10-Q 1 f10q0912_yewbio.htm FORM 10-Q f10q0912_yewbio.htm


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 SEPTEMBER 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  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 November 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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012
 
TABLE OF CONTENTS
 
     
   
Page
Number
 
PART I. FINANCIAL INFORMATION
     
ITEM 1.
FINANCIAL STATEMENTS
4
     
 
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011
4
     
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)  FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30, 2011
5
     
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30, 2011
6
     
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
24
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
43
     
ITEM 4.
CONTROLS AND PROCEDURES
43
 
PART II. OTHER INFORMATION
     
ITEM 1.
LEGAL PROCEEDINGS
44
     
ITEM 1A.
RISK FACTORS
44
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
44
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
44
     
ITEM 4.
MINE SAFETY DISCLOSURES
44
     
ITEM 5.
OTHER INFORMATION
44
     
ITEM 6.
EXHIBITS
44
 
 
 

 
 
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;
 
 
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.

 
 

 
 
PART I
 
FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
 
   
September 30, 2012
   
December 31, 2011
 
   
(Unaudited)
   
(As Restated)
 
ASSETS
           
CURRENT ASSETS:
           
    Cash
  $ 567,798     $ 732,371  
    Accounts receivable
    530,471       -  
    Inventories
    899,783       710,844  
    Prepaid rent - related party
    67,292       -  
    Prepaid expenses and other assets
    14,245       433  
        Total Current Assets
    2,079,589       1,443,648  
LONG-TERM ASSETS:
               
    Inventories, net of current portion
    9,703,596       7,508,030  
    Property and equipment, net
    838,002       784,222  
    Land use rights and yew forest assets, net
    15,034,720       15,166,197  
        Total long-term assets
    25,576,318       23,458,449  
        Total Assets
  $ 27,655,907     $ 24,902,097  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
    Accounts payable
  $ 915,792     $ 1,360,611  
    Accrued expenses and other payables
    49,939       119,901  
    Taxes payable
    11,303       500  
    Refundable common stock subscription
    -       950,000  
    Due to related parties
    56,098       266,488  
        Total Current Liabilities
    1,033,132       2,697,500  
        Total Liabilities
    1,033,132       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 September 30, 2012 and December 31, 2011, respectively)
    50,000       40,500  
    Additional paid-in capital
    8,149,470       7,208,970  
    Retained earnings
    14,465,223       11,469,172  
    Statutory reserves
    2,049,906       1,686,087  
    Accumulated other comprehensive income - foreign currency translation adjustment
    1,908,176       1,799,868  
        Total Shareholders' Equity
    26,622,775       22,204,597  
                 
        Total Liabilities and Shareholders' Equity
  $ 27,655,907     $ 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 September 30,
   
For the Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
REVENUES:
                       
    Revenues
  $ 930,557     $ 954,122     $ 4,230,631     $ 3,246,602  
    Revenues - related party
    442,467       251,876       602,159       1,169,688  
        Total Revenues
    1,373,024       1,205,998       4,832,790       4,416,290  
                                 
COST OF REVENUES:
                               
    Cost of revenues
    146,409       220,121       726,957       691,588  
    Cost of revenues - related party
    84,528       41,009       109,752       297,004  
        Total Cost of Revenues
    230,937       261,130       836,709       988,592  
GROSS PROFIT
    1,142,087       944,868       3,996,081       3,427,698  
OPERATING EXPENSES:
                               
     Selling
    6,643       8,455       17,880       42,640  
     General and administrative
    256,013       221,654       619,786       533,595  
        Total Operating Expenses
    262,656       230,109       637,666       576,235  
INCOME FROM OPERATIONS
    879,431       714,759       3,358,415       2,851,463  
OTHER INCOME (EXPENSES):
                               
     Interest income
    474       263       2,062       1,712  
     Other (expense)
    (246 )     (2,717 )     (607 )     (14,838 )
        Total Other Income (Expenses)
    228       (2,454 )     1,455       (13,126 )
NET INCOME
  $ 879,659     $ 712,305     $ 3,359,870     $ 2,838,337  
COMPREHENSIVE INCOME:
                               
      NET INCOME
  $ 879,659     $ 712,305     $ 3,359,870     $ 2,838,337  
                                 
  OTHER COMPREHENSIVE INCOME:
                               
Unrealized foreign currency translation   gain (loss)
    (59,359 )     158,519       108,308       582,653  
                                 
      COMPREHENSIVE INCOME
  $ 820,300     $ 870,824     $ 3,468,178     $ 3,420,990  
NET INCOME PER COMMON SHARE:
                               
        Basic
  $ 0.02     $ 0.02     $ 0.07     $ 0.07  
        Diluted
  $ 0.02     $ 0.01     $ 0.07     $ 0.06  

See notes to unaudited consolidated financial statements
 
5

 
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
   
For the Nine Months Ended September 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 3,359,870     $ 2,838,337  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation
    158,502       128,086  
Amortization of land use rights and yew forest assets
    259,221       213,131  
Loss on disposal of fixed assets
    -       9,877  
Changes in operating assets and liabilities:
               
