10-Q 1 f10q0913_yewbio.htm FORM 10-Q Unassociated Document


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

 
FORM 10-Q
 

 
(MARK ONE)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM TO
 
COMMISSION FILE NUMBER 000-54701
 
YEW BIO-PHARM GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
26-1579105
(State or other jurisdiction of
 incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
294 Powerbilt Avenue
Las Vegas, Nevada 89148 

(Address of principal executive offices) (Zip Code)
 
(702) 487-6727 

(Registrant’s telephone number, including area code)
 
N/A 

(Former name, former address and former fiscal year, if changed since last report) 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
 
 
Large accelerated filer
¨
Accelerated filer
¨
 
Non-accelerated filer
¨
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  x
 
As of November 5, 2013, there were 50,000,000 shares, $0.001 par value per share, of the registrant’s common stock outstanding.
 


 
 

 
  
YEW BIO-PHARM GROUP, INC.
 
FORM 10-Q
 
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013
TABLE OF CONTENTS
 
   
Page
Number
 
PART I. FINANCIAL INFORMATION
     
ITEM 1.
FINANCIAL STATEMENTS
4
     
 
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012
4
     
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE-AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 AND SEPTEMBER 30, 2012
5
     
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE  NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 AND SEPTEMBER 30, 2012
6
     
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
22
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
38
     
ITEM 4.
CONTROLS AND PROCEDURES
38
 
PART II. OTHER INFORMATION
     
ITEM 1.
LEGAL PROCEEDINGS
39
     
ITEM 1A.
RISK FACTORS
39
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
39
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
39
     
ITEM 4.
MINE SAFETY DISCLOSURES
39
     
ITEM 5.
OTHER INFORMATION
39
     
ITEM 6.
EXHIBITS
40
 
 
 

 
 
Forward-Looking Statements
 
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements”, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
 
Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.
 
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. Some of the key factors impacting these risks and uncertainties include, but are not limited to:
 
risks related to our ability to collect amounts owed to us by some of our largest customers;
our ability to continue to purchase yew cuttings from our various suppliers at relatively stable prices;
our dependence on a small number of customers for our yew raw materials, including a related party ;
our dependence on a small number of customers for our yew trees for reforestation;
our ability to market successfully yew raw materials used in the manufacture of traditional Chinese medicine (“TCM”);
industry-wide market factors and regulatory and other developments affecting our operations;
our ability to sustain revenues should the Chinese economy slow from its current rate of growth;
continued preferential tax treatment for the sale of yew trees and potted yew trees;
uncertainties about involvement of the Chinese government in business in the People’s Republic of China (the “PRC” or “China”) generally; and
any change in the rate of exchange of the Chinese Renminbi (“RMB”) to the U.S. dollar, which could affect currency translations of our results of operations, which are earned in RMB but reported in dollars;
industry-wide market factors and regulatory and other developments affecting our operations;
any impairment of any of our assets;
changes in the Chinese banking industry, including the availability of credit, which, among other things, could affect our ability to borrow funds or affect the ability of our customers to borrow funds and pay amounts owed to us on a timely basis;
The dependence of our largest purchaser of yew raw materials, Yew Pharmaceutical Co., Ltd. (“Yew Pharmaceutical”), on receiving payments from hospitals for the TCM it sells to them, in order to make payments to us for the yew raw materials Yew Pharmaceutical buys from us;
The dependence of our other purchasers of yew raw materials to be paid by their customers, in order for them to make payments to us for the yew raw materials they buy from us; and
risks related to changes in accounting interpretations.
 
For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see the section entitled “Risk Factors”, beginning on page 19 of our Annual Report on Form 10-K for the year ended December 31, 2012.
 
