10-Q/A 1 f10q0612a2_yewbioph.htm FORM 10Q AMENDMENT #2 - JUNE 30, 2012 f10q0612a2_yewbioph.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

Amendment No. 2
To
FORM 10-Q

 
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO             
 
COMMISSION FILE NUMBER 000-54701
 
YEW BIO-PHARM GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
26-1579105
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
294 Powerbilt Avenue
Las Vegas, Nevada 89148
(Address of principal executive offices) (Zip Code)
 
(702) 487-6727
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)

 
Indicate by check mark whether the registrant (1) 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.    Yes  ¨    No  x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
       
Non-accelerated filer
 
¨
  
Smaller reporting company
 
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of August 10, 2012, there were 50,000,000 shares, $0.001 par value per share, of the registrant’s common stock outstanding.
 
 
 

 
YEW BIO-PHARM GROUP, INC.
 
FORM 10-Q FOR THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2012
 
TABLE OF CONTENTS
 
     
   
Page
Number
 
PART I. FINANCIAL INFORMATION
     
ITEM 1.
FINANCIAL STATEMENTS
4
     
 
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011
4
     
 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2012 AND JUNE 30, 2011
5
     
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2012 AND JUNE 30, 2011
6
     
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
27
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
49
     
ITEM 4.
CONTROLS AND PROCEDURES
50
 
PART II. OTHER INFORMATION
     
ITEM 1.
LEGAL PROCEEDINGS
51
     
ITEM 1A.
RISK FACTORS
51
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
51
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
51
     
ITEM 4.
MINE SAFETY DISCLOSURES
51
     
ITEM 5.
OTHER INFORMATION
51
     
ITEM 6.
EXHIBITS
51
 
 
 

 
 
EXPLANATORY NOTE
 
The purpose of this Amendment No. 2 on Form 10–Q/A to the quarterly report on Form 10–Q for the quarter ended June 30, 2012, originally filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2012 (the “Form 10–Q”) and Amendment No.1 to the Form10-Q, filed with the SEC on September 13, 2012, is as follows:
 
On or about August 27, 2012, management determined that as of June 30, 2012 and December 31, 2011, certain inventory on the consolidated balance sheets included in our Quarterly Report on Form 10-Q for that period should be reclassified from current assets to long-term assets. This determination was made after analysis of comments made by the staff of the Securities and Exchange Commission concerning the proper accounting treatment for slow-moving inventory and potential reserves for slow-moving inventory.    We originally recorded all inventory in current assets. However, based on analysis of inventory movement and analysis of our operating cycle of one year, it was subsequently determined that any inventory in excess of our current operating cycle of one year, based on historical and anticipated levels of sales, should be classified as long-term on our consolidated balance sheets. Our classification of long-term inventory requires us to estimate the portion of inventory that can be realized over the next 12 months.
 
Accordingly, we restated our unaudited interim consolidated balance sheet as of June 30, 2012 and our consolidated balance sheet as of December 31, 2011 herein. We did not restate our consolidated statements of income and comprehensive income or consolidated statement of cash flows for the periods ended June 30, 2012 and 2011. The respective restatement adjustments are non-cash in nature. These adjustments resulted in a decrease in our total current assets of $7,356,251 and $7,508,030 as of June 30, 2012 and December 31, 2011, respectively, and an increase in long-term assets of $7,356,251 and $7,508,030 as of June 30, 2012 and December 31, 2011, respectively. We believe that the reclassification of inventory balance from current assets to long-term assets are now correctly recorded our consolidated balance sheets. Additionally, we revised certain disclosures in the notes to the consolidated financial statements and management’s discussion and analysis.
 
Please see Note 17, “Restatements”, contained in the Notes to Consolidated Financial Statements appearing later in this Form 10-Q/A, which further describes the effect of these restatements.
 
This Amendment No. 2 to the Form 10-Q for the period ended June 30, 2012 contains currently dated certifications as Exhibits 31.1, 31.2, 32.1 and 32.2.  No attempt has been made in this Amendment No. 2 to the Form 10-Q for the period ended June 30, 2012 to modify or update the other disclosures presented in the Form 10-Q as previously filed, except as required by the restatement. This Amendment No. 2 on Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures that may be affected by subsequent events.  Accordingly, this Amendment No. 2 should be read in conjunction with our other filings with the SEC.
 
 
2

 
 
Forward-Looking Statements
 
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements”, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
 
Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.
 
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. Some of the key factors impacting these risks and uncertainties include, but are not limited to:
 
 
risks related to our ability to collect amounts owed to us by some of our largest customers;
 
 
our ability to continue to purchase yew cuttings from our various suppliers at relatively stable prices;
 
 
our dependence on a small number of customers for our yew trees for reforestation, which in the aggregate constitute the majority of our consolidated revenues;
 
 
our ability to market successfully yew raw materials used in the manufacture of traditional Chinese medicine (“TCM”);
 
 
industry-wide market factors and regulatory and other developments affecting our operations;
 
 
our ability to sustain revenues should the Chinese economy slow from its current rate of growth;
 
 
continued preferential tax treatment for the sale of yew trees and potted yew trees;
 
 
uncertainties about involvement of the Chinese government in business in the People’s Republic of China (the “PRC” or “China”) generally; and
 
 
any change in the rate of exchange of the Chinese Renminbi (“RMB”) to the U.S. dollar, which could affect currency translations of our results of operations, which are earned in RMB but reported in dollars;
 
 
industry-wide market factors and regulatory and other developments affecting our operations;
 
 
a slowdown in the Chinese economy; and
 
 
risks related to changes in accounting interpretations.
 
For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see the section entitled “Risk Factors,” beginning on page 29 of our Registration Statement on Form 10/A.
 
 
3

 
PART I
 
FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
June 30, 2012
   
December 31, 2011
 
   
(As Restated)
   
(As Restated)
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS:
           
    Cash
  $ 693,908     $ 732,371  
    Accounts receivable
    316,471       -  
    Inventories
    973,206       710,844  
    Prepaid rent - related party
    70,690       -  
    Prepaid expenses and other assets
    2,175       433  
                 
        Total Current Assets
    2,056,450       1,443,648  
LONG-TERM ASSETS:
               
    Inventories, net of current portion
    7,356,251       7,508,030  
    Property and equipment, net
    732,761       784,222  
    Deposit on land use rights
    996,883       -  
    Land use rights and yew forest assets, net
    15,090,125       15,166,197  
        Total Long-term Assets
    24,176,020       23,458,449  
        Total Assets
  $ 26,232,470     $ 24,902,097  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
    Accounts payable
  $ 62,476     $ 1,360,611  
    Accrued expenses and other payables
    76,952       119,901  
    Advance from customers
    232,290       -  
    Taxes payable
    4,423       500  
    Refundable common stock subscription
    -       950,000  
    Due to related parties
    53,855       266,488  
        Total Current Liabilities
    429,995       2,697,500  
        Total Liabilities
    429,995       2,697,500  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS' EQUITY:
               
    Common Stock ($0.001 par value;  50,000,000 shares authorized;
               
     50,000,000 and 40,500,000 shares issued and outstanding at
               
     June 30, 2012 and December 31, 2011, respectively)
    50,000       40,500  
    Additional paid-in capital
    8,149,470       7,208,970  
    Retained earnings
    13,687,925       11,469,172  
    Statutory reserves
    1,947,545       1,686,087  
    Accumulated other comprehensive income - foreign currency translation adjustment
    1,967,534       1,799,868  
                 
        Total Shareholders' Equity
    25,802,475       22,204,597  
        Total Liabilities and Shareholders' Equity
  $ 26,232,470     $ 24,902,097  
 
See notes to unaudited consolidated financial statements
 
 
4

 
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
 
                                 
 
  
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
 
  
2012
   
2011
   
2012
   
2011
 
REVENUES:
  
                             
Revenues
  
$
1,905,421
  
 
$
1,379,800
  
 
$
3,300,074
  
 
$
2,292,480
  
Revenues - related party
  
 
—  
  
   
385,138
  
   
159,692
  
   
917,812
  
Total Revenues
  
 
1,905,421
  
   
1,764,938
  
   
3,459,766
  
   
3,210,292
  
COST OF REVENUES:
  
                             
Cost of revenues
  
 
297,744
  
   
290,585
  
   
580,548
  
   
471,467
  
Cost of revenues - related party
  
 
—  
  
   
108,632
  
   
25,224
  
   
255,995
  
Total Cost of Revenues
  
 
297,744
  
   
399,217
  
   
605,772
  
   
727,462
  
GROSS PROFIT
  
 
1,607,677
  
   
1,365,721
  
   
2,853,994
  
   
2,482,830
  
 
  
                             
OPERATING EXPENSES:
  
                             
Selling
  
 
5,350
  
   
13,825
  
   
11,237
  
   
34,185
  
General and administrative
  
 
150,062
  
   
179,959
  
   
363,773
  
   
311,941
  
Total Operating Expenses
  
 
155,412
  
   
193,784
  
   
375,010
  
   
346,126
  
INCOME FROM OPERATIONS
  
 
1,452,265
  
   
1,171,937
  
   
2,478,984
  
   
2,136,704
  
 
  