Accounts receivable
    (531,020 )     -  
Inventories
    (2,335,370 )     859,356  
Prepaid and other current assets
    (13,812 )     (5,043 )
Prepaid rent- related party
    (67,361 )     -  
Accounts payable
    (451,897 )     501,672  
Accrued expenses and other payables
    (66,648 )     2,234  
Due to related parties
    27,247       -  
Taxes payable
    7,081       (5,935 )
Advances from customers
    -       (173,686 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
    345,813       4,368,029  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from disposal of property and equipment
    -       19,982  
Purchase of property and equipment
    (208,524 )     (133,678 )
Purchase of land use rights and yew forest assets
    (65,749 )     (5,494,788 )
NET CASH USED IN INVESTING ACTIVITIES
    (274,273 )     (5,608,484 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayments to related party
    (239,043 )     -  
Proceeds from related party advances
    -       137,480  
Proceeds from directors advances
    -       62,944  
                 
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    (239,043 )     200,424  
                 
EFFECT OF EXCHANGE RATE ON CASH
    2,930       (21,968 )
                 
NET (DECREASE) IN CASH
    (164,573 )     (1,061,999 )
                 
CASH  - beginning of period
    732,371       1,850,488  
                 
CASH - end of period
  $ 567,798     $ 788,489  
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. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2012, and the results of operations and cash flows for the nine-month period ended September 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
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
  
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.
 
 
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.
 
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.
 
 
9

 
 
As of September 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.
 
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 September 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:

   
September 30, 2012
   
December 31, 2011
 
Assets
           
Cash
  $ 506,987     $ 479,494  
Accounts receivable
    530,470       -  
Inventories (current and long-term)
    10,603,379       8,218,874  
Prepaid expenses and other assets
    1,595       283  
Prepaid rent - related party
    64,529       -  
Property and equipment, net
    735,639       750,779  
Land use rights and yew forest assets, net
    15,034,720       15,166,197  
Total assets of VIE
  $ 27,477,319     $ 24,615,627  
                 
Liabilities
               
Accounts payable
  $ 900,489     $ 1,360,611  
Accrued expenses and other payables
    23,163       73,727  
Taxes payable
    8,142       1,049  
Due to VIE holding companies
    2,058,426       2,164,107  
Due to related parties
    6,623       240,159  
Total liabilities of VIE
  $ 2,996,843     $ 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).

 
10

 
 
NOTE 3 – RESTATEMENTS
 
The Company’s consolidated financial statements have been restated as of 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 sheet as of December 31, 2011. The Company did not restate its consolidated statements of income and comprehensive income or consolidated statement of cash flows for the period ended September 30, 2011. The respective restatement adjustments are non-cash in nature. These adjustments resulted in a decrease in our total current assets of $7,508,030 and an increase in long-term assets of $7,508,030 as of December 31, 2011, respectively and summarized as follows:
 
   
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
 

NOTE 4 – INVENTORIES
 
Inventories consisted of raw materials, work-in-progress, finished goods-handicrafts, yew seedlings and other trees (consisting of larix, spruce and poplar trees). The Company classifies its inventories based on its historical and anticipated levels of sales; any inventory in excess of its normal operating cycle of one year is classified as long-term on its consolidated balance sheets.  As of September 30, 2012 and December 31, 2011, inventories consisted of the following:

   
September 30, 2012
   
December 31, 2011
 
   
Current portion
   
Long-term portion
   
Total
   
Current portion
   
Long-term portion
   
Total
 
Raw materials
  $ 208,862     $ 2,727,438     $ 2,936,300     $ 29,401     $ 2,817,980     $ 2,847,381  
Work-in-process
    18,732       -       18,732       18,642       -       18,642  
Finished goods - handicrafts
    229,740       631,004       860,744       236,854       687,258       924,112  
Yew seedlings
    442,449       4,125,309       4,567,758       425,947       4,002,792       4,428,739  
Other trees
    -       2,219,845       2,219,845       -       -        -  
    $ 899,783     $ 9,703,596     $ 10,603,379     $ 710,844     $ 7,508,030     $ 8,218,874  

 
11

 
 
NOTE 5 – PROPERTY AND EQUIPMENT
 
Property and equipment consisted of the following as of September 30, 2012 and December 31, 2011:

   
September 30, 2012
   
December 31, 2011
 
Buildings and building improvements
  $ 351,321     $ 267,015  
Machinery and equipment
    522,939       520,416  
Office equipment
    46,207       44,841  
Leasehold improvement
    53,019       52,763  
Motor vehicles
    639,885       513,280  
      1,613,371       1,398,315  
Less: accumulated depreciation
    (775,369 )     (614,093 )
    $ 838,002     $ 784,222  

For the three months ended September 30, 2012 and 2011, depreciation expense amounted to $55,302 and $44,150, respectively.  For the nine months ended September 30, 2012 and 2011, depreciation expenses amounted to $158,502 and $128,086, respectively.
 
NOTE 6 – 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 and leaves that will be used by the Company’s customers for production of TCM. 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 September 30, 2012 and 2011, amortization expense amounted to $87,050 and $88,830, respectively. For the nine months ended September 30, 2012 and 2011, amortization expense amounted to $259,221 and $213,131, respectively. As of September 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
Parcel E
Undeveloped forest land
 
16
 
7/2012
 
3/2028
 
117.5

At September 30, 2012 and December 31, 2011, land and yew forest use rights consisted of the following:

 
Useful life
 
September 30, 2012
 
December 31, 2011
Land and yew forest use rights
16-50 years
 
 $       15,675,733
 
 $               15,546,414
Less: accumulated amortization
   
            (641,013)
 
                 (380,217)
Total
   
 $        15,034,720
 
 $               15,166,197

 
12

 
 
Amortization of land and yew forest use rights attributable to future periods is as follows:

Twelve-month periods ending September 30:
 