 
 

 
 
PART I
 
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
             
   
September 30,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS:
           
    Cash
  $ 1,110,025     $ 386,821  
    Accounts receivable
    1,027,690       722,598  
    Accounts receivable - related party
    1,172,091       284,986  
    Inventories
    1,447,980       991,234  
    Prepaid expenses and other assets
    34,168       150  
    Prepaid expenses - related parties
    40,832       60,245  
                 
        Total Current Assets
    4,832,786       2,446,034  
                 
LONG-TERM ASSETS:
               
    Inventories, net of current portion
    10,032,669       9,382,164  
    Property and equipment, net
    977,824       885,969  
    Land use rights and yew forest assets, net
    15,755,289       15,328,318  
                 
        Total Long-term Assets
    26,765,782       25,596,451  
                 
        Total Assets
  $ 31,598,568     $ 28,042,485  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
    Accounts payable
  $ 4,411     $ 990  
    Accrued expenses and other payables
    113,751       199,098  
    Taxes payable
    4,851       5,722  
    Due to related parties
    51,657       47,876  
                 
        Total Current Liabilities
    174,670       253,686  
                 
        Total Liabilities
    174,670       253,686  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS' EQUITY:
               
    Preferred stock ($0.001 par value; 10,000,000 shares authorized, no shares
               
       issued and outstanding at September 30, 2013 and December 31, 2012, respectively)
    -       -  
    Common stock ($0.001 par value;  140,000,000 shares authorized;  50,000,000 shares
               
       issued and outstanding at September 30, 2013 and December 31, 2012, respectively)
    50,000       50,000  
    Additional paid-in capital
    10,396,377       10,396,377  
    Retained earnings
    15,728,008       13,182,032  
    Statutory reserves
    2,490,750       2,179,494  
    Accumulated other comprehensive income - foreign currency translation adjustment
    2,758,763       1,980,896  
                 
        Total Shareholders' Equity
    31,423,898       27,788,799  
                 
        Total Liabilities and Shareholders' Equity
  $ 31,598,568     $ 28,042,485  
                 
See notes to unaudited consolidated financial statements
 
 
 
4

 
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
(UNAUDITED)
 
   
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
REVENUES:
                       
    Revenues
  $ 1,455,621     $ 930,557     $ 4,040,492     $ 4,230,631  
    Revenues - related party
    88,706       442,467       1,409,141       602,159  
                                 
        Total Revenues
    1,544,327       1,373,024       5,449,633       4,832,790  
                                 
COST OF REVENUES:
                               
    Cost of revenues
    618,059       146,409       1,320,028       726,957  
    Cost of revenues - related party
    20,169       84,528       402,391       109,752  
                                 
        Total Cost of Revenues
    638,228       230,937       1,722,419       836,709  
                                 
GROSS PROFIT
    906,099       1,142,087       3,727,214       3,996,081  
                                 
OPERATING EXPENSES:
                               
     Selling
    7,356       6,643       19,049       17,880  
     General and administrative
    308,611       256,013       852,480       619,786  
                                 
        Total Operating Expenses
    315,967       262,656       871,529       637,666  
                                 
INCOME FROM OPERATIONS
    590,132       879,431       2,855,685       3,358,415  
                                 
OTHER INCOME (EXPENSES):
                               
     Interest income
    161       474       245       2,062  
     Other income (expense)
    1,919       (246 )     1,302       (607 )
                                 
        Total Other Income (Expenses)
    2,080       228       1,547       1,455  
                                 
NET INCOME
  $ 592,212     $ 879,659     $ 2,857,232     $ 3,359,870  
                                 
COMPREHENSIVE INCOME:
                               
      NET INCOME
  $ 592,212     $ 879,659     $ 2,857,232     $ 3,359,870  
                                 
      OTHER COMPREHENSIVE INCOME:
                               
           Foreign currency translation adjustment
    180,344       (59,359 )     777,867       108,308  
                                 
      COMPREHENSIVE INCOME
  $ 772,556     $ 820,300     $ 3,635,099     $ 3,468,178  
                                 
NET INCOME PER COMMON SHARE:
                               
       Basic
  $ 0.01     $ 0.02     $ 0.06     $ 0.07  
       Diluted
  $ 0.01     $ 0.02     $ 0.06     $ 0.07  
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
                               
       Basic
    50,000,000       50,000,000       50,000,000       47,052,920  
       Diluted
    50,000,000       50,000,000       50,000,000       50,000,000  
                                 
See notes to unaudited consolidated financial statements
 
 
 