                             
OTHER INCOME (EXPENSES):
  
                             
Interest income
  
 
1,509
  
   
370
  
   
1,588
  
   
1,449
  
Other (expense)
  
 
(361
   
(1,275
   
(361
   
(12,121
Total Other Income (Expenses)
  
 
1,148
  
   
(905
   
1,227
  
   
(10,672
NET INCOME
  
$
1,453,413
  
 
$
1,171,032
  
 
$
2,480,211
  
 
$
2,126,032
  
 
  
                             
COMPREHENSIVE INCOME:
  
                             
NET INCOME
  
$
1,453,413
  
 
$
1,171,032
  
 
$
2,480,211
  
 
$
2,126,032
  
OTHER COMPREHENSIVE INCOME:
  
                             
Unrealized foreign currency translation gain
  
 
21,762
  
   
293,658
  
   
167,667
  
   
424,134
  
 
  
                             
COMPREHENSIVE INCOME
  
$
1,475,175
  
 
$
1,464,690
  
 
$
2,647,878
  
 
$
2,550,166
  
NET INCOME PER COMMON SHARE:
  
                             
Basic
  
$
0.03
  
 
$
0.03
  
 
$
0.05
  
 
$
0.05
  
Diluted
  
$
0.03
  
 
$
0.02
  
 
$
0.05
  
 
$
0.04
  
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
  
                             
Basic
  
 
50,000,000
  
   
40,500,000
  
   
45,563,187
  
   
40,500,000
  
Diluted
  
 
50,000,000
  
   
50,000,000
  
   
50,000,000
  
   
50,000,000
  
 
See notes to unaudited consolidated financial statements
 
 
5

 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
                 
 
  
For the Six Months Ended June 30,
 
 
  
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
  
             
Net income
  
$
2,480,211
  
 
$
2,126,032
  
Adjustments to reconcile net income to net cash provided by operating activities:
  
             
Depreciation
  
 
103,200
  
   
83,936
  
Amortization of land use rights and yew forest assets
  
 
172,171
  
   
124,301
  
Loss on disposal of fixed assets
  
 
—  
  
   
9,813
  
Changes in operating assets and liabilities:
  
             
Accounts receivable
  
 
(316,181
   
—  
  
Inventories
  
 
(40,286
   
870,611
  
Prepaid and other current assets
  
 
(1,739
   
(11,570
Prepaid rent - related party
  
 
(70,625
   
—  
  
Accounts payable
  
 
(1,306,617
   
1,508,530
  
Accrued expenses and other payable
  
 
(40,191
   
19,381
  
Due to related parties
  
 
22,473
  
   
14,466
  
Taxes payable
  
 
655
  
   
629
  
Advances from customers
  
 
232,077
  
   
(325,281
 
  
             
NET CASH PROVIDED BY OPERATING ACTIVITIES
  
 
1,235,148
  
   
4,420,848
  
 
  
             
CASH FLOWS FROM INVESTING ACTIVITIES:
  
             
Proceeds from disposal of property and equipment
  
 
—  
  
   
19,471
  
Purchase of property and equipment
  
 
(46,305
   
(35,700
Deposit on land use right
  
 
(995,969
   
—  
  
Purchase of land use rights and yew forest assets
  
 
—  
  
   
(5,587,113
 
  
             
NET CASH USED IN INVESTING ACTIVITIES
  
 
(1,042,274
   
(5,603,342
 
  
             
CASH FLOWS FROM FINANCING ACTIVITIES:
  
             
Repayments to related party
  
 
(236,595
   
—  
  
Proceeds from related party advances
  
 
—  
  
   
91,127
  
Proceeds from repayment from directors
  
 
—  
  
   
61,215
  
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
  
 
(236,595
   
152,342
  
EFFECT OF EXCHANGE RATE ON CASH
  
 
5,258
  
   
(8,558
 
  
             
CASH - beginning of period
  
 
732,371
  
   
1,850,488
  
CASH - end of period
  
$
693,908
  
 
$
811,778
  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  
             
Cash paid for:
  
             
Interest
  
$
—  
  
 
$
—  
  
Income taxes
  
$
—  
  
 
$
—  
  
Non-cash investing and financing activities
  
             
Common stock issued for common stock refundable subscription
  
$
950,000
  
 
$
—  
  
 
See notes to unaudited consolidated financial statements
 
 
6

 
YEW BIO-PHARM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
 
NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted as permitted by rules and regulations of the US Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of December 31, 2011 was derived from the audited consolidated financial statements of Yew Bio-Pharm Group, Inc. (individually “YBP” and collectively with its subsidiaries and operating variable interest entity, the “Company”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated balance sheet of the Company as of December 31, 2011, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the year then ended included in the Company’s Registration Statement on Form 10/A filed with the SEC.
 
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of June 30, 2012, and the results of operations and cash flows for the six-month period ended June 30, 2012 and 2011, have been made.
 
The preparation of consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company continually evaluates its estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. The Company bases its estimates on historical experience and on various other assumptions that it believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
 
Details of the Company’s subsidiaries and variable interest entities (“VIE”) are as follows:
 
 
Name
 
  
Domicile and date
of  incorporation
  
Registered capital
 
  
Effective
ownership
  
Principal activities
Heilongjiang Jinshangjing Bio-
Technology Development Co., Limited
(“JSJ”)
  
PRC
  
USD $
100,000
  
  
100%
  
Holding company
 
  
October 29, 2009
  
     
  
 
  
 
         
Yew Bio-Pharm Holdings Limited (“Yew
Bio-Pharm (HK)”)
  
Hong Kong
November 29, 2010
  
HK$
10,000
  
  
100%
  
Holding company
of JSJ
         
Harbin Yew Science and Technology
Development Co., Ltd. (“HDS”)
  
PRC
August 22, 1996
  
RMB
 45,000,000
  
  
Contractual
arrangements
  
Processing and selling yew raw materials used in the manufacture of TCM; growing and selling yew tree seedlings and mature trees, including potted miniature yew trees; and manufacturing and selling furniture and handicrafts made of yew tree timber
 
 
7

 
 
NOTE 2 – PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the financial statements of YBP, its subsidiaries and operating VIE, in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated on consolidation.
 
YBP’s subsidiary JSJ entered into a series of contractual arrangements (the “Contractual Arrangements”) with HDS and/or Zhiguo Wang (“Mr. Wang”), his wife Guifang Qi (“Madame Qi”), Xingming Han (Mr. Han) (collectively, the “HDS Shareholders”) as described below:
 
 
Exclusive Business Cooperation Agreement. Pursuant to the Exclusive Business Cooperation Agreement between JSJ and HDS (the “Business Cooperation Agreement”), JSJ has the exclusive right to provide to HDS general business operation services, including advice and strategic planning, as well as consulting services related to technology, research and development, human resources, marketing and other services deemed necessary (collectively, the “Services”). Under the Business Cooperation Agreement, JSJ has exclusive and proprietary rights and interests in all rights, ownership, interests and intellectual properties arising out of or created during the performance of the Business Cooperation Agreement, including but not limited to copyrights, patents, patent applications, software and trade secrets. HDS shall pay to JSJ a monthly consulting service fee (the “Service Fee”) in RMB that is equal to 100% of the monthly net income of HDS. Upon the prior written consent by JSJ, the rate of Service Fee may be adjusted pursuant to the operational needs of HDS. Within 30 days after the end of each month, HDS shall (a) deliver to JSJ the management accounts and operating statistics of HDS for such month, including the net income of HDS during such month (the “Monthly Net Income”), and (b) pay 80% of such Monthly Net Income to JSJ (each such payment, a “Monthly Payment”). Within ninety (90) days after the end of each fiscal year, HDS shall (a) deliver to JSJ financial statements of HDS for such fiscal year, which shall be audited and certified by an independent certified public accountant approved by JSJ, and (b) pay an amount to JSJ equal to the shortfall, if any, of the aggregate net income of HDS for such fiscal year, as shown in such audited financial statements, as compared to the aggregate amount of the Monthly Payments paid by HDS to JSJ in such fiscal year. HDS also granted an irrevocable and exclusive option to JSJ to purchase any and all of the assets of HDS, to the extent permitted under PRC law, at the lowest price permitted by PRC law. Unless earlier terminated in accordance with the provisions of the Business Cooperation Agreement or other agreements separately executed between JSJ and HDS, the Business Cooperation Agreement is for a term of ten years and expires on November 5, 2020; however, the term of the Business Cooperation Agreement may be extended if confirmed in writing by JSJ prior to the expiration of the term thereof. The period of the extended term shall be determined exclusively by JSJ and HDS shall accept such extended term unconditionally. Unless JSJ commits gross negligence, or a fraudulent act, against HDS, HDS shall not terminate the Business Cooperation Agreement prior to the expiration of the term, including any extended term. Notwithstanding the foregoing, JSJ shall have the right to terminate the Business Cooperation Agreement at any time upon giving 30 days’ prior written notice to HDS.
 