Amount
 
2013
  $ 348,056  
2014
    348,056  
2015
    348,056  
2016
    348,056  
2017
    348,056  
2018 and thereafter
    13,294,440  
Total
  $ 15,034,720  

NOTE 7 – ACCRUED EXPENSES AND OTHER PAYABLES
 
At September 30, 2012 and December 31, 2011, accrued expenses and other payables consisted of the following:

   
September 30, 2012
   
December 31, 2011
 
Accrued wage
  $ 19,939     $ 16,844  
Accrued professional fees
    10,000       75,029  
Other
    20,000       28,028  
Total
  $ 49,939     $ 119,901  

NOTE 8 – TAXES
 
(a) Federal Income Tax and Enterprise Income Taxes
 
The Company is incorporated 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 September 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 nine months ended September 30, 2012 and 2011:

   
Nine Months Ended September 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
    -       -  
 
Income before income tax expenses of $879,659 and $712,305 for the three months ended September 30, 2012 and 2011, respectively, and $3,359,870 and $2,838,337 for the nine months ended September 30, 2012 and 2011, respectively, was attributed to subsidiaries with operations in China. No income tax expense related to China income incurred for the nine months ended September 30, 2012 and 2011.
 
 
13

 
 
The combined effects of the income tax expense exemptions and tax reductions available to the Company for the three and nine months ended September 30, 2012 and 2011 are as follows:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Tax exemption effect
  $ 255,902     $ 188,982     $ 909,548     $ 737,027  
Basic net income per share effect
  $ (0.01 )   $ (0.00 )   $ (0.02 )   $ (0.02 )
Diluted net income per share effect
  $ (0.01 )   $ (0.00 )   $ (0.02 )   $ (0.01 )

The Company has incurred United States net operating loss for income tax purposes for the three and nine months ended September 30, 2012 and 2011. The net operating loss carry forwards for United States income tax purposes amounted to $830,018 and $564,438 at September 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 September 30, 2012 and December 31, 2011. The valuation allowance at September 30, 2012 and December 31, 2011 was approximately $282,206 and $191,909, respectively. The net change in the valuation allowance was an increase of $47,527 and $13,566 during the three months ended September 30, 2012 and 2011, respectively, and $90,297 and $33,224 during the nine months ended September 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 $15.3 million and $12.0 million as of September 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.
 
The Company did not have any interest and penalty provided or recognized in the income statements for the three and nine months ended September 30, 2012 and 2011 or balance sheet as of September 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.

 
14

 
 
NOTE 9 – 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 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 September 30, 2012 and December 31, 2011.
 
NOTE 10 – 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.
 
The following table presents a reconciliation of basic and diluted net income per share for the three months ended September 30, 2012 and 2011:
 
   
Three Months Ended September 30,
 
   
2012
   
2011
 
Net income available to common stockholders for basic and diluted net income per share of common stock
  $ 879,659     $ 712,305  
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
  $ 0.02     $ 0.02  
Net income per common share - diluted
  $ 0.02     $ 0.01  

 
15

 

The following table presents a reconciliation of basic and diluted net income per share for the nine months ended September 30, 2012 and 2011:

   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Net income available to common stockholders for basic and diluted net income per share of common stock
  $ 3,359,870     $ 2,838,337  
Weighted average common stock outstanding - basic
    47,052,920       40,500,000  
Effect of dilutive securities:
               
Subscribed common shares issuable and subject to recession
    2,947,080       9,500,000  
Weighted average common stock outstanding - diluted
    50,000,000       50,000,000  
Net income per common share - basic
  $ 0.07     $ 0.07  
Net income per common share - diluted
  $ 0.07     $ 0.06  

NOTE 11 – CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
 
Customers
 
For the three and nine months ended September 30, 2012 and 2011, customers accounting for 10% or more of the Company’s revenue were as follows:

     
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Customer
   
2012
   
2011
   
2012
   
2011
 
A       20 %     27 %     16 %     28 %
B       32 %     21 %     12 %     26 %
C       13 %     24 %     14 %     14 %
D       *       18 %     *       *  
E       17 %     *       14 %     *  
F       *       *       11 %     *  
G       *       *       13 %     *  

*
Less than10%
 
Three of the Company’s top five largest customers for the nine months ended September 30, 2012 accounted for 100% of the Company’s accounts receivable at September 30, 2012. The Company did not have any accounts receivable at December 31, 2011.
 
Suppliers
 
For the three and nine months ended September 30, 2012, the Company did not make any purchases of yew seedlings. In connection with an agreement to acquire a land use right (see Note 15) in July 2012 (the “Fuye Field Agreement”), the Company acquired more than 80,000 trees - which are not yew trees - for approximately $2.2 million (the amount was included in the land use right agreement as part of the purchase price) from an individual.  For the three and nine months ended September 30, 2012, this purchase  accounted for 100% and 95%, respectively, of the Company’s purchase of yew seedlings and other trees  and the Company had accounts payable of $895,532 related to the supplier at September 30, 2012. For the three months ended September 30, 2011, the Company did not make any purchases of yew seedlings. For the nine months ended September 30, 2011, one company accounted for 94% of the Company’s purchase of yew seedlings and the Company had accounts payable of $2,379,308 related to the supplier at September 30, 2011.
 