5

 
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
             
   
For the Nine Months Ended
September 30,
 
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 2,857,232     $ 3,359,870  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    147,782       158,502  
Amortization of land use rights and yew forest assets
    271,580       259,221  
Loss on disposal of fixed assets
    421       -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (282,524 )     (531,020 )
Accounts receivable - related party
    (869,562 )     -  
Prepaid expenses and other assets
    (33,635 )     (13,812 )
Prepaid expenses - related parties
    20,789       (67,361 )
Inventories
    (594,434 )     (2,335,370 )
Accounts payable
    3,357       (451,897 )
Accrued expenses and other payables
    (88,148 )     (66,648 )
Due to related parties
    3,688       27,247  
Taxes payable
    (1,010 )     7,081  
                 
NET CASH PROVIDED BY OPERATING ACTIVITIES
    1,435,536       345,813  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
    (217,604 )     (208,524 )
Payments for land use rights and yew forest assets
    (513,685 )     (65,749 )
                 
NET CASH USED IN INVESTING ACTIVITIES
    (731,289 )     (274,273 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayments for related parties advances
    -       (239,043 )
                 
NET CASH USED IN FINANCING ACTIVITIES
    -       (239,043 )
                 
EFFECT OF EXCHANGE RATE ON CASH
    18,957       2,930  
                 
NET INCREASE (DECREASE) IN CASH
    723,204       (164,573 )
                 
CASH  - beginning of period
    386,821       732,371  
                 
CASH - end of period
  $ 1,110,025     $ 567,798  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for:
               
Interest
  $ -     $ -  
Income taxes
  $ -     $ -  
                 
Non-cash investing and financing activities
               
Shares issued for refundable common stock subscription
  $ -     $ 950,000  
                 
See notes to unaudited consolidated financial statements
 
 
 
6

 
 
YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
 
NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of December 31, 2012 was derived from the audited consolidated financial statements of Yew Bio-Pharm Group, Inc. (individually “YBP” and collectively with its subsidiaries and operating variable interest entity, the “Company”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.
 
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2013, and the results of operations and cash flows for the nine-month period ended September 30, 2013 and 2012, have been made.
 
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company continually evaluates its estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. The Company bases its estimates on historical experience and on various other assumptions that it believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
 
Details of the Company’s subsidiaries and variable interest entities (“VIE”) are as follows:
 
Name
 
Domicile and date of incorporation
 
Registered capital
 
Effective ownership
 
Principal activities
Heilongjiang Jinshangjing Bio-Technology Development Co., Limited (“JSJ”)
 
PRC
October 29, 2009
 
USD $ 100,000
 
100%
 
Holding company
                 
Yew Bio-Pharm Holdings Limited (“Yew Bio-Pharm (HK)”)
 
Hong Kong
November 29, 2010
 
HK$ 10,000
 
100%
 
Holding company of JSJ
                 
Harbin Yew Science and Technology Development Co., Ltd. (“HDS”)
 
PRC
August 22, 1996
 
RMB 45,000,000
 
Contractual arrangements
 
Sales of yew tree components for use in pharmaceutical industry; sales of yew tree seedlings and potted yew trees; and the manufacture of yew tree wood handicrafts
 
 
7

 
 
NOTE 2 – PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the financial statements of YBP, its subsidiaries and operating VIE, in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated on consolidation.
 
Pursuant to a restructuring plan intended to ensure compliance with applicable PRC laws and regulations (the “Second Restructure”), on November 5, 2010, JSJ entered into a series of contractual arrangements (the “Contractual Arrangements”) with HDS and/or Zhiguo Wang, his wife Guifang Qi and Xingming Han (collectively with Mr. Wang and Madame Qi, the “HDS Shareholders”), as described below:
 