 
8

 
 
 
 
Exclusive Option Agreement. Under an Exclusive Option Agreement among JSJ, HDS and each HDS Shareholder (individually, an “Option Agreement”), the terms of which are substantively identical to each other, each HDS Shareholder has granted JSJ or its designee the irrevocable and exclusive right to purchase, to the extent permitted under PRC law, all or any part of the HDS Shareholder’s equity interests in HDS (the “Equity Interest Purchase Option”) for RMB 10. If an appraisal is required by PRC laws at the time when and if JSJ exercises the Equity Interest Purchase Option, the parties shall negotiate in good faith and, based upon the appraisal, make a necessary adjustment to the purchase price so that it complies with any and all then applicable PRC laws. Without the consent of JSJ, the HDS Shareholders shall not sell, transfer, mortgage or dispose of their respective shares of HDS stock. Additionally, without the prior consent of JSJ, the HDS Shareholders shall not in any manner supplement, change or amend the articles of association and bylaws of HDS, increase or decrease its registered capital, change the structure of its registered capital in any other manner, or engage in any transactions that could materially affect HDS’ assets, liabilities, rights or operations, including, without limitation, the incurrence or assumption of any indebtedness except incurred in the ordinary course of business, execute any major contract over RMB 500,000, sell or purchase any assets or rights, incur of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. The term of each Option Agreement is ten years commencing on November 5, 2020 and may be extended at the sole election of JSJ.
 
 
Equity Interest Pledge Agreement. In order to guarantee HDS’s performance of its obligations under the Business Cooperation Agreement, each HDS Shareholder, JSJ and HDS entered into an Equity Interest Pledge Agreement (individually, a “Pledge Agreement”), the terms of which are substantially similar to each other. Pursuant to the Pledge Agreement, each HDS Shareholder pledged all of his or her equity interest in HDS to JSJ. If HDS or the HDS Shareholders breach their respective contractual obligations and such breach is not remedied to the satisfaction of JSJ within 20 days after the giving of notice of breach, JSJ, as pledgee, will be entitled to exercise certain rights, including the right to foreclose upon and sell the pledged equity interests. During the term of the Pledge Agreement, the HDS Shareholder shall not transfer his or her equity interest in HDS or place or otherwise permit any other security interest of other encumbrance to be placed on such equity interest. Upon the full payment of the Service Fee under the Business Cooperation Agreement and upon the termination of HDS’s obligations thereunder, the Pledge Agreement shall be terminated.
 
 
Power of Attorney. Under the Power of Attorney executed by each HDS Shareholder (each, a “Power of Attorney”), the terms of which are substantially similar to each other, JSJ has been granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the HDS Shareholders, to act on behalf of the HDS Shareholder as his or her exclusive agent and attorney with respect to all matters concerning the HDS Shareholder’s equity interests in HDS, including without limitation, the right to: 1) attend shareholders’ meetings of HDS; 2) exercise all the HDS Shareholders’ rights, including voting rights under PRC laws and HDS’s Articles of Association, including but not limited to the sale or transfer or pledge or disposition of the HDS Shareholder’s equity interests in HDS in whole or in part; and 3) designate and appoint on behalf of the HDS Shareholders the legal representative, executive director, supervisor, manager and other senior management of HDS.
 
 
9

 
 
To the extent that the Contractual Arrangements are enforceable under PRC law, as from time to time interpreted by relevant state agencies, they constitute the valid and binding obligations of each of the parties to each such agreement.
 
The Company believes that HDS is considered a VIE under ASC 810 “Consolidation”, because the equity investors in HDS no longer have the characteristics of a controlling financial interest, and the Company, through JSJ, is the primary beneficiary of HDS and controls HDS’s operations. Accordingly, HDS has been consolidated as a deemed subsidiary into YBP as a reporting company under ASC 810.
 
As required by ASC 810-10, the Company performs a qualitative assessment to determine whether the Company is the primary beneficiary of HDS which is identified as a VIE of the Company. A quality assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and the parties involved in the design of the entity. The Company’s assessment on the involvement with HDS reveals that the Company has the absolute power to direct the most significant activities that impact the economic performance of HDS. JSJ is obligated to absorb a majority of the risk of loss from HDS activities and entitles JSJ to receive a majority of HDS’s expected residual returns. In addition, HDS’s shareholders have pledged their equity interest in HDS to JSJ, irrevocably granted JSJ an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the equity interests in HDS and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by JSJ. Under the accounting guidance, the Company is deemed to be the primary beneficiary of HDS and the results of HDS are consolidated in the Company’s consolidated financial statements for financial reporting purposes. Accordingly, as a VIE, HDS’s sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s and the Company’s net income includes all of HDS’s net income. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income attributable to the Company. Because of the Contractual Arrangements, YBP has a pecuniary interest in HDS that requires consolidation of HDS’s financial statements with those of the Company.
 
Additionally, pursuant to ASC 805, as YBP and HDS are under the common control of the HDS Shareholders, the Second Restructure was accounted for in a manner similar to a pooling of interests. As a result, the Company’s historical amounts in the accompanying consolidated financial statements give retrospective effect to the Second Restructure, whereby the assets and liabilities of the Company are reflected at the historical carrying values and their operations are presented as if they were consolidated for all periods presented, with the results of the Company being consolidated from the date of the Second Transfer Agreement. The accounts of HDS are consolidated in the accompanying financial statements.
 
As of June 30, 2012, the Company agreed to waive all management fees to be payable by HDS and the Company expects to waive such management fees in the near future due to a need of working capital in HDS to expand HDS’s operations.
 
The Company is principally engaged in (1) processing and selling yew raw materials used in the manufacture of TCM; (2) growing and selling yew tree seedlings and mature trees, including potted miniature yew trees; and (3) manufacturing and selling furniture and handicrafts made of yew tree timber. The Company is located in Harbin, Heilongjiang Province, China.
 
 
10

 
 
YBP has no direct or indirect legal or equity ownership interest in HDS. However, through the Contractual Arrangements, the stockholders of HDS have assigned all their rights as stockholders, including voting rights and disposition rights of their equity interests in HDS to JSJ, our indirect, wholly-owned subsidiary. YBP is deemed to be the primary beneficiary of HDS and the financial statements of HDS are consolidated in the Company’s consolidated financial statements. At June 30, 2012 and December 31, 2011, the carrying amount and classification of the assets and liabilities in the Company’s balance sheets that relate to the Company’s variable interest in the VIE is as follows:
 
                 
 
  
June 30, 2012
 
  
December 31, 2011
 
Assets
  
     
  
     
Cash
  
$
588,633
  
  
$
479,494
  
Accounts receivable
  
 
316,471
  
  
 
—  
  
Inventories (current and long-term)
  
 
8,329,457
  
  
 
8,218,874
  
Prepaid expenses and other assets
  
 
2,025
  
  
 
283
  
Prepaid rent - related party
  
 
70,690
  
  
 
—  
  
Property and equipment, net
  
 
705,172
  
  
 
750,779
  
Deposit on land use right
  
 
996,883
  
  
 
—  
  
Land use rights and yew forest assets, net
  
 
15,090,125
  
  
 
15,166,197
  
Total assets of VIE
  
$
26,099,456
  
  
$
24,615,627
  
 
  
     
  
     
     
Liabilities
  
     
  
     
Accounts payable
  
$
54,475
  
  
$
1,360,611
  
Advance payments from customers
  
 
232,290
  
  
 
—  
  
Accrued expenses and other payables
  
 
46,952
  
  
 
73,727
  
Taxes payable
  
 
4,133
  
  
 
1,049
  
Due to VIE holding companies
  
 
2,207,372
  
  
 
2,164,107
  
Due to related parties
  
 
5,016
  
  
 
240,159
  
Total liabilities of VIE
  
$
2,550,238
  
  
$
3,839,653
  
 
The assets and liabilities in the table above are held in HDS. The creditors of HDS have legal recourse only to the assets of HDS and do not have such recourse to the Company. In addition, HDS’ assets are generally restricted only to pay such liabilities. Thus, the Company’s maximum legal exposure to loss related to VIE is significantly less than the carrying value of the HDS assets due to outstanding intercompany liabilities. Restricted net assets of the VIE shall mean that amount of our proportionate share of net assets of HDS (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by the VIE in the form of loans, advances or cash dividends without the consent of a third party (e.g. lender, regulatory agency, foreign government).
 