 
16

 
 
NOTE 12 – 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 nine months ended September 30, 2012 and 2011, the Company recorded revenues from this related party, as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
Name of related party
 
2012
   
2011
   
2012
   
2011
 
Yew pharmaceutical
  $ 442,467     $ 251,876     $ 602,159     $ 1,169,688  
Total
  $ 442,467     $ 251,876     $ 602,159     $ 1,169,688  

At September 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 September 30, 2012 and 2011, sales to Yew Pharmaceutical under the Development Agreement amounted to $442,467 and $251,876, respectively. For the nine months ended September 30, 2012 and 2011, sales to Yew Pharmaceutical under the Development Agreement amounted to $600,558 and $1,169,688, respectively. At September 30, 2012 and December 31, 2011, the Company did not have any accounts receivable from Yew Pharmaceutical.
 
Purchases
 
For the three and nine months ended September 30, 2012 and 2011, the Company did not make any material purchases from its related party companies. At September 30, 2012 and December 31, 2011, there were no accounts payable amounts related to related parties.

 
17

 

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 September 30, 2012 and 2011, rent expense related to the ZTC Lease amounted to $6,414 and $6,323, respectively. For the nine months ended September 30, 2012 and 2011, rent expense related to the ZTC Lease amounted to $19,255 and $18,727, respectively. At September 30, 2012, prepaid rent to ZTC amounted to $64,118. 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 consolidated 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 September 30, 2012 and 2011, rent expense related to the Store Lease amounted to $616 and $467, respectively. For the nine months ended September 30, 2012 and 2011, rent expense related to the Store Lease amounted to $1,849 and $1,383, respectively. At September 30, 2012, prepaid rent to Madame Qi amounted to $411.
 
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 September 30, 2012 and 2011, rent expense related to the Office Lease amounted $592 and $584, respectively. For the nine months ended September 30, 2012 and 2011, rent expense related to the Office Lease amounted $1,778 and $1,729, respectively.
 
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. For the three and nine months ended September 30, 2012, rent expense related to the Far East Office Lease amounted $395. At September 30, 2012, prepaid rent to Mr. Wang related to the Far East Office Lease amounted to $2,763.
 
At September 30, 2012, the total prepaid rent for above operating lease amounted to $67,292 which was included in prepaid rent – related parties on the accompanying consolidated balance sheets.

Future minimum rental payments required under the related party operating leases are as follows:

Twelve-month periods ending September 30:
     
2013
  $ 32,057  
2014
    32,057  
2015
    29,610  
2016
    28,015  
2017
    28,015  
Thereafter
    468,366  
Total
  $ 618,120  

 
18

 
 
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 party amount at September 30, 2012 and December 31, 2011 is as follows:
   
Due to related party
 
Name of related party
 
September 30, 2012
   
December 31, 2011
 
Zhiguo Wang
  $ 54,409     $ 31,357  
Yew Pharmaceutical
    -       62,847  
Madame Qi
    1,689       -  
ZTC
    -       172,284  
Total
  $ 56,098     $ 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 September 30, 2012, Kairun has not yet completed the services provided for in the Technology Agreement and, therefore, no payment was made to Kairun.
 
NOTE 13 – 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 September 30, 2012 and 2011, the Company appropriated to the statutory surplus reserve in the amount of $102,361 and $75,593, respectively. For the nine months ended September 30, 2012 and 2011, the Company appropriated to the statutory surplus reserve in the amount of $363,819 and $294,811, respectively. The accumulated balance of the statutory reserve of the Company as of September 30, 2012 and December 31, 2011 was $2,049,906 and $1,686,087, respectively.

NOTE 14 – SEGMENT INFORMATION
 
ASC 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.

 
19

 
 
During the three and nine months ended September 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.

Information with respect to these reportable business segments for the three and nine months ended September 30, 2012 and 2011 is as follows:
 
   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
TCM raw materials
  $ 893,909     $ 859,497     $ 2,860,552     $ 2,659,234  
Yew trees
    396,416       322,015       1,853,504       1,665,665  
Handicrafts
    82,699       24,486       118,734       91,391  
      1,373,024       1,205,998       4,832,790       4,416,290  
Cost of revenues:
                               
TCM raw materials
    158,354       161,226       446,436       640,843  
Yew trees
    21,395       88,380       320,410       287,681  
Handicrafts
    51,188       11,524       69,863       60,068  
      230,937       261,130       836,709       988,592  
 
Depreciation and amortization:
                               
TCM raw materials
    84,334       95,545       253,157       208,248  
Yew trees
    14,573       13,020       41,638       37,485  
Handicrafts
    7,428       9,538       23,532       23,824  
Other
    36,017       14,877       99,396       71,660  
      142,352       132,980       417,723       341,217  
Net income (loss):
                               
TCM raw materials
    735,555       698,271       2,414,116       2,018,391  
Yew trees
    375,021       233,635       1,533,094       1,377,984  
Handicrafts
    31,511       12,962       48,871       31,323  
Other
    (262,428 )     (232,563 )     (636,211 )     (589,361 )
    $ 879,659     $ 712,305     $ 3,359,870     $ 2,838,337  

   
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     $ 61,436     $ -     $ 130,385     $ 5,707,411  

   
September 30, 2012
 
   
TCM raw materials
   
Yew trees
   
Handicrafts
   
Other
   
Total
 
Identifiable long-lived assets, net
  $ 14,687,708     $ 739,908     $ 130,936     $ 314,170     $ 15,872,722  
Expenditures for segment assets
  $ 65,749     $ 83,098     $ -     $ 125,426     $ 274,273  
 
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.
 