Exclusive Business Cooperation Agreement. Pursuant to the Exclusive Business Cooperation Agreement between JSJ and HDS (the “Business Cooperation Agreement”), JSJ has the exclusive right to provide to HDS general business operation services, including advice and strategic planning, as well as consulting services related to technology, research and development, human resources, marketing and other services deemed necessary (collectively, the “Services”). Under the Business Cooperation Agreement, JSJ has exclusive and proprietary rights and interests in all rights, ownership, interests and intellectual properties arising out of or created during the performance of the Business Cooperation Agreement, including but not limited to copyrights, patents, patent applications, software and trade secrets. HDS shall pay to JSJ a monthly consulting service fee (the “Service Fee”) in RMB that is equal to 100% of the monthly net income of HDS. Upon the prior written consent by JSJ, the rate of Service Fee may be adjusted pursuant to the operational needs of HDS. Within 30 days after the end of each month, HDS shall (a) deliver to JSJ the management accounts and operating statistics of HDS for such month, including the net income of HDS during such month (the “Monthly Net Income”), and (b) pay 80% of such Monthly Net Income to JSJ (each such payment, a “Monthly Payment”). Within ninety (90) days after the end of each fiscal year, HDS shall (a) deliver to JSJ financial statements of HDS for such fiscal year, which shall be audited and certified by an independent certified public accountant approved by JSJ, and (b) pay an amount to JSJ equal to the shortfall, if any, of the aggregate net income of HDS for such fiscal year, as shown in such audited financial statements, as compared to the aggregate amount of the Monthly Payments paid by HDS to JSJ in such fiscal year. HDS also granted an irrevocable and exclusive option to JSJ to purchase any and all of the assets of HDS, to the extent permitted under PRC law, at the lowest price permitted by PRC law. Unless earlier terminated in accordance with the provisions of the Business Cooperation Agreement or other agreements separately executed between JSJ and HDS, the Business Cooperation Agreement is for a term of ten years and expires on November 5, 2020; however, the term of the Business Cooperation Agreement may be extended if confirmed in writing by JSJ prior to the expiration of the term thereof. The period of the extended term shall be determined exclusively by JSJ and HDS shall accept such extended term unconditionally. Unless JSJ commits gross negligence, or a fraudulent act, against HDS, HDS shall not terminate the Business Cooperation Agreement prior to the expiration of the term, including any extended term. Notwithstanding the foregoing, JSJ shall have the right to terminate the Business Cooperation Agreement at any time upon giving 30 days’ prior written notice to HDS.
 
Exclusive Option Agreement. Under an Exclusive Option Agreement among JSJ, HDS and each HDS Shareholder (individually, an “Option Agreement”), the terms of which are substantively identical to each other, each HDS Shareholder has granted JSJ or its designee the irrevocable and exclusive right to purchase, to the extent permitted under PRC law, all or any part of the HDS Shareholder’s equity interests in HDS (the “Equity Interest Purchase Option”) for RMB 10. If an appraisal is required by PRC laws at the time when and if JSJ exercises the Equity Interest Purchase Option, the parties shall negotiate in good faith and, based upon the appraisal, make a necessary adjustment to the purchase price so that it complies with any and all then applicable PRC laws. Without the consent of JSJ, the HDS Shareholders shall not sell, transfer, mortgage or dispose of their respective shares of HDS stock. Additionally, without the prior consent of JSJ, the HDS Shareholders shall not in any manner supplement, change or amend the articles of association and bylaws of HDS, increase or decrease its registered capital, change the structure of its registered capital in any other manner, or engage in any transactions that could materially affect HDS’ assets, liabilities, rights or operations, including, without limitation, the incurrence or assumption of any indebtedness except incurred in the ordinary course of business, execute any major contract over RMB 500,000, sell or purchase any assets or rights, incur of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. The term of each Option Agreement is ten years commencing on November 5, 2020 and may be extended at the sole election of JSJ.
 
 
8

 
 
Equity Interest Pledge Agreement. In order to guarantee HDS’s performance of its obligations under the Business Cooperation Agreement, each HDS Shareholder, JSJ and HDS entered into an Equity Interest Pledge Agreement (individually, a “Pledge Agreement”), the terms of which are substantially similar to each other. Pursuant to the Pledge Agreement, each HDS Shareholder pledged all of his or her equity interest in HDS to JSJ. If HDS or the HDS Shareholders breach their respective contractual obligations and such breach is not remedied to the satisfaction of JSJ within 20 days after the giving of notice of breach, JSJ, as pledgee, will be entitled to exercise certain rights, including the right to foreclose upon and sell the pledged equity interests. During the term of the Pledge Agreement, the HDS Shareholder shall not transfer his or her equity interest in HDS or place or otherwise permit any other security interest of other encumbrance to be placed on such equity interest. Upon the full payment of the Service Fee under the Business Cooperation Agreement and upon the termination of HDS’s obligations thereunder, the Pledge Agreement shall be terminated.
 