NOTE 3 – INVENTORIES
 
Inventories consisted of the following as of June 30, 2012 and December 31, 2011:
 
   
June 30, 2012
   
December 31, 2011
 
   
Current portion
   
Long-term portion
         
Current portion
   
Long-term portion
       
 
Total
   
Total
 
Raw Materials
  $ 218,653     $ 2,761,467     $ 2,980,120     $ 29,401     $ 2,817,980     $ 2,847,381  
Work in process
    18,775       -       18,775       18,642       -       18,642  
Finished goods-handicrafts
    271,690       640,895       912,585       236,854       687,258       924,112  
Yew seedlings
    464,088       3,953,889       4,417,977       425,947       4,002,792       4,428,739  
    $ 973,206     $ 7,356,251     $ 8,329,457     $ 710,844     $ 7,508,030     $ 8,218,874  
 
 
11

 
 
NOTE 4 – PROPERTY AND EQUIPMENT
 
Property and equipment consisted of the following as of June 30, 2012 and December 31, 2011:
 
                 
 
  
June 30, 2012
   
December 31, 2011
 
Buildings and building improvements
  
$
268,916
  
 
$
267,015
  
Machinery and equipment
  
 
524,122
  
   
520,416
  
Office equipment
  
 
45,107
  
   
44,841
  
Leasehold improvement
  
 
53,139
  
   
52,763
  
Motor vehicles
  
 
563,171
  
   
513,280
  
 
  
 
1,454,455
  
   
1,398,315
  
Less: accumulated depreciation
  
 
(721,694
   
(614,093
 
  
$
732,761
  
 
$
784,222
  
 
For the three months ended June 30, 2011 and 2010, depreciation expense amounted to $52,711 and $41,342. For the six months ended June 30, 2012 and 2011, depreciation expenses amounted to $103,200 and $83,936, respectively.
 
NOTE 5 – LAND AND YEW FOREST USE RIGHTS
 
There is no private ownership of land in PRC. Land is owned by the government and the government grants land use rights for specified terms. The following summarizes land use rights acquired by the Company.
 
Yew trees on land containing yew tree forests will be used to supply raw materials such as branches, leaves and fruit to the Company that will be used to for production of the Company’s products. The Company amortizes these land and yew forest use rights over the term of the respective land use right. The lease agreements do not have any renewal option and the Company has no further obligations to the lessor. The Company records the amortization of these land and yew forest use rights as part of its cost of revenues. For the three months ended June 30, 2012 and 2011, amortization expense amounted to $86,012 and $65,322, respectively. For the six months ended June 30, 2012 and 2011, amortization expense amounted to $172,171 and $124,301, respectively. As of June 30, 2012, land and yew forest use rights consisted of the following:
 
                         
 
  
Description
  
Useful
life
  
Acquisition
date
  
Expiration
date
  
Metric Acres
(“MU”)
 
Parcel A
  
Undeveloped forest land
  
50
  
3/2004
  
3/2054
  
 
125
  
Parcel B
  
Undeveloped forest land
  
50
  
4/2004
  
4/2054
  
 
400
  
Parcel C
  
Yew tree forests and underlying land
  
50
  
1/2008
  
1/2058
  
 
290
  
Parcel D
  
Yew tree forests and underlying land
  
45
  
3/2010
  
3/2055
  
 
15,865
  
 
At June 30, 2012 and December 31, 2011, land and yew forest use rights consisted of the following:
 
                   
 
Useful Life
  
June 30, 2012
   
December 31, 2011
 
Land and yew forest use rights
45-50 years
  
$
15,645,378
  
 
$
15,546,414
  
Less: accumulated amortization
 
  
 
(555,253
   
(380,217
Total
 
  
$
15,090,125
  
 
$
15,166,197
  
 
 
12

 
 
Amortization of land and yew forest use rights attributable to future periods is as follows:
 
 
  
Amount
 
Twelve-month periods ending June 30:
  
     
2013
  
$
344,586
  
2014
  
 
344,586
  
2015
  
 
344,586
  
2016
  
 
344,586
  
2017
  
 
344,586
  
2018 and thereafter
  
 
13,367,195
  
Total
  
$
15,090,125
  
 
NOTE 6 – ACCRUED EXPENSES AND OTHER PAYABLES
 
At June 30, 2012 and December 31, 2011, accrued expenses and other payables consisted of the following:
 
 
  
June 30, 2012
 
  
December 31, 2011
 
Accrued wage
  
$
46,952
  
  
$
16,844
  
Accrued professional fees
  
 
10,000
  
  
 
75,029
  
Other
  
 
20,000
  
  
 
28,028
  
Total
  
$
76,952
  
  
$
119,901
  
 
NOTE 7 – TAXES
 
(a) Federal Income Tax and Enterprise Income Taxes
 
The Company is registered in the State of Nevada and is subject to the United States federal income tax at a tax rate of 34%. No provision for income taxes in the U.S. has been made as the Company had no U.S. taxable income as of June 30, 2012 and December 31, 2011.
 
The Company’s subsidiary and VIE, JSJ and HDS, respectively, being incorporated in the PRC, are subject to PRC’s Enterprise Income Tax. Pursuant to the PRC Income Tax Laws, Enterprise Income Taxes (“EIT”) is generally imposed at 25%. However, JSJ and HDS has been named as a leading enterprise in the agricultural area and awarded with a tax exemption for the years up to December 31, 2058.
 
The table below summarizes the difference between the U.S. statutory federal tax rate and the Company’s effective tax rate for the six months ended June 30, 2012 and 2011:
 
                 
 
  
Six Months Ended June 30,
 
 
  
2012
   
2011
 
U.S. federal income tax rate
  
 
34
   
34
Foreign income not recognized in the U.S.
  
 
(34
%) 
   
(34
%) 
PRC Enterprise Income Tax
  
 
25
   
25
Tax exemption
  
 
(25
%) 
   
(25
%) 
Total provision for income tax
  
 
—  
  
   
—  
  
 
 
13

 
 
Income before income tax expenses of $1,453,413 and $1,171,032 for the three months ended June 30, 2012 and 2011, respectively, and $2,480,211 and $2,126,032 for the six months ended June 30, 2012 and 2011, respectively, was attributed to subsidiaries with operations in China. No income tax expense related to China income incurred for the six months ended June 30, 2012 and 2011.
 
The combined effects of the income tax expense exemptions and tax reductions available to the Company for the three and six months ended June 30, 2012 and 2011 are as follows:
 
 
  
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
  
2012
   
2011
   
2012
   
2011
 
         
Tax exemption effect
  
$
396,794
  
 
$
292,544
  
 
$
653,646
  
 
$
548,045
  
 
  
                             
Basic net income per share effect
  
$
(0.01
 
$
(0.01
 
$
(0.01
 
$
(0.01
 
  
                             
Diluted net income per share effect
  
$
(0.01
 
$
(0.01
 
$
(0.01
 
$
(0.01
 
The Company has incurred United States net operating loss for income tax purposes for the three and six months ended June 30, 2012 and 2011. The net operating loss carry forwards for United States income tax purposes amounted to $690,233 and $564,438 at June 30, 2012 and December 31, 2011, respectively, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2032. Management believes that the realization of the benefits arising from this loss appear to be uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance at June 30, 2012 and December 31, 2011. The valuation allowance at June 30, 2012 and December 31, 2011 was approximately $234,679 and $191,909, respectively. The net change in the valuation allowance was an increase of $18,424 and $12,470 during the three months ended June 30, 2012 and 2011, respectively, and $42,770 and $19,658 during the six months ended June 30, 2012 and 2011, respectively. and management will review this valuation allowance periodically and make adjustments as warranted.
 
For U.S. tax purposes, the Company has cumulative undistributed earnings of foreign subsidiary and VIE of approximately $14.4 million and $12.0 million as of June 30, 2012 and December 31, 2011, respectively, which are included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted to the U.S. in the future.
 
There will be no deferred income tax assets or liabilities calculation in the Federal Income Tax because the US corporation taxable loss and deferred taxable loss was the same and the use of any net operating loss carry forwards appears to be uncertain, There will be no deferred income tax assets or liabilities calculation in the EIT because the Company awarded EIT exempted status under agricultural area.
 
 
14

 
 
The Company did not have any interest and penalty provided or recognized in the income statements for the three and six months ended June 30, 2012 and 2011 or balance sheet as of June 30, 2012 and December 31, 2011. The Company did not have uncertainty tax positions or events leading to uncertainty tax position within the next 12 months. The Company’s 2009, 2010 and 2011 U.S. Corporation Income Tax Return are subject to U.S. Internal Revenue Service examination. The Company’s 2008, 2009, 2010 and 2011 China corporate income tax returns are subject to China State Administration of Taxation examination.
 
(b) Value Added Taxes
 
The applicable VAT tax rate is 13% for agricultural products and 17% for handicrafts sold in the PRC. In accordance with VAT regulations in the PRC, the Company is exempt from paying VAT on its yew seedling and trees sales as an agricultural corps cultivating company up to December 31, 2016. VAT payable in the PRC is charged on an aggregated basis at the applicable rate on the full price collected for the goods sold or taxable services provided and less any deductible VAT already paid by the taxpayer on purchases of goods in the same financial year.
 