 
20

 
 
NOTE 15 – 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 September 30, 2012 and 2011, rent expense related to the A’cheng Lease amounted $987 and $973, respectively. For the nine months ended September 30, 2012 and 2011, rent expense related to the A’cheng Lease amounted $2,963 and $2,882, respectively.
 
Future minimum rental payments required under the A’cheng Lease are as follows:

Twelve-month periods ending September 30:
     
2013
  $ 3,947  
2014
    3,947  
2015
    3,947  
2016
    3,947  
2017
    3,947  
Thereafter
    29,438  
Total
  $ 49,173  

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 nine months ended September 30, 2012. For the three and nine months ended September 30, 2011, the Company made sales of $0 and $311,158, respectively, under the Seedling Agreement.
 
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 nine months ended September 30, 2012. As of September 30, 2012, there was no unpaid amount related to the Land Use Right and Seedling Transfer Agreement.

 
21

 

Land Use Right
 
On July 18, 2012, the Company entered into the Fuye Field Agreement with an individual in the PRC. Pursuant to the Fuye Field Agreement, HDS leases 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 paid RMB 9,330,000 (approximately $1.5 million) as of September 30, 2012 and the unpaid amount related to the Fuye Field Agreement was RMB 5,672,300 (approximately $0.9 million) as of September 30, 2012 which was included in accounts payable on the accompanying consolidated balance sheets. 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.

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 will be subject to pre-issuance approval  by our shareholders as described below;
 
 
 
Each Founder’s Option will be 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 will be exercisable for a period of five years;
 
 
 
Each Founder’s Option will have a per share exercise price of equal to the fair market value of a share of YBP common stock on the date of grant;  and
 
 
 
Each Founder’s Option will have a cashless exercise feature, pursuant to which, at the optionee’s election, he or she may choose to deliver previously-owned shares of YBP common stock in payment of the exercise price or not 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 difference, if any, between the aggregate fair market value of the shares issuable upon exercise of the Founder’s Option and the exercise price of the Founder’s Option.

 
22

 
 
The Company has scheduled a special meeting of shareholders (the “Meeting”) to be held on December 13, 2012 to approve the Founders’ Options, among other proposals to be brought before the Meeting. Shareholders of record as of the record date of October 18, 2012 will be entitled to vote at the Meeting.
 
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 16 – 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 nine months ended September 30, 2012 and 2011, the Company has not generated any revenues or activity on this land.
 
NOTE 17 – RECENT ACCOUNTING PRONOUCEMENTS
 
In July 2012, the Financial Accounting Standards Board (FASB) amended ASC 350,Intangibles — Goodwill and Other”. This amendment is intended to simplify how an entity tests indefinite-lived assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The amended provisions will be effective for the Company beginning in the first quarter of 2014, and early adoption is permitted. This amendment impacts impairment testing steps only, and therefore adoption will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.
 
In August 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on financial position or results of operations of the Company.
 
In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04 ("ASU 2012-04"). The amendments in this update cover a wide range of topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on financial position or results of operations of the Company.
 
 
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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 nine months ended September 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 September 30, 2012, revenues from the sale of TCM raw materials represented approximately 65.1% of consolidated revenue (including 32.2% of consolidated revenues to related parties); sale of yew trees represented approximately 28.9% of consolidated revenue; and the sale of handicrafts represented approximately 6.0% of consolidated revenue. For the nine months ended September 30, 2012, revenues from the sale of TCM raw materials represented approximately 59.2% of consolidated revenue (including 12.4% of consolidated revenues to related parties); sale of yew trees represented approximately 38.3% of consolidated revenue; and the sale of handicrafts represented approximately 2.5% of consolidated revenue (including 0.1% of consolidated revenues to related parties).
 
For the three months ended September 30, 2011, revenues from the sale of TCM raw materials represented approximately 71.3% of consolidated revenue (including 20.9% of consolidated revenues to related parties); sale of yew trees represented approximately 26.7% of consolidated revenue; and the sale of handicrafts represented approximately 2.0% of consolidated revenue. For the nine months ended September 30, 2011, revenues from the sale of TCM raw materials represented approximately 60.2% of consolidated revenue (including 26.5% of consolidated revenues to related parties); sale of yew trees represented approximately 37.7% 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 $182,000 and $98,000 for the nine months ended September 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 September 30, 2012, YBP has approximately $23,000 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 $54,000, including approximately $37,000 in cash at September 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 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.
 
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.
 
 
25

 
 
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 September 30, 2012 could be collected and accordingly, the Company did not record any allowance for doubtful accounts.
 
Inventories
 
Inventories consisted of raw materials, work-in-progress, finished goods-handicrafts, yew seedlings and other trees (consisting of larix, spruce and poplar trees). The Company classifies its inventories based on its historical and anticipated levels of sales; any inventory in excess of its normal operating cycle of one year is classified as long-term on its consolidated balance sheets.  Inventories are stated at the lower of cost or market value utilizing the weighted average method. Raw materials primarily include yew timber used in the production of products such as handicrafts, furniture and other products containing yew timber. Finished goods-handicraft and yew seedlings 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 amount of slow-moving or obsolete inventories, we analyze movement of our products, monitor competing products and technologies and evaluate acceptance of our products.  Periodically, we will identify inventories that cannot be sold at all or can only be sold at deeply discounted prices. An allowance will be established if management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record reserves for the difference between the carrying cost and the estimated market value.
 