Power of Attorney. Under the Power of Attorney executed by each HDS Shareholder (each, a “Power of Attorney”), the terms of which are substantially similar to each other, JSJ has been granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the HDS Shareholders, to act on behalf of the HDS Shareholder as his or her exclusive agent and attorney with respect to all matters concerning the HDS Shareholder’s equity interests in HDS, including without limitation, the right to: 1) attend shareholders’ meetings of HDS; 2) exercise all the HDS Shareholders’ rights, including voting rights under PRC laws and HDS’s Articles of Association, including but not limited to the sale or transfer or pledge or disposition of the HDS Shareholder’s equity interests in HDS in whole or in part; and 3) designate and appoint on behalf of the HDS Shareholders the legal representative, executive director, supervisor, manager and other senior management of HDS.
 
To the extent that the Contractual Arrangements are enforceable under PRC law, as from time to time interpreted by relevant state agencies, they constitute the valid and binding obligations of each of the parties to each such agreement.
 
The Company believes that HDS is considered a VIE under ASC 810 “Consolidation”, because the equity investors in HDS no longer have the characteristics of a controlling financial interest, and the Company, through JSJ, is the primary beneficiary of HDS and controls HDS’s operations. Accordingly, HDS has been consolidated as a deemed subsidiary into YBP as a reporting company under ASC 810.
 
As required by ASC 810-10, the Company performs a qualitative assessment to determine whether the Company is the primary beneficiary of HDS which is identified as a VIE of the Company. A quality assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and the parties involved in the design of the entity. The Company’s assessment on the involvement with HDS reveals that the Company has the absolute power to direct the most significant activities that impact the economic performance of HDS. JSJ is obligated to absorb a majority of the risk of loss from HDS activities and entitles JSJ to receive a majority of HDS’s expected residual returns. In addition, HDS’s shareholders have pledged their equity interest in HDS to JSJ, irrevocably granted JSJ an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the equity interests in HDS and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by JSJ. Under the accounting guidance, the Company is deemed to be the primary beneficiary of HDS and the results of HDS are consolidated in the Company’s consolidated financial statements for financial reporting purposes. Accordingly, as a VIE, HDS’s sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s and the Company’s net income includes all of HDS’s net income. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income attributable to the Company. Because of the Contractual Arrangements, YBP has a pecuniary interest in HDS that requires consolidation of HDS’s financial statements with those of the Company.
 
 
9

 
 
Additionally, pursuant to ASC 805, as YBP and HDS are under the common control of the HDS Shareholders, the Second Restructure was accounted for in a manner similar to a pooling of interests. As a result, the Company’s historical amounts in the accompanying consolidated financial statements give retrospective effect to the Second Restructure, whereby the assets and liabilities of the Company are reflected at the historical carrying values and their operations are presented as if they were consolidated for all periods presented, with the results of the Company being consolidated from the date of the Second Transfer Agreement. The accounts of HDS are consolidated in the accompanying financial statements.
 
As of September 30, 2013, JSJ has agreed to waive all management fees to be payable by HDS and the Company expects to waive such management fees in the near future due to a need of working capital in HDS to expand HDS’s operations.
 
The Company is principally engaged in (1) processing and selling yew raw materials used in the manufacture of traditional Chinese medicine (“TCM”); (2) growing and selling yew tree seedlings and mature trees, including potted miniature yew trees; and (3) manufacturing and selling furniture and handicrafts made of yew tree timber. The Company is located in Harbin, Heilongjiang Province, China.
 