NOTE 8 – STOCKHOLDERS’ EQUITY
 
At December 31, 2011, the Company reflected a $950,000 refundable common stock subscription liability related to 9,500,000 of the shares in a private offering of the Company’s common stock (the “2009 Summer 2009 Offering”) on the accompanying balance sheet. The 9,500,000 shares of YBP Common Stock were the subject of a rescission offering (the “Rescission Offering”) to the 62 subscribers in the 2009 Summer Offering, all of whom are residents of the PRC. In the Rescission Offering, subscribers in the 2009 Summer Offering could either 1) confirm their subscriptions of shares of YBP Common Stock or 2) elect to rescind their subscriptions of shares of YBP Common Stock and receive a refund of their respective subscription amounts, together with interest. Pursuant to the Rescission Offering, which was conducted in March 2012, all the subscribers in the 2009 Summer Offering confirmed their subscriptions for an aggregate 9,500,000 shares of YBP Common Stock.
 
Pursuant to an agreement dated November 1, 2010 between YBP and a consultant, a resident of the U.S., YBP agreed to pay $20,000 cash and 500,000 Shares to the consultant as compensation for consulting services rendered by him to the Company. The shares were valued at $0.10 per share or $50,000 in total and the Company recorded $50,000 of compensation expense related to those Shares for the year ended December 31, 2010. The shares were recorded as outstanding as of June 30, 2012 and December 31, 2011.
 
NOTE 9 – EARNINGS PER SHARE
 
ASC 260 “Earnings per Share,” requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
 
Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
 
 
15

 
 
The following table presents a reconciliation of basic and diluted net income per share for the three months ended June 30, 2012 and 2011:
 
 
  
Three Months Ended June 30,
 
 
  
2012
 
  
2011
 
Net income available to common stockholders for basic and diluted net income per share of common stock
  
$
1,453,413
  
  
$
1,171,032
  
 
  
     
  
     
Weighted average common stock outstanding - basic
  
 
50,000,000
  
  
 
40,500,000
  
Effect of dilutive securities:
  
     
  
     
Subscribed common shares issuable and subject to recession
  
 
—  
  
  
 
9,500,000
  
 
  
     
  
     
Weighted average common stock outstanding - diluted
  
 
50,000,000
  
  
 
50,000,000
  
 
  
     
  
     
Net income per common share - basic
  
$
0.03
  
  
$
0.03
  
 
  
     
  
     
Net income per common share - diluted
  
$
0.03
  
  
$
0.02
  
 
The following table presents a reconciliation of basic and diluted net income per share for the six months ended June 30, 2012 and 2011:
 
                 
 
  
Six Months Ended June 30,
 
 
  
2012
 
  
2011
 
Net income available to common stockholders for basic and diluted net income per share of common stock
  
$
2,480,211
  
  
$
2,126,032
  
 
  
     
  
     
Weighted average common stock outstanding - basic
  
 
45,563,187
  
  
 
40,500,000
  
Effect of dilutive securities:
  
     
  
     
Subscribed common shares issuable and subject to recession
  
 
4,436,813
  
  
 
9,500,000
  
 
  
     
  
     
Weighted average common stock outstanding - diluted
  
 
50,000,000
  
  
 
50,000,000
  
 
  
     
  
     
Net income per common share - basic
  
$
0.05
  
  
$
0.05
  
 
  
     
  
     
Net income per common share - diluted
  
$
0.05
  
  
$
0.04
  
 
NOTE 10 – CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
 
Customers
 
For the six months ended June 30, 2012 and 2011, customers accounting for 10% or more of the Company’s revenue were as follows:
 
 
  
Three Months Ended
June 30
   
Six Months Ended
June 30
 
Customer
  
2012
   
2011
   
2012
   
2011
 
A
  
 
*
  
   
*
  
   
18
   
*
  
B
  
 
28
   
*
  
   
15
   
*
  
C
  
 
11
   
51
   
14
   
28
D
  
 
*
  
   
*
  
   
14
   
10
E
  
 
23
   
*
  
   
13
   
*
  
F
  
 
21
   
*
  
   
12
   
*
  
G
  
 
*
  
   
22
   
*
  
   
29
H
  
 
*
  
   
*
  
   
*
  
   
10
I
  
 
*
  
   
*
  
   
*
  
   
10
 
*
Below 10%
 
 
16

 
 
The Company’s largest customer for the six months ended June 30, 2012 accounted for 100% of the Company’s accounts receivable at June 30, 2012. The Company did not have any accounts receivable amount at December 31, 2011.
 
Suppliers
 
For the three and six months ended June 30, 2012, the Company did not make material purchases and a third party supplier accounted 69% for the Company’s accounts payable at June 30, 2012. For the three months ended June 30, 2011, the Company did not make material purchases. For the six months ended June 30, 2011, one company accounted for 94% of the Company’s purchase and the Company had accounts payable of $3,379,655 related to the supplier at June 30, 2011.
 
NOTE 11 – RELATED PARTY TRANSACTIONS
 
In addition to several of the Company’s officers and directors, the Company conducted transactions with the following related parties:
 
     
 
Company
 
  
Ownership
Heilongjiang Zishan Technology Stock Co., Ltd. (“ZTC”)
  
18% owned by Heilongjiang Hongdoushan Ecology Forest Stock Co., Ltd., 39% owned by Zhiguo Wang, Chairman and Chief Executive Officer, 31% owned by Guifang Qi, the wife of Mr. Wang and Director of the Company, and 12% owned by third parties.
   
Heilongjiang Yew Pharmaceuticals, Co., Ltd. (“Yew Pharmaceutical”)
  
95% owned by Heilongjiang Hongdoushan Ecology Forest Stock Co., Ltd., and 5% owned by Madame Qi.
   
Shanghai Kairun Bio-Pharmaceutical Co., Ltd. (“Kairun”)
  
60% owned by Heilongjiang Zishan Technology Co., Ltd., 20% owned by Heilongjiang Hongdoushan Ecology Forest Stock Co., Ltd., and 20% owned by Mr. Wang.
   
Heilongjiang Hongdoushan Ecology Forest Stock Co., Ltd. (“HEFS”)
  
63% owned by Mr. Wang, 34% owned by Madame Qi, and 3% owned by third parties.
 
Revenue from Related Parties
 
Pursuant to the Cooperation and Development Agreement discussed below, the Company generated sales from its related party company, Yew Pharmaceutical. For the three and six months ended June 30, 2012 and 2011, the Company recorded revenues from this related party, as follows:
 
 
Name of Related Party
  
Three Months Ended June 30,
 
  
Six Months Ended June 30,
 
 
  
2012
 
  
2011
 
  
2012
 
  
2011
 
Yew Pharmaceutical
  
$
—  
  
  
$
385,138
  
  
$
159,692
  
  
$
917,812
  
 
  
     
  
     
  
     
  
     
Total
  
$
—  
  
  
$
385,138
  
  
$
159,692
  
  
$
917,812
  
 
 
17

 
 
At June 30, 2012 and December 31, 2011, the Company did not have any accounts receivable from Yew Pharmaceutical.
 
Cooperation and Development Agreement
 
On January 9, 2010, the Company entered into a Cooperation and Development Agreement (the “Development Agreement”) with Yew Pharmaceutical. Pursuant to the Development Agreement, for a period of ten years expiring on January 9, 2020, the Company shall supply cultivated yew raw materials to Yew Pharmaceutical that will be used by Yew Pharmaceutical to make traditional Chinese medicines and other pharmaceutical products, at price of RMB 1,000,000 (approximately $158,000) per metric ton. For the three months ended June 30, 2012 and 2011, sales to Yew Pharmaceutical amounted to $0 and $385,138, respectively. For the six months ended June 30, 2012 and 2011, sales to Yew Pharmaceutical amounted to $159,828 and $917,812, respectively. At June 30, 2012 and December 31, 2011, the Company did not have any accounts receivable from Yew Pharmaceutical.
 
Purchases
 
For the three and six months ended June 30, 2012 and 2011, the Company did not make any material purchases from its related party companies. At June 30, 2012 and December 31, 2011, there were no accounts payable amounts due to ZTC related to the purchases.
 
Operating leases
 
On March 25, 2005, the Company entered into an Agreement for the Lease of Seedling Land with ZTC (the “ZTC Lease”). Pursuant to the ZTC Lease, the Company leased 361 mu of land from ZTC for a period of 30 years, expiring on March 24, 2035. Annual payments under the ZTC Lease are RMB 162,450 (approximately $25,400). The payment for the first five years of the ZTC Lease was due prior to December 31, 2010 and beginning in 2011, the Company is required to make full payment for the land use rights in advance for each subsequent five-year period. For the three months ended June 30, 2012 and 2011, rent expense related to the ZTC Lease amounted to $6,415 and $6,241, respectively. For the six months ended June 30, 2012 and 2011, rent expense related to the ZTC Lease amounted to $12,841 and $12,404, respectively. At June 30, 2012, prepaid rent to ZTC amounted to $70,690. At December 31, 2011, amounts due under the ZTC lease amounted to $172,284, and are included in due to related parties on the accompanying balance sheets.
 
