10-Q 1 f10q0613_yewbio.htm QUARTERLY REPORT Unassociated Document


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

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, 2013

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 x No ¨

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 12, 2013, 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 SIX-MONTH PERIOD ENDED JUNE 30, 2013
TABLE OF CONTENTS
 
   
Page
Number
 
PART I. FINANCIAL INFORMATION
     
ITEM 1.
FINANCIAL STATEMENTS
4
     
 
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012
4
     
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE-AND SIX-MONTH PERIODS ENDED JUNE 30, 2013 AND JUNE 30, 2012
5
     
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE  SIX-MONTH PERIOD ENDED JUNE 30, 2013 AND JUNE 30, 2012
6
     
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
22
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
38
     
ITEM 4.
CONTROLS AND PROCEDURES
38
 
PART II. OTHER INFORMATION
     
ITEM 1.
LEGAL PROCEEDINGS
39
     
ITEM 1A.
RISK FACTORS
39
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
39
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
39
     
ITEM 4.
MINE SAFETY DISCLOSURES
39
     
ITEM 5.
OTHER INFORMATION
39
     
ITEM 6.
EXHIBITS
39
 
 
 

 
 
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 raw materials, including a related party ;
 
our dependence on a small number of customers for our yew trees for reforestation;
 
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;
 
any impairment of any of our assets;
 
a slowdown in the Chinese banking industry, including the availability of credit; 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 19 of our Annual Report on Form 10-K for the year ended December 31, 2012.
 
 
 

 
 
PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS:
           
    Cash
  $ 30,021     $ 386,821  
    Accounts receivable
    1,767,073       722,598  
    Accounts receivable - related party
    1,486,700       284,986  
    Inventories
    1,247,219       991,234  
    Prepaid expenses and other assets
    24,465       150  
    Prepaid expenses - related parties
    47,556       60,245  
                 
       Total Current Assets
    4,603,034       2,446,034  
                 
LONG-TERM ASSETS:
               
    Inventories, net of current portion
    9,755,424       9,382,164  
    Property and equipment, net
    801,397       885,969  
    Land use rights and yew forest assets, net
    15,736,290       15,328,318  
                 
       Total Long-term Assets
    26,293,111       25,596,451  
                 
       Total Assets
  $ 30,896,145     $ 28,042,485  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
    Accounts payable
  $ 3,996     $ 990  
    Accrued expenses and other payables
    187,423       199,098  
    Taxes payable
    2,997       5,722  
    Due to related parties
    50,387       47,876  
                 
       Total Current Liabilities
    244,803       253,686  
                 
       Total Liabilities
    244,803       253,686  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS' EQUITY:
               
    Preferred stock ($0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively)
    -       -  
    Common stock ($0.001 par value;  140,000,000 shares authorized;  50,000,000 issued and outstanding at June 30, 2013 and December 31, 2012, respectively)
    50,000       50,000  
    Additional paid-in capital
    10,396,377       10,396,377  
    Retained earnings
    15,199,568       13,182,032  
    statutory reserves
    2,426,978       2,179,494  
    Accumulated other comprehensive income - foreign currency translation adjustment
    2,578,419       1,980,896  
                 
       Total Shareholders' Equity
    30,651,342       27,788,799  
                 
       Total Liabilities and Shareholders' Equity
  $ 30,896,145     $ 28,042,485  
 
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,
 
   
2013
   
2012
   
2013
   
2012
 
REVENUES:
                       
    Revenues
  $ 1,143,880     $ 1,905,421     $ 2,584,871     $ 3,300,074  
    Revenues - related party
    962,486       -       1,320,435       159,692  
                                 
       Total Revenues
    2,106,366       1,905,421       3,905,306       3,459,766  
                                 
COST OF REVENUES:
                               
    Cost of revenues
    206,310       297,744       701,969       580,548  
    Cost of revenues - related party
    299,212       -       382,222       25,224  
                                 
       Total Cost of Revenues
    505,522       297,744       1,084,191       605,772  
                                 
GROSS PROFIT
    1,600,844       1,607,677       2,821,115       2,853,994  
                                 
OPERATING EXPENSES:
                               
    Selling
    6,079       5,350       11,693       11,237  
    General and administrative
    271,908       150,062       543,869       363,773  
                                 
       Total Operating Expenses
    277,987       155,412       555,562       375,010  
                                 
INCOME FROM OPERATIONS
    1,322,857       1,452,265       2,265,553       2,478,984  
                                 
OTHER INCOME (EXPENSES):
                               
    Interest income
    42       1,509       84       1,588  
    Other income (expense)
    (200 )     (361 )     (617 )     (361 )
                                 