YBP has no direct or indirect legal or equity ownership interest in HDS. However, through the Contractual Arrangements, the stockholders of HDS have assigned all their rights as stockholders, including voting rights and disposition rights of their equity interests in HDS to JSJ, our indirect, wholly-owned subsidiary. YBP is deemed to be the primary beneficiary of HDS and the financial statements of HDS are consolidated in the Company’s consolidated financial statements. At September 30, 2013 and December 31, 2012, the carrying amount and classification of the assets and liabilities in the Company’s balance sheets that relate to the Company’s variable interest in the VIE was as follows:
 
Assets
 
September 30,
2013
   
December 31,
2012
 
Cash
 
$
1,091,749
   
$
343,990
 
Accounts receivable
   
1,027,690
     
722,598
 
Accounts receivable – related party
   
1,172,091
     
284,986
 
Inventories (current and long-term)
   
11,480,650
     
10,373,398
 
Prepaid expenses and other assets
   
34,018
     
-
 
Prepaid expenses - related parties
   
39,613
     
57,870
 
Property and equipment, net
   
903,235
     
790,563
 
Land use rights and yew forest assets, net
   
15,755,289
     
15,328,318
 
Total assets of VIE
 
$
31,504,335
   
$
27,901,723
 
Liabilities
               
Accounts payable
 
$
4,411
   
$
990
 
Accrued expenses and other payables
   
70,687
     
79,981
 
Taxes payable
   
3,813
     
6,305
 
Due to YBP and JSJ
   
1,706,144
     
1,939,720
 
Due to related parties
   
5,682
     
1,900
 
Total liabilities of VIE
 
$
1,790,737
   
$
2,028,896
 
 
The assets and liabilities in the table above are held in HDS, the VIE. 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 the 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 and most recent reporting balance sheet date 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

 
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the previously reported financial position, results of operations and cash flows.
 
NOTE 3 – 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, 2013 and December 31, 2012, inventories consisted of the following:
 
   
September 30, 2013
   
December 31, 2012
 
   
Current portion
   
Long-term portion
   
Total
   
Current portion
   
Long-term portion
   
Total
 
Raw materials
  $ 354,500     $ 2,742,112     $ 3,096,612     $ 284,628     $ 2,734,896     $ 3,019,524  
Work-in-process
    88,749       -       88,749       22,523       -       22,523  
Finished goods - handicrafts
    196,647       626,737       823,384       153,578       695,426       849,004  
Yew seedlings
    796,715       3,527,843       4,324,558       530,505       3,622,991       4,153,496  
Other trees
    11,369       3,135,977       3,147,346       -       2,328,851       2,328,851  
Total
  $ 1,447,980     $ 10,032,669     $ 11,480,649     $ 991,234     $ 9,382,164     $ 10,373,398  
 
NOTE 4 – TAXES
 
(a) Federal Income Tax and Enterprise Income Taxes
 
The Company is registered in the State of Nevada and is subject to the United States federal income tax at a tax rate of 34%. No provision for income taxes in the U.S. has been made as the Company had no U.S. taxable income as of September 30, 2013 and December 31, 2012.
 
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%.
 
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, 2013 and 2012:
 
   
Nine Months Ended
September 30,
 
   
2013
   
2012
 
U.S. federal income tax rate
   
34
%
   
34
%
Foreign income not recognized in the U.S.
   
(34
%)
   
(34
%)
PRC EIT rate
   
25
%
   
25
%
PRC tax exemption and reduction
   
(25
%)
   
(25
%)
Total provision for income taxes
   
-
     
-
 
 
 
11

 
 
Income before income tax expenses of $592,212 and $879,659 for the three months ended September 30, 2013 and 2012, respectively, and $2,857,232 and $3,359,870 for the nine months ended September 30, 2013 and 2012, respectively, was attributed to subsidiaries with operations in China. HDS and JSJ recorded no income tax expense for the nine months ended September 30, 2013 and 2012 due to the fact that HDS has been granted a tax exemption and has loss carry-forwards from previous years to offset income tax liability generated for handicraft sales and JSJ has been incurring net losses.
 
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, 2013 and 2012 are as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Tax exemption effect
  $ 156,812     $ 252,051     $ 778,923     $ 904,032  
Tax reduction due to loss carry-forward
    -       3,851       -       5,516  
Gain (loss) not subject to income tax
    1,786       (1,041 )     (3,883 )     (3,186 )
Basic net income per share effect
  $ (0.00 )   $ (0.01 )   $ (0.02 )   $ (0.02 )
Diluted net income per share effect
  $ (0.00 )   $ (0.01 )   $ (0.02 )   $ (0.02 )
 
The deferred income tax assets or liabilities calculated pursuant to the EIT is not material due to the fact that the Company has been granted EIT exemption with respect to its yew raw materials and yew tree segments and is only subject to tax under the EIT for its handicrafts segment, which only represents a small portion of net revenues.
 