On December 3, 2008, the Company entered into a lease for retail space in Harbin with Madame Qi (the “Store Lease”). Pursuant to the Store Lease, no payment was due for the first year and an annual payment of RMB 12,000 (approximately $1,875) is due for each of the second and third years thereof. The term of the Store Lease is three years and expired on December 3, 2011. On November 15, 2011, the Company renewed the Store Lease. Pursuant to the renewed Store Lease, the annual rent is RMB 15,600 (approximately $2,359) and the annual payment is due by May 30 of each year. The term of the renewed Store Lease is 3 years and expires on December 1, 2014. For the three months ended June 30, 2012 and 2011, rent expense related to the Store Lease amounted to $616 and $461, respectively. For the six months ended June 30, 2012 and 2011, rent expense related to the Store Lease amounted to $1,233 and $916, respectively.
 
 
18

 
 
On January 1, 2010, the Company entered into a lease for office space with Mr. Wang (the “Office Lease”). Pursuant to the Office Lease, annual payments of RMB 15,000 (approximately $2,400) are due for each of the term. The term of the Office Lease is 15 years and expires on December 31, 2025. For the three months ended June 30, 2012 and 2011, rent expense related to the Office Lease amounted $593 and $576, respectively. For the six months ended June 30, 2012 and 2011, rent expense related to the Office Lease amounted $1,186 and $1,145, respectively.
 
Future minimum rental payments required under the related party operating leases are as follows:
 
 
Twelve-month periods ending June 30:
  
   
2013
  
$
30,519
  
2014
  
 
30,519
  
2015
  
 
29,081
  
2016
  
 
29,081
  
2017
  
 
29,081
  
Thereafter
  
 
464,744
  
Total
  
$
613,025
  
 
Due to /due from related parties
 
The Company also received from and provided advances to its officers and directors and related parties. These advances are unsecured and payable on demand.
 
The due to/due from related parties amount at June 30, 2012 and December 31, 2011 is as follows:
 
Name of Related Party
  
Due to related parties
 
 
  
June 30,
2012
 
  
December 31,
2011
 
     
Zhiguo Wang
  
$
53,190
  
  
$
31,357
  
     
Yew Pharmaceutical
  
 
—  
  
  
 
62,847
  
     
Madame Qi
  
 
665
  
  
 
—  
  
     
ZTC
  
 
—  
  
  
 
172,284
  
 
  
     
  
     
Total
  
$
53,855
  
  
$
266,488
  
 
Research and Development Agreement
 
The Company entered into a Technology Development Service Agreement dated January 1, 2010 (the “Technology Agreement”) with Kairun. The term of the Technology Agreement was two years. Under the Technology Agreement, Kairun provides the Company with testing and technologies regarding utilization of yew trees to extract taxol and develop higher concentration of taxol in the yew trees the Company grow and cultivate. For these services, the Company agreed to pay Kairun RMB 200,000 after the technologies developed by Kairun are tested and approved by the Company. The Company will retain all intellectual property rights in connection with the technologies developed by Kairun. Kairun may not provide similar services to any other party without the Company’s prior written consent. In February 2012, we entered into a supplemental agreement with Kairun, extending the term of the Technology Agreement indefinitely until project results specified in the original Technology Agreement have been achieved. Kairun is owned directly and indirectly primarily by Mr. Wang and Madame Qi. As of June 30, 2012, Kairun has not yet completed the services provided for in the Technology Agreement and, therefore, no payment was made to Kairun.
 
 
19

 
 
NOTE 12 – STATUTORY RESERVES
 
The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriation to the statutory surplus reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors.
 
The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. For the three months ended June 30, 2012 and 2011, the Company appropriated to the statutory surplus reserve in the amount of $148,686 and $121,563, respectively. For the six months ended June 30, 2012 and 2011, the Company appropriated to the statutory surplus reserve in the amount of $261,458 and $219,218, respectively. The accumulated balance of the statutory reserve of the Company as of June 30, 2012 and December 31, 2011 was $1,947,345 and $1,686,087, respectively.
 
NOTE 13 – SEGMENT INFORMATION
 
ASC Topic 280 requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. During the three and six months ended June 30, 2012 and 2011, the Company operated in three reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees, including potted miniature yew trees; and (3) the handicrafts segment, consisting of the manufacture and sale of handicrafts and furniture made of yew timber. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of the Company’s operations are conducted in the PRC.
 
 
20

 
 
Information with respect to these reportable business segments for the three and six months ended June 30, 2012 and 2011 is as follows:
 
                                 
 
  
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
 
  
2012
   
2011
   
2012
   
2011
 
Revenues:
  
                             
TCM raw materials
  
$
1,225,360
  
 
$
1,116,822
  
 
$
1,966,643
  
 
$
1,799,737
  
Yew trees
  
 
673,565
  
   
592,314
  
   
1,457,088
  
   
1,343,650
  
Handicrafts
  
 
6,496
  
   
55,802
  
   
36,035
  
   
66,905
  
 
  
 
1,905,421
  
   
1,764,938
  
   
3,459,766
  
   
3,210,292
  
 
  
                             
Cost of revenues:
  
                             
TCM raw materials
  
 
176,781
  
   
294,468
  
   
288,082
  
   
479,617
  
Yew trees
  
 
118,220
  
   
59,778
  
   
299,015
  
   
199,301
  
Handicrafts
  
 
2,743
  
   
44,971
  
   
18,675
  
   
48,544
  
 
  
 
297,744
  
   
399,217
  
   
605,772
  
   
727,462
  
 
  
                             
Depreciation and amortization:
  
                             
TCM raw materials
  
 
84,399
  
   
57,314
  
   
168,823
  
   
112,703
  
Yew trees
  
 
18,774
  
   
17,383
  
   
27,065
  
   
24,465
  
Handicrafts
  
 
8,045
  
   
6,423
  
   
16,104
  
   
14,286
  
Other
  
 
27,505
  
   
25,544
  
   
63,379
  
   
56,783
  
 
  
 
138,723
  
   
106,664
  
   
275,371
  
   
208,237
  
 
  
                             
Net income (loss):
  
                             
TCM raw materials
  
 
1,048,579
  
   
822,354
  
   
1,678,561
  
   
1,320,120
  
Yew trees
  
 
555,345
  
   
532,536
  
   
1,158,073
  
   
1,144,349
  
Handicrafts
  
 
3,753
  
   
10,831
  
   
17,360
  
   
18,361
  
Other
  
 
(154,264
   
(194,689
   
(373,783
   
(356,798
 
  
$
1,453,413
  
 
$
1,171,032
  
 
$
2,480,211
  
 
$
2,126,032
  
 
 
  
December 31, 2011
 
 
  
TCM raw
materials
 
  
Yew
trees
 
  
Handicrafts
 
  
Other
 
  
Total
 
Identifiable long-lived assets, net
  
$
14,880,192
  
  
$
600,364
  
  
$
153,686
  
  
$
316,177
  
  
$
15,950,419
  
           
Expenditures for segment assets
  
 
5,515,590
  
  
 
61436
  
  
 
—  
  
  
 
130,385
  
  
 
5,707,411
  
 
 
  
June 30, 2012
 
 
  
TCM raw
materials
 
  
Yew
trees
 
  
Handicrafts
 
  
Other
 
  
Total
 
Identifiable long-lived assets, net
  
$
14,805,311
  
  
$
591,776
  
  
$
139,018
  
  
$
286,761
  
  
$
15,822,866
  
           
Expenditures for segment assets
  
 
—  
  
  
 
—  
  
  
 
—  
  
  
 
46,305
  
  
 
46,305
  
 
 
21

 
 
The Company does not allocate any selling, general and administrative expenses to its reportable segments because these activities are managed at a corporate level and not allocable to any segment. Accordingly, depreciation, interest expense or net income by segment is not reported. The Company’s operations are located in the PRC. All revenues are derived from customers in the PRC. All of the Company’s operating assets are located in the PRC.
 
NOTE 14 – COMMITMENTS AND CONTINGENCIES
 
Operating lease
 
On March 20, 2002, the Company leased office space in the A’cheng district in Harbin (the “A’cheng Lease”). The A’cheng Lease is for a term of 23 years and expires on March 19, 2025. Pursuant to the A’cheng Lease, lease payment shall be made as follows:
 
 
Year
 
 
Annual Lease Amount
 
Payment Due Date
March 2002 to February 2012
 
RMB
    25,000  
Before December 2012
March 2012 to February 2017
 
RMB
    25,000  
Before December 2017
March 2017 to March 2025
 
RMB
    25,000  
Before December 2025
 
For the three months ended June 30, 2012 and 2011, rent expense related to the A’cheng Lease amounted $987 and $961, respectively. For the six months ended June 30, 2012 and 2011, rent expense related to the A’cheng Lease amounted $1,976 and $1,909, respectively.
 
Future minimum rental payments required under the A’cheng Lease are as follows:
 
 
Twelve-month periods ending June 30:
  
   
2013
  
$
3,952
  
2014
  
 
3,952
  
2015
  
 
3,952
  
2016
  
 
3,952
  
2017
  
 
3,952
  
Thereafter
  
 
30,630
  
Total
  
$
50,390
  
 
See Note 11 for related party operating lease commitments.
 