       Total Other Income (Expenses)
    (158 )     1,148       (533 )     1,227  
                                 
NET INCOME
  $ 1,322,699     $ 1,453,413     $ 2,265,020     $ 2,480,211  
                                 
COMPREHENSIVE INCOME:
                               
    NET INCOME
  $ 1,322,699     $ 1,453,413     $ 2,265,020     $ 2,480,211  
                                 
    OTHER COMPREHENSIVE INCOME:
                               
       Foreign currency translation adjustment
    442,871       21,762       597,523       167,667  
                                 
    COMPREHENSIVE INCOME
  $ 1,765,570     $ 1,475,175     $ 2,862,543     $ 2,647,878  
                                 
NET INCOME PER COMMON SHARE:
                               
    Basic
  $ 0.03     $ 0.03     $ 0.05     $ 0.05  
    Diluted
  $ 0.03     $ 0.03     $ 0.05     $ 0.05  
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
                         
    Basic
    50,000,000       50,000,000       50,000,000       45,563,187  
    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,
 
         
 
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:  
           
  Net income
  $ 2,265,020     $ 2,480,211  
  Adjustments to reconcile net income to net cash provided by operating activities:  
               
    Depreciation  
    102,954       103,200  
    Amortization of land use rights and yew forest assets   
    178,817       172,171  
    Loss on disposal of fixed assets   
    420       -  
  Changes in operating assets and liabilities:  
               
    Accounts receivable  
    (1,019,696 )     (316,181 )
    Accounts receivable - related party  
    (1,184,390 )     -  
    Prepaid expenses and other assets  
    (24,082 )     (1,739 )
    Prepaid expenses - related parties  
    13,801       (70,625 )
    Inventories  
    (186,105 )     (40,286 )
    Accounts payable  
    2,957       (1,306,617 )
    Accrued expenses and other payables  
    (14,358 )     (40,191 )
    Due to related parties  
    2,448       22,473  
    Taxes payable  
    (2,824 )     655  
    Advances from customers  
    -       232,077  
         
               
NET CASH PROVIDED BY OPERATING ACTIVITIES  
    134,962       1,235,148  
         
               
CASH FLOWS FROM INVESTING ACTIVITIES:  
               
    Purchase of property and equipment  
    (3,084 )     (46,305 )
    Payments for yew forest assets  
    (493,878 )     -  
    Deposit on land use right  
    -       (995,969 )
         
               
NET CASH USED IN INVESTING ACTIVITIES  
    (496,962 )     (1,042,274 )
         
               
CASH FLOWS FROM FINANCING ACTIVITIES:  
               
    Repayments for related parties advances   
    -       (236,595 )
         
               
NET CASH USED IN FINANCING ACTIVITIES  
    -       (236,595 )
         
               
EFFECT OF EXCHANGE RATE ON CASH  
    5,200       5,258  
         
               
NET DECREASE IN CASH  
    (356,800 )     (38,463 )
         
               
CASH  - beginning of period  
    386,821       732,371  
         
               
CASH - end of period
  $ 30,021     $ 693,908  
         
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
  Cash paid for:  
               
      Interest
  $ -     $ -  
      Income taxes
  $ -     $ -  
         
               
  Non-cash investing and financing activities   
               
      Shares issued for refundable common stock subscription
  $ -     $ 950,000  
 
See notes to unaudited consolidated financial statements
 
 
6

 
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013

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 (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of December 31, 2012 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 summary of significant accounting policies and notes to consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.

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, 2013, and the results of operations and cash flows for the six-month period ended June 30, 2013 and 2012, have been made.

The preparation of consolidated financial statements in accordance with U.S. 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
October 29, 2009
 
USD $ 100,000
 
100%
 
Holding company
                 
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
 
Sales of yew tree components for use in pharmaceutical industry; sales of yew tree seedlings and potted yew trees; and the manufacture of yew tree wood handicrafts

 
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.

Pursuant to a restructuring plan intended to ensure compliance with applicable PRC laws and regulations (the “Second Restructure”), on November 5, 2010, JSJ entered into a series of contractual arrangements (the “Contractual Arrangements”) with HDS and/or Zhiguo Wang, his wife Guifang Qi and Xingming Han (collectively with Mr. Wang and Madame Qi, 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.

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.
 
 
8

 
 
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.
 
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.
 
 
9

 
 
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, 2013, JSJ has 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 traditional Chinese medicine (“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.

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, 2013 and December 31, 2012, 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 was as follows:

Assets
 
June 30,
2013
   
December 31,
2012