Our handicraft and yew furniture products are hand-made by traditional Chinese artisans and many are one-of-a-kind pieces that do not decrease in market value. Much of the furniture that we produce is reproductions of popular Ming and Qing Dynasty style antique furnishings with high collection value; therefore we believe that the market value will increase from time to time. Currently, we have an adequate supply rare Northeast yew timber on hand for approximately five years’ worth of production. Northeast yew trees are considered an endangered species with a relatively slow growing nature and are officially protected in the PRC. Because of the scarcity of Northeast yew timber supply, the cost to acquire new inventory of yew timber is rising. We had minimal manufacturing activities and minimal sales of exclusive and expensive handicraft and yew furniture in 2010 and 2011 and accordingly, the yew timber and certain handicrafts and yew furniture pieces are considered slow-moving. In 2010 and 2011, we concentrated on the sale of our TCM products and did not actively market our handicraft products. In August 2012, we began to increase our marketing efforts for our handicraft products.  Historically, we have never sold our handicraft products below cost and we believe the current selling price which is higher than historical cost can be obtained. Additionally, we believe that we are one of only a few companies in the PRC to have received approval for the manufacture of items made from yew timber. In short, we may have difficulties finding reasonable cost Northeast yew timber suppliers if the handicraft finished goods sell out due to our market development activities.
 
In connection with the inventory of our Northeast yew timber, in February 2012, we engaged a third party independent appraiser and they prepared a report which indicated that the current fair value of such timber is greater than our historical cost. The appraiser was comprised of several forestry experts and approved by the Price Authentication Center of Heilongjiang Province of China, a provincial government institute.

Based on factors above, at September 30, 2012 and December 31, 2011, we did not provide any inventory allowance and reserve.

In accordance with ASC 905, “Agriculture”, our costs of growing Yew seedlings are accumulated until the time of harvest and are reported at the lower of cost or market.
 
 
26

 
 
Property and equipment
 
Property and equipment are carried at cost and are depreciated on a straight-line basis (after taking into account their respective estimated residual value) over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The estimated useful lives are as follows:
 
Building
15 years
Machinery and equipment
10 years
Office equipment
3 years
Leasehold improvement
5 years
Motor vehicles
4 years
 
Land and yew forest use rights
 
All land in the PRC is owned by the PRC government and cannot be sold to any individual or company. We have recorded the amounts paid to the PRC government to acquire long-term interests to utilize land and yew forests as land and yew forest use rights. This type of arrangement is common for the use of land in the PRC. Yew trees on land containing yew tree forests will be used to supply raw materials such as branches, leaves and fruit to us that will be used to manufacture our products. We amortize these land and yew forest use rights over the term of the respective land and yew forest use right, which ranges from 45 to 50 years. The lease agreements do not have any renewal option and we have no further obligations to the lessor. We record the amortization of these land and forest use rights as part of its cost of revenues.
 
Revenue recognition
 
We generate our revenue from sales of yew seedling products, sales of yew raw materials for medical application, and sales of yew craft products. Pursuant to the guidance of ASC 605 and ASC 360, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured, and no significant obligations remain.
 
Income taxes
 
We are governed by the Income Tax Law of the PRC, Hong Kong and the United States. We account for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence; it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
 
We apply the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to our liability for income taxes. Any such adjustment could be material to our results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. Currently, we have no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
 
 
27

 
 
Stock-based compensation
 
Stock based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award. The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
 
Pursuant to ASC 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.
 
Recent accounting pronouncements
 
In July 2012, the Financial Accounting Standards Board (FASB) amended ASC 350,Intangibles — Goodwill and Other. This amendment is intended to simplify how an entity tests indefinite-lived assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The amended provisions will be effective for us beginning in the first quarter of 2014, and early adoption is permitted. This amendment impacts impairment testing steps only, and therefore adoption will not have an impact on our consolidated financial position, results of operations or cash flows.
 
In August 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
 
In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04 ("ASU 2012-04"). The amendments in this update cover a wide range of topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
 
Currency exchange rates
 
Our functional currency is the U.S. dollar, and the functional currency of our operating subsidiaries and VIEs is the RMB. All of our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect our reported levels of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.
 
Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating subsidiaries. Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.
 
 
28

 
 
Our financial statements are expressed in U.S. dollars, which is the functional currency of our parent company. The functional currency of our operating subsidiaries and affiliates is RMB. To the extent we hold assets denominated in U.S. dollars, any appreciation of the RMB against the U.S. dollar could result in a charge in our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results.
 
Recently Enacted JOBS Act
 
We qualify as an “emerging growth company” under the recently enacted Jumpstart our Businesses Act of 2012 (the “JOBS” Act). As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, among other things, we will not be required to:
 
 
Have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
 
 
Submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency”;
 
 
Obtain shareholder approval of any golden parachute payments not previously approved; and
 
 
Disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive’s compensation to median employee compensation.
 