Seedling Purchase and Sale Long-Term Cooperation Agreement
 
On November 25, 2010, HDS entered into a Seedling Purchase and Sale Long-Term Cooperation Agreement (the “Seedling Agreement”) with Wuchang City Xinlin Foresty Co., Ltd (“Xinlin”), pursuant to which HDS will sell yew seedlings to Xinlin at a price equal to 90% of HDS’s publicly-published wholesale prices. Xinlin has agreed to purchase from the Company 10,000 yew seedlings annually. The Company did not make sales under the Seedling Agreement for the three and six months ended June 30, 2012. For the three and six months ended June 30, 2011, the Company made sales of $111,868 and $309,155, respectively, under the Seedling Agreement.
 
 
22

 
 
Land Use Rights and Yew Forest Purchase
 
On March 4, 2010, the Company entered into Land Use Right and Seedling Transfer Agreement with Heilongjiang Pingshan Yew Comprehensive Development Co., Ltd., pursuant to which the Company acquired land use rights with an area of 15,865 mu and all yew trees and seedlings situated on such land, for an aggregate cost of RMB 80,152,900 (approximately $12,500,000). The purchase price was divided into three installments, each installment representing a parcel of land and the Company paid final installment in full during the six months ended June 30, 2012. As of June 30, 2012, there was no unpaid amount related to the Land Use Right and Seedling Transfer Agreement.
 
Options
 
Generally, the founders of a corporation in the United States receive shares of stock in consideration of the tangible and intangible assets contributed by them to the enterprise. Since the consideration for those shares is the transfer of assets, including intellectual property, and business know-how, sometimes referred to as “sweat equity”, no payment for such shares occurs.
 
However, unfamiliar with the usual way that founders acquire equity interests in corporations in the United States, the HDS Shareholders actually purchased their HDS Shareholders’ Stock between March 2008 and September 2009, for cash, in a series of four different offerings of YBP Common Stock during that period, at prices ranging between $0.02 and $0.10 per share, for an aggregate purchase price of $890,501.
 
As a result of the Contractual Arrangements of the Second Restructure, in which all of the profits of HDS will be paid under the terms of the Business Cooperation Agreement to JSJ, which is an indirect wholly-owned subsidiary of YBP, combined with the actual purchase by the HDS Shareholders of the HDS Shareholders’ Stock for cash, it could be viewed that Mr. Wang, Madame Qi and Mr. Han have, in effect, paid for their HDS Shareholders’ Stock twice.
 
Accordingly, it is the intention of the Company to rectify this situation by issuing a stock purchase option (a “Founder’s Option”) to each of Mr. Wang, Madame Qi and Mr. Han in an amount equal to the number of shares of YBP Common Stock that each of them currently owns. The terms of each Founder’s Option will be identical to each other except for the name of the optionee and the number of shares of YBP Common Stock subject to each such Founder’s Option. Those terms include:
 
 
 
The issuance of the Founder’s Option may be subject to pre-issuance approval or post-issuance ratification by our shareholders as described below;
 
 
 
Each Founder’s Option is fully vested upon issuance;
 
 
 
Each Founder’s Option may be exercised only upon the approval by the YBP shareholders of an amendment to YBP’s Articles of Incorporation increasing the number of shares of authorized Common Stock and the filing of an amendment of the Articles of Incorporation with the Secretary of State of Nevada;
 
 
 
Each Founder’s Option is exercisable for a period of five years;
 
 
 
Each Founder’s Option has an exercise price of $0.10 per share, which is the same price per share in the most recently completed offering of YBP’s Common Stock; and
 
 
 
Each Founder’s Option has a cashless exercise feature, pursuant to which, at the optionee’s election, he or she may choose not to pay the exercise price of the Founder’s Option and receive instead a reduced number of shares of YBP Common Stock reflecting the value of the number of shares of YBP Common Stock equal to the aggregate exercise price of the Founder’s Option.
 
 
23

 
 
Assuming the options are approved by the shareholders of the Company, the options will be valued on the date of grant using the Black-Scholes option pricing model, using the expected and implied volatility from its peer companies’ volatilities as the Company itself does not have historical trading history, expected dividends yield of 0%, expected term of 5 years and risk-free interest rate on the date of grant. The value of the options granted will be immediately recognized as the Company’s compensation expenses upon the issuance of the options. The number of shares of YBP Common Stock subject to each Founder’s Option is as follows:
 
 
Name of Optionee
  
Number of Shares
Subject to Option
 
Zhioguo Wang
  
 
20,103,475
  
Guifang Qi
  
 
2,488,737
  
Xingming Han
  
 
213,300
  
 
The terms of the Founder’s Option have not been determined as a result of arm’s-length negotiations. The Board of Directors of YBP, which consists of the same persons who are the HDS Shareholders and the grantees of the Founder’s Option, may seek shareholder approval or ratification of the issuance of the Founder’s Options.
 
To the extent that the Founder’s Options are exercised, assuming they are granted as described above, the number of shares to YBP Common Stock then held by each HDS Shareholder could as much double, which would be highly dilutive to the other existing YBP shareholders. The following chart shows the maximum effect of this dilution assuming full exercise of each Founder’s Option for cash:
 
 
Shareholder
  
Number
Shares
Presently
Held
 
  
Percentage
of Issued
Shares
Presently
Held
   
Number Shares
Held Assuming
Exercise of
Founder’s
Options
 
  
Percentage of
Issued Shares
Following Exercise
of Founder’s
Options
 
Zhiguo Wang
  
 
20,103,475
  
  
 
40.50
   
40,206,950
  
  
 
55.23
Guifang Qi
  
 
2,488,737
  
  
 
4.98
   
4,977,474
  
  
 
6.84
Xingming Han
  
 
213,300
  
  
 
0.43
   
426,600
  
  
 
0.58
All HDS Shareholders as a group (3 persons)
  
 
22,805,512
  
  
 
45.61
   
45,611,024
  
  
 
62.65
         
All other existing shareholders
  
 
27,194,488
  
  
 
54.39
   
27,194,488
  
  
 
37.35
Total
  
 
50,000,000
  
  
 
100.00
   
72,805,512
  
  
 
100.00
 
NOTE 15 – JOINT VENTURE AGREEMENT FOR PLANTING OF YEW TREES
 
On March 21, 2004, HDS entered into a Joint Venture Planting Agreement (the “Joint Venture Agreement”) with Wuchang City Forestry Bureau (the “Forest Bureau”), pursuant to which the Forest Bureau has given HDS access to 1,000,000 mu of forest land located in Wuchang City to develop yew tree forests and produce yew seedlings. Pursuant to the Joint Venture Agreement, the Company is required to plant yew trees on this land from 2004 to 2034. Any profits from the planting of yew trees and other agriculture shall be distributed 80% to the Company and 20% to the Forest Bureau. For the six months ended June 30, 2012 and 2011, the Company has not generated any revenues or activity on this land.
 
 
24

 
 
NOTE 16 – SUBSEQUENT EVENTS
 
The Company has evaluated all other subsequent events through August 14, 2012, and determined that there were no other subsequent events or transactions that require recognition or disclosures in the financial statements, except the following:
 
Related Party Lease
 
On July 1, 2012, the Company entered into a lease for office space with Mr. Wang (the “Far East Office Lease”). Pursuant to the Far East Office Lease, JSJ leases approximately 30 square meter of office space from Mr. Wang in Harbin. Rent under the Far East Office Lease is RMB 10,000 (approximately $1,600) annually. The term of the Far East Office Lease is three years and expires on June 30, 2015.
 
Land Use Right
 
On July 18, 2012, the Company entered into a land use agreement (the “Fuye Field Agreement”) with an individual in the PRC. Pursuant to the Fuye Field Agreement, HDS leasees 117.5 mu (approximately 19.6 acres) located at Fuye Field, Beizhao Village, Hongxing Town, A’cheng District in Helongjiang Province, PRC. The term of the Fuye Field Agreement is 16 years, through March 2028. During the term of the Fuye Field Agreement, HDS has the right to develop the property for the production of yew trees. In addition, HDS acquired a building and more than 80,000 trees – which are not yew trees – located on the property.
 
Payments to be made by the Company under the Fuye Field Agreement total RMB 15,002,300, payable as follows:
 
 
 
RMB 6,300,000 upon receipt by HDS of all related supporting documents and materials on the ownership and land use right of the property
 
 
 
RMB 3,700,000 on December 25, 2012
 
 
 
RMB 5,002,300 on or before December 25, 2013.
 
The Company prepaid the first installment of RMB 6,300,000 (approximately $1 million) in June 2012 and the amount was recorded in the Company’s deposit on land use right in the accompanying consolidated balance sheet at June 30, 2012. The Company presently expects to be able to make the additional payments required by the Fuye Field Agreement from cash-on-hand and net cash flow from operations.
 
