) exchange rate, do not affect materially affect our gross and net profit margins even though they could result in foreign exchange and operating losses.

Our primary foreign currency exposures are transaction, cash flow and translation:
 
Transaction Exposure:  We have certain asset and liabilities, primarily receivables, investments and accounts payable that are denominated in currencies other than the relevant entity's functional currency.  In certain circumstances, changes in the functional currency value of these assets and liabilities create fluctuations in our reported consolidated financial position, results of operations and cash flows.  We may enter into foreign exchange forward contracts or other instruments to minimize the short-term foreign currency fluctuations on such assets and liabilities.  The gains and losses on the foreign forward contracts offset the transaction gains and losses on certain foreign currency receivables, investments and payables recognizedrecogn ized in earnings.

 
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Item 3. 
Quantitative and Qualitative Disclosures about Market Risk - continued
 
Cash Flow Exposure:  We have forecasted future cash flows, including revenues and expenses, denominated in currencies other than the relevant entity's functional currency.  Our primary cash flow exposures include future customer collections and vendor payments.

Earnings Translation Exposure:  Fluctuations in foreign currency exchange rates do not create volatility in our reported results of operations because we are required to consolidate the financial statement of all of our subsidiaries and most of our sales are in China.  We decide to purchase forward exchange contracts or other instruments to offset the impact of currency fluctuations.  Such contracts would be marked-to-market on a monthly basis and any unrealized gain or loss would be reported in interest and other income, net.  We do not edge translation exposure at this time but may do so in the future.
 
Interest Rate Risk

We are exposed to interest rate risk because some of our distributors and other vendees depend on debt financing to purchase our products and some of our subsidiaries depend on debt financing to construct facilities and to improve the farms.  Although the useful life of our farm products is short, our distributors and vendees still have to pay the entire cost of their purchases at the time of shipment.  As a result, many of our distributors and vendees rely on debt financing to fund their up-front cash flow needs and expenditures.  An increase in interest rates could make it difficult for our distributors and vendee to secure the financings necessary to purchase, hold and resell our products, and thus lower and postpone demand for our products and reduce our net sales.
 
Commodity Risk

We are exposed to price risks associated with raw material purchases and sales into the domestic and foreign commodities markets.


Item 4.Controls and Procedures.

Changsheng Zhou(a)      Evaluation of disclosure controls and HaiYun Zhuang, our Chief Executive Officer and Chief Financial Officer, respectively, have concluded that ourprocedures. Our disclosure controls and procedures are designed to ensure (i) that information required to be disclosed by us in the reports we file or submit under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (ii) that information required to be disclosed by us in the reports it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of September 30, 2010 we carried out an evaluation, under the supervision and effective. They have evaluated these controls and procedures aswith the participation of the date of this report on Form 10-Q. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Our management, including our Chief Executive Officer and Chief Financial Officer, believes thatof the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and internal control over financial reporting are designed to provide reasonable assurance15d-15(e) under the Securities Exchange Act of achieving their objectives1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and areChief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level. However, our management does not expect

It should be noted that our disclosureany system of controls, and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter howhowever well conceiveddesigned and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met. Further,In addition, the design of aany 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 lim itations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a 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 also is based in part upon certain assumptions about the likelihood of future events,events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

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PART IIconditions.


(b)     Changes in internal controls. During the period covered by this report, there was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II.   Other Information

Item 1.       Legal Proceedings

The Company is not presently a party to any material legal actions.

 
Item 1A.  Risk Factors
 
See Item 3 in part above and the Company’s 10-K10_k for the year ended December 31, 2009

 
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Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds
 
On February 17, 2010, we entered into a convertible note purchase agreement (“Purchase Agreement”)  with an investor (“Investor”) pursuant to which we sold and issued a 10% Convertible Promissory Note for a principal amount of $250,000 (the “Note”).  The Note is due 24 months from the issuance date unless otherwise converted into shares of common stock of the Company (“Conversion Shares”). As security interest for the Note, Ms. Wu, our president and director, entered into a Stock Pledge Agreement pledging five hundred thousand (500,000) shares of her common stock of the Company for the benefit of Investor (the “Pledged Shares”).
The securities offered, sold, issued and secured in connection with the Purchase Agreement,  were made by us in reliance upon the exemptions from registration provided under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended,  and Rule 506 of Regulation D, promulgated by the SEC under federal securities laws,  and comparable exemptions for sales to “accredited” investors under state securities laws.  None of these transactions involved any underwriters or any public offering.  The recipients of the securities in these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution, and appropria te legends were affixed to the share certificates and instruments issued in these transactions.


Item 3.       Defaults Upon Senior Securities
 
None

 
Item 4.       Submission of Matters to Vote of Security Holders
 
None

 
Item 5.       Other Information
 
None










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Item 6.       Exhibits


Exhibit No.Description 
31.1
Certification of Chief Executive Officer Pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a) 
31.2
Certification of Chief Financial Officer Pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a) 
32.132.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: April 25,November 5, 2010
 
 
YASHENG GROUP

By:/s/Changsheng Zhou
Changsheng Zhou
Chief Executive Officer



/s/ Haiyun Zhuang
Haiyun Zhuang
Chief Financial Officer


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