The Company has incurred net operating loss for income tax purposes for the three and nine months ended September 30, 2013 and 2012. The net operating loss carry-forwards for U.S. income tax purposes amounted to $1,205,716 and $962,787 at September 30, 2013 and December 31, 2012, respectively, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2033. 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 on the deferred tax asset to reduce the asset to zero at September 30, 2013 and December 31, 2012. The valuation allowance at September 30, 2013 and December 31, 2012 was $409,943 and $327,348, respectively. The net change in the valuation allowance was an increase of $14,340 and $47,527 during the three months ended September 30, 2013 and 2012, respectively. The net change in the valuation allowance was an increase of $82,595 and $90,297 during the nine months ended September 30, 2013 and 2012, respectively, and management will review this valuation allowance periodically and make adjustments as necessary.
 
Deferred tax assets and liabilities are provided for significant income and expense items recognized in different years for income tax and financial reporting purposes. Temporary differences, which give rise to a net deferred tax asset for the Company as of September 30, 2013 and December 31, 2012, are as follows:
 
   
September 30,
2013
   
December 31,
2012
 
U.S. tax benefit of net operating loss carry forward
 
$
409,943
   
$
327,348
 
Valuation allowance
   
(409,943
)
   
(327,348
)
Net deferred tax assets
 
$
-
   
$
-
 
 
For U.S. income tax purposes, the Company has cumulative undistributed earnings of foreign subsidiary and VIE of approximately $19.2 million and $16.4 million as of September 30, 2013 and December 31, 2012, respectively, which are included in consolidated retained earnings and will continue to be indefinitely reinvested in overseas 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.
 
 
12

 
 
The Company did not have uncertainty tax positions or events leading to uncertainty tax position within the next 12 months. The Company’s 2010, 2011 and 2012 U.S. corporation income tax returns are subject to Internal Revenue Service examination. The Company’s 2009, 2010, 2011 and 2012 China corporate income tax returns are subject to China State Administration of Taxation examination.
 
(b) Value Added Taxes (“VAT”)
 
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 raw materials and yew 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 fiscal year.
 
NOTE 5 – STOCKHOLDERS’ EQUITY
 
Stock Options
 
On December 13, 2012, the Company’s shareholders approved the issuance of stock purchase options (“Founders’ Options”) to the Company’s directors/officers (collectively, the “Founders”) and the Company issued the Founders’ Options to the Founders following such approval. The terms of each Founder’s Option are identical to each other except for the name of the optionee and the number of shares of the Company’s common stock subject to each Founder’s Option. The principal terms of the Founders’ Options include the following:

Each Founder’s Option is fully vested upon issuance;
 
Each Founder’s Option is exercisable for a period of five years from the date of issuance;
 
Each Founder’s Option is exercisable at $0.22 per share; and
 
Each Founder’s Option has 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.
 
The number of shares of the Company’s common stock subject to each Founder’s Option is as follows:
 
Name of Optionee
 
Number of Shares
Subject to Founder's
Option
 
Zhiguo Wang
   
20,103,475
 
Guifang Qi
   
2,488,737
 
Xingming Han
   
213,300
 
Total
   
22,805,512
 
 
There were no stock warrants issued, terminated/forfeited and exercised during the nine months ended September 30, 2013.
 
 
13

 
 
The following table summarizes the shares of the Company's common stock issuable upon exercise of options outstanding at September 30, 2013:
 
Stock Options Outstanding
   
Stock Options Exercisable
 
Range of
 Exercise Price
   
Number
Outstanding at
 September 30,
2013
   
Weighted Average
Remaining
 Contractual Life
 (Years)
   
Weighted
Average
 Exercise Price
   
Number
Exercisable at
September 30,
2013
   
Weighted
 Average
 Exercise Price
 
$ 0.22       22,805,512       4.20     $ 0.22       22,805,512     $ 0.22  
 
The intrinsic value of options at September 30, 2013 is zero since the estimated market value of the Company’s common stock as of September 30, 2013 is lower than the exercise price of the options.
 