 
25

 
 
NOTE 17 – RESTATEMENTS
 
The Company’s consolidated financial statements have been restated as of June 30, 2012 and December 31, 2011 to reflect the proper accounting treatment for slow-moving inventory and potential reserves for slow-moving inventory. Based on analysis of inventory, the Company determined that a reclassification of certain inventory should be made from current assets to long-term assets.   The Company originally recorded all inventory in current assets. However, based on analysis of inventory movement and analysis of its operating cycle of one year, it was subsequently determined that any inventory in excess of our current operating cycle of one year, based on historical and anticipated levels of sales, should be classified as long-term on its consolidated balance sheets. The classification of long-term inventory requires the Company to estimate the portion of inventory that can be realized over the next 12 months.
 
Accordingly, the Company restated its consolidated balance sheets as of June 30, 2012 and December 31, 2011. The Company did not restate its consolidated statements of income and comprehensive income or consolidated statement of cash flows for the periods ended June 30, 2012 and 2011. The respective restatement adjustments are non-cash in nature. These adjustments resulted in a decrease in our total current assets of $7,356,251 and $7,508,030 and an increase in long-term assets of $7,356,251 and $7,508,030 as of June 30, 2012 and December 31, 2011, respectively and summarized as follows:
 
   
June 30, 2012 (As Previously Reported)
   
Adjustments to Restate
   
June 30, 2012 (As Restated)
 
Consolidated Balance Sheet:
                 
Assets:
                 
Current Assets:
                 
    Inventories
  $ 8,329,457     $ (7,356,251 )   $ 973,206  
         Total Current Assets
    9,412,701       (7,356,251 )     2,056,450  
                         
Long-term Assets:
                       
   Inventories, net of current portion
    -       7,356,251       7,356,251  
                         
Total Assets
  $ 26,232,470     $ -     $ 26,232,470  
 
   
December 31, 2011 (As Previously Reported)
   
Adjustments to Restate
   
December 31, 2011 (As Restated)
 
Consolidated Balance Sheet:
                       
Assets:
                       
Current Assets:
                       
    Inventories
  $ 8,218,874     $ (7,508,030 )   $ 710,844  
         Total Current Assets
    8,951,678       (7,508,030 )     1,443,648  
                         
Long-term Assets:
                       
   Inventories, net of current portion
    -       7,508,030       7,508,030  
                         
Total Assets
  $ 24,902,097     $ -     $ 24,902,097  
 
 
26

 
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
We are a major grower and seller of yew trees and manufacturers of products made from yew trees, including potted yew trees for display in homes and offices, and handicrafts. We also sell branches and leaves of yew trees for the manufacture of TCM containing taxol, which TCM has been approved in the PRC for use as a secondary treatment of certain cancers, meaning it must be administered in combination with other pharmaceutical drugs. The yew industry is highly regulated in the PRC because the Northeast yew tree is considered an endangered species.
 
For the three and six months ended June 30, 2012 and 2011, we operated in three reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees, including potted miniature yew trees; and (3) the handicrafts segment, consisting of the manufacture and sale of furniture and handicrafts made of yew timber. Our reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of our operations are conducted in the PRC. We are located in Harbin, Heilongjiang Province, China.
 
For the three months ended June 30, 2012, revenues from the sale of TCM raw materials represented approximately 64.3% of consolidated revenue (including 4.6% of consolidated revenues to related parties); sale of yew trees represented approximately 35.3% of consolidated revenue; and the sale of handicrafts represented approximately 0.4% of consolidated revenue (including 0.1% of consolidated revenues to related parties). For the six months ended June 30, 2012, revenues from the sale of TCM raw materials represented approximately 56.8% of consolidated revenue (including 4.6% of consolidated revenues to related parties); sale of yew trees represented approximately 42.1% of consolidated revenue; and the sale of handicrafts represented approximately 1.1% of consolidated revenue (including 0.1% of consolidated revenues to related parties).
 
For the three months ended June 30, 2011, revenues from the sale of TCM raw materials represented approximately 63.3% of consolidated revenue (including 21.8% of consolidated revenues to related parties); sale of yew trees represented approximately 33.6% of consolidated revenue; and the sale of handicrafts represented approximately 0.3% of consolidated revenue. For the six months ended June 30, 2011, revenues from the sale of TCM raw materials represented approximately 56.1% of consolidated revenue (including 28.6% of consolidated revenues to related parties); sale of yew trees represented approximately 41.9% of consolidated revenue; and the sale of handicrafts represented approximately 2.1% of consolidated revenue.
 
All of our revenues were generated by HDS. Other than expenses (approximately $126,000 and $58,000 for the six months ended June 30, 2012 and 2011, respectively) incurred primarily related to meeting its reporting requirements in the U.S., YBP has no other significant business operations. At June 30, 2012, YBP has approximately $10,000 in cash and holds the 100% equity interests in its subsidiaries Yew HK and JSJ. Yew HK itself has no business operations or assets other than holding of equity interests in JSJ. JSJ has no business operations and assets with a book value of approximately $114,000, including approximately $95,000 in cash at June 30, 2012. JSJ also holds the VIE interests in HDS through the contractual arrangements (the “Contractual Arrangements”) described in Note 1 to Notes to Consolidated Financial Statements. In the event we are unable to enforce the Contractual Agreements, we may not be able to exert effective control over HDS, and our ability to conduct our business may be materially and adversely affected. If the applicable PRC authorities invalidate our Contractual Agreements for violation of PRC laws, rules and regulations, in such an event, we would lose control of the VIE resulting in its deconsolidation in financial reporting and severe loss in our marked valuation.
 
 
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Critical accounting policies and estimates
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.
 
Variable interest entities
 
Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, we are required to include in our consolidated financial statements the financial statements of VIEs. The accounting standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity. HDS is considered a VIE, and we are the primary beneficiary. We entered into agreements with the HDS pursuant to which we shall receive 100% of HDS’s net income. In accordance with these agreements, HDS shall pay consulting fees equal to 100% of its net income to our wholly-owned subsidiary, JSJ and JSJ shall supply the technology and administrative services needed to service the HDS.
 
The accounts of HDS are consolidated in the accompanying financial statements. As VIEs, HDS’ sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of HDS’ net income, and their assets and liabilities are included in our consolidated balance sheets. The VIEs do not have any non-controlling interest and, accordingly, we did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in HDS that require consolidation of HDS’ financial statements with our financial statements.
 
 
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As required by ASC 810-10, we perform a qualitative assessment to determine whether we are the primary beneficiary of HDS which is identified as a VIE of the Company. A quality assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and the parties involved in the design of the entity. The significant terms of the agreements between us and HDS are discussed above in the “Corporate Structure and Recapitalization - Second Restructure” section. Our assessment on the involvement with HDS reveals that we have the absolute power to direct the most significant activities that impact the economic performance of HDS. JSJ, our wholly own subsidiary, is obligated to absorb a majority of the risk of loss from HDS activities and entitles JSJ to receive a majority of HDS’s expected residual returns. In addition, HDS’s shareholders have pledged their equity interest in HDS to JSJ, irrevocably granted JSJ an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the equity interests in HDS and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by JSJ. Under the accounting guidance, we are deemed to be the primary beneficiary of HDS and the results of HDS are consolidated in our consolidated financial statements for financial reporting purposes.
 
Accordingly, as a VIE, HDS’s sales are included in our total sales, its income from operations is consolidated with our income from operations and our net income includes all of HDS’s net income. All the equity (net assets) and profits (losses) of HDS are attributed to us. Therefore, no non-controlling interest in HDS is presented in the Company’s consolidated financial statements. As we do not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income attributable to us. Because of the Contractual Arrangements, YBP has a pecuniary interest in HDS that requires consolidation of HDS’s financial statements with those of ours.
 
Additionally, pursuant to ASC 805, as YBP and HDS are under the common control of the HDS Shareholders, the Second Restructure was accounted for in a manner similar to a pooling of interests. As a result, our historical amounts in the accompanying consolidated financial statements give retrospective effect to the Second Restructure, whereby our assets and liabilities are reflected at the historical carrying values and their operations are presented as if they were consolidated for all periods presented, with our results of operations being consolidated from the date of the Second Transfer Agreement. The accounts of HDS are consolidated in the accompanying financial statements.
 
Accounts receivable
 
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. The Company recognized the probability of the collection for each customer and believes the amount of the balance as of June 30, 2012 could be collected and accordingly, the Company did not record any allowance for doubtful accounts.
 
 
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Inventories
 
Inventories, consisting of raw materials, work in process, Yew seedlings and finished goods related to the Company’s Yew products are stated at the lower of cost or market value utilizing the weighted average method. Raw materials primarily include Yew wood used in the production of Yew products such as furniture, ornaments, and other products containing Yew wood. Finished goods, consisting of Yew products include direct materials, direct labor and an appropriate proportion of overhead.
 
We estimate the amount of the excess inventories by comparing inventory on hand with the estimated sales that can be sold within our normal operating cycle of one year.  Any inventory in excess of our current requirements based on historical and anticipated levels of sales is classified as long-term on our consolidated balance sheets. Our classification of long-term inventory requires us to estimate the portion of inventory that can be realized over the next 12 months.
 
To estimate the amoun