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
 
We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion; (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
 
Until such time, however, because the JOBS Act has only recently been enacted, we cannot predict whether investors will find our stock less attractive because of the more limited disclosure requirements that we may be entitled to follow and other exemptions on which we are relying while we are an “emerging growth company”. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 
29

 

Results of Operations
 
The following tables set forth key components of our results of operations for the periods indicated, in dollars, and key components of our revenue for the periods indicated, in dollars. The discussion following the table is based on these results.
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues - third parties
  $ 930,557     $ 954,122     $ 4,230,631     $ 3,246,602  
Revenues - related party
    442,467       251,876       602,159       1,169,688  
Total revenues
    1,373,024       1,205,998       4,832,790       4,416,290  
Cost of revenues - third parties
    146,409       220,121       726,957       691,588  
Cost of revenues - related party
    84,528       41,009       109,572       297,004  
Total cost of revenues
    230,937       261,130       836,709       988,592  
Gross profit
    1,142,087       944,868       3,996,081       3,427,698  
Operating expenses
    262,656       230,109       637,666       576,235  
Income from operations
    879,431       714,759       3,358,415       2,851,463  
Other income (expenses)
    228       (2,454 )     1,455       (13,126 )
Net income
    879,659       712,305       3,359,870       2,838,337  
Other comprehensive income:
                               
Unrealized foreign currency translation gain (loss)
    (59,359 )     158,519       108,308       582,653  
Comprehensive income
  $ 820,300     $ 870,824     $ 3,468,178     $ 3,420,990  

Three and Nine Months Ended September 30, 2012 Compared to Three and Nine Months Ended September 30, 2011
 
Revenues
 
For the three months ended September 30, 2012, we had total revenues of $1,373,024, as compared to $1,205,998 for the three months ended September 30, 2011, an increase of $167,026 or 13.8%. For the nine months ended September 30, 2012, we had total revenues of $4,832,790, as compared to $4,416,290 for the nine months ended September 30, 2011, an increase of $416,500 or 9.4%. The increase in total revenue was attributable to the increase in revenue from all three of our business segments, and is summarized as follows:

   
Three Months Ended
September 30,
         
Percentage
 
   
2012
   
2011
   
Increase
   
Change
 
TCM raw materials
  $ 893,909     $ 859,497     $ 34,412       4.0 %
Yew trees
    396,416       322,015       74,401       23.1 %
Handicrafts
    82,699       24,486       58,213       237.7 %
Total
  $ 1,373,024     $ 1,205,998     $ 167,026       13.8 %

   
Nine Months Ended September 30,
         
Percentage
 
   
2012
   
2011
   
Increase
   
Change
 
TCM raw materials
  $ 2,860,552     $ 2,659,234     $ 201,318       7.6 %
Yew trees
    1,853,504       1,665,665       187,839       11.3 %
Handicrafts
    118,734       91,391       27,343       29.9 %
Total
  $ 4,832,790     $ 4,416,290     $ 416,500       9.4 %

 
30

 
 
Sales of yew raw materials to a related party customer decreased during the first two quarters of 2012 because the related party customer had adequate inventory for its needs and  we focused our attention on expanding such sales to third party customers. During the third quarter of 2012, sales of yew raw materials to the related party customer increased because the related party customer required more yew raw material as its own inventory decreased, while sales of yew raw material to third party customers decreased because such customers now had adequate inventory. Over the nine months ended September 30, 2012, the overall mix of sales of our yew raw materials consisted of sales primarily to third party customers compared to the related party customer.

Cost of Revenues
 
For the three months ended September 30, 2012, cost of revenues amounted to $230,937, as compared to $261,130 for the three months ended September 30, 2011, a decrease of $30,193 or 11.6%. For the nine months ended September 30, 2012, cost of revenues amounted to $836,709 as compared to $988,592 for the nine months ended September 30, 2011, a decrease of $151,883 or 15.4%. Our cost of revenues principally consists of the cost of raw materials such as wood plates and yews, amortization of land and yew forest use rights, labor, utilities, manufacturing costs, manufacturing related depreciation, machinery maintenance costs, purchasing and receiving costs, inspection costs, and other fixed costs. For the three months ended September 30, 2012, cost of revenues accounted for 16.8% of total revenues compared to 21.7% of total revenues for the three months ended September 30, 2011. For the nine months ended September 30, 2012, cost of revenues accounted for 17.3% of total revenues compared to 22.4% of total revenues for the nine months ended September 30, 2011.
 
Cost of revenues by product categories were as follows:

   
Three Months Ended
September 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
TCM raw materials
  $ 158,354     $ 161,226     $ (2,872 )     ( 1.8 )%
Yew trees
    21,395       88,380       (66,985 )     (75.8 )%
Handicrafts
    51,188       11,524       39,664       344.2 %
Total
  $ 230,937     $ 261,130     $ (30,193 )     (11.6 )%


   
Nine Months Ended
September 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
TCM raw materials
  $ 446,436     $ 640,843     $ (194,407 )     (30.3 )%
Yew trees
    320,410       287,681       32,729       11.4 %
Handicrafts
    69,863       60,068       9,795       16.3 %
Total
  $ 836,709     $ 988,592     $ (151,883 )     15.4 %

The decrease in our cost of revenues for the three months ended September 30, 2012 was primarily a result of decreases in costs of revenue in our TCM raw materials and yew trees segments, partially offset by an increase in cost of revenue in our handicrafts segment.

The decrease in our cost of revenues for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was primarily a result of decreases in costs of revenue in our TCM raw materials, partially offset by an increase in cost of revenue in our yew trees and handicrafts segments.

Gross Profit
 
For the three months ended September 30, 2012, gross profit was $1,142,087 as compared to $944,868 for the three months ended September 30, 2011, representing gross margins of 83.2% and 78.3%, respectively. For the nine months ended September 30, 2012, gross profit was $3,996,081 as compared to $3,427,698 for the nine months ended September 30, 2011, representing gross margins of 82.7% and 77.6%, respectively. Gross profit margins by product categories were as follows:
 
 
31

 
 
   
Three Months Ended
September 30,
   
Increase
 
   
2012
   
2011
   
(Decrease)
 
TCM raw materials
    82.3 %     81.2 %     1.1 %
Yew trees
    94.6 %     72.6 %     22.0 %
Handicrafts
    38.1 %     52.9 %     (14.8 )%
Total
    83.2 %     78.3 %     4.9 %

   
Nine Months Ended
September 30,
   
Increase
 
   
2012
   
2011
   
(Decrease)
 
TCM raw materials
    84.4 %     75.9 %     8.5 %
Yew trees
    82.7 %     82.7 %     0.0 %
Handicrafts
    41.2 %     34.3 %     6.9 %
Total
    82.7 %     77.6 %     5.1 %

The overall increase in our gross profit margin for the three months ended September 30, 2012 was primarily attributable to the increase in the TCM raw materials and yew trees segments, partially offset by a decrease in our handicrafts segment. The overall increase in our gross profit margin for the nine months ended September 30, 2012 was primarily attributable to the increase in the TCM raw materials and handicrafts segments.
 
For the three and nine months ended September 30, 2012, the increase in our gross margin percentage related to the sale of TCM raw materials was primarily attributable to the operational efficiency improvements as we have had longer operation experience in the TCM raw materials segment as compared to the same periods in 2011.
 
The increase in our gross margin percentage related to the sale of yew trees for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 is primarily attributable to the fact that the average unit selling price for our yew trees was higher, which contributed to the higher gross profit margin in 2012. For the nine months ended September 30, 2012, the gross margin percentage related to the sale of yew trees remained consistent as compared to 2011.

The decrease in our gross margin percentage related to the sale of handicrafts for the three months ended September 30, 2012 was because we sold more high value handicrafts as compared to the same period in 2011. High value handicrafts products generally have lower profit margins compared to low value handicraft products. The increase in our gross margin percentage related to the sale of handicrafts for the nine months ended September 30, 2012 as compared to the same periods in 2011 was mainly because, overall, we sold fewer high value handicrafts as a percentage of our handicrafts revenue in 2012.

Selling Expenses
 
Selling expenses consisted of the following:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Salary and related benefit
  $ 4,016     $ 3,129     $ 11,718     $ 8,714  
Advertising
    -       61       -       9,482  
Shipping and handling
    303       3,568       696       10,317  
Other
    2,324       1,697       5,466       14,127  
Total
  $ 6,643     $ 8,455     $ 17,880     $ 42,640  

 
32

 
 
For the three months ended September 30, 2012, selling expenses were $6,643, as compared to $8,455 for the three months ended September 30, 2011, a decrease of $1,812 or 21.4%. The decrease in our selling expenses for the three months ended September 30, 2012 was primarily attributable to the decreases in advertising and shipping and handling expenses, partially offset by the increases in salary and related benefit and other expenses. For the nine months ended September 30, 2012, selling expenses were $17,880 as compared to $42,640 for the nine months ended September 30, 2011, a decrease of $24,760 or 58.1%. The decrease in our selling expenses for the nine months ended September 30, 2012 was primarily attributable to the decreases in advertising, shipping and handling and other expenses, partially offset by an increase in salary and related benefit.
 
For the three months ended September 30, 2012, salary and related benefit increased by $887 as compared to the three months ended September 30, 2011. The increase was attributable to the increase in salary expenses and bonuses paid, as we had more sales staff on our sales team during the three months ended September 30, 2012 as compared to the same period in 2011. For the nine months ended September 30, 2012, salary and related benefit increased by $3,004 as compared to the nine months ended September 30, 2011, which was primarily attributable to an increase in salary expenses and bonus paid, as we had more sales staff on our sales team during the nine months ended September 2012 as compared to the corresponding period in 2011.
 
For the three and nine months ended September 30, 2012, we did not incur any advertising expenses, while we recorded advertising expenses of $61 and $9,482 for the three and nine months ended September 30, 2011, respectively. We primarily relied on our sales staff to promote our products and did not have any advertising activities during 2012.
 
For the three months ended September 30, 2012, shipping and handling expenses decreased by $3,265 as compared to the three months ended September 30, 2011. In the third quarter of 2012, the majority of the shipping fees were either paid directly or reimbursed by our customers, while in the third quarter of 2011 shipping fees were paid by us. For the nine months ended September 30, 2012, shipping and handling expenses decreased by $9,621 as compared to the nine months ended September 30, 2011. For the nine months ended September 30, 2012, a majority of the shipping fees were either paid directly by our customers or reimbursed to us by our customers, while in the nine months ended September 30, 2011 shipping fees were paid by us.
 
For the three months ended September 30, 2012, other miscellaneous selling expenses increased by $627 as compared to the three months ended September 30, 2011. This increase was primarily attributable to the increase in materials expenditure related to handicrafts selling activities during the three months ended September 30, 2012. For the nine months ended September 30, 2012, other miscellaneous selling expenses decreased by $8,661 as compared to the nine months ended September 30, 2011. This decrease was primarily attributable to the overall decrease in materials expenditure related to selling activities.
 
General and Administrative Expenses
 
For the three months ended September 30, 2012, general and administrative expenses amounted to $256,013, as compared to $221,654 for the three months ended September 30, 2011, an increase of $34,359 or 15.5%. For the nine months ended September 30, 2012, general and administrative expenses amounted to $619,786, as compared to $533,595 for the nine months ended September 30, 2011, an increase of $86,191 or 16.2%. General and administrative expenses consisted of the following:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011