NOTE 6 – 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. Potentially dilutive common shares consist of common shares issuable upon the confirmation of subscriptions for shares and common stock options (using the treasury stock method).
 
The following table presents a reconciliation of basic and diluted net income per share for the three and nine months ended September 30, 2013 and 2012:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Net income available to common stockholders for basic and diluted net income per share of common stock
  $ 592,212     $ 879,659     $ 2,857,232     $ 3,359,870  
Weighted average common stock outstanding – basic
    50,000,000       50,000,000       50,000,000       47,052,920  
Effect of dilutive securities:
                               
  Subscribed common shares issuable
    -       -       -       2,947,080  
  Stock options issued to directors/officers
    -       -       -       -  
Weighted average common stock outstanding – diluted
    50,000,000       50,000,000       50,000,000       50,000,000  
Net income per common share – basic
  $ 0.01     $ 0.02     $ 0.06     $ 0.07  
Net income per common share – diluted
  $ 0.01     $ 0.02     $ 0.06     $ 0.07  
 
 
14

 
 
The Company's aggregate common stock equivalents at September 30, 2013 and December 31, 2012 included the following:
 
   
September 30,
 2013
   
December 31, 2012
 
Stock options
   
22,805,512
     
22,805,512
 
     Total
   
22,805,512
     
22,805,512
 
 
NOTE 7 – CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
 
Customers
 
For the three and nine months ended September 30, 2013 and 2012, 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
 
 2013
 
 2012
 
 2013
 
 2012
 
A
 
16
20
10
16
B
 
*
 
*
 
*
 
13
C
 
*
 
13
*
 
14
D
 
*
 
17
*
 
14
E
 
*
 
*
 
*
 
11
F
 
*
 
*
 
24
*
 
G (Yew Pharmaceutical, a related party)
 
*
 
32
26
12
*  
Less than 10%
 
The three largest customers accounted for 88.6% of the Company’s total outstanding accounts receivable at September 30, 2013, of which Yew Pharmaceutical, a related party, accounted for 53.3%. Three customers accounted for 100% of the Company’s total outstanding accounts receivable at December 31, 2012, of which Yew Pharmaceutical accounted for 28.3%.
 
Suppliers
 
For the three and nine months ended September 30, 2013 and 2012, suppliers accounting for 10% or more of the Company’s purchase were as follows:
 
   
 Three Months Ended September 30,
 
 Nine Months Ended
September 30,
 
Supplier
 
 2013
 
 2012
 
 2013
 
 2012
 
A
 
*
 
*
 
62
%
*
 
B
 
*
 
*
 
38
%
*
 
C
 
*
 
100
*
 
95
*  
Less than 10%
 
For the three months ended September 30, 2013, the Company did not make any significant purchases. For the nine months ended September 30, 2013, two suppliers accounted for 100% of the Company’s purchases and the Company did not have any payable with these suppliers at September 30, 2013.
 
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 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 a third party supplier accounted for 100% of the Company’s accounts payable at December 31, 2012.
 
 
15

 
 
NOTE 8 – RELATED PARTY TRANSACTIONS
 
The Company conducted transactions with certain of the Company’s officers and directors, as well as 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.
 
Cooperation and Development Agreement and Revenues from Related Party
 
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, which will be used by Yew Pharmaceutical to make traditional Chinese medicines and other pharmaceutical products, at a price of RMB 1,000,000 (approximately $161,000) per metric ton.
 
For the three months ended September 30, 2013 and 2012, sales to Yew Pharmaceutical under the Development Agreement amounted to $88,706 and $442,467, respectively. For the nine months ended September 30, 2013 and 2012, sales to Yew Pharmaceutical under the Development Agreement amounted to $1,409,141 and $600,556, respectively. Additionally, for the three months ended September 30, 2013 and 2012, the Company did not record any revenue from the sale of yew handicrafts to Yew Pharmaceutical. For the nine months ended September 30, 2013 and 2012, the Company recorded revenues from the sale of yew handicrafts to Yew Pharmaceutical of $0 and $1,603, respectively.  In summary, for the three and nine months ended September 30, 2013 and 2012, the Company recorded revenues from the following related party:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
Name of related party
 
2013
   
2012
   
2013
   
2012
 
Yew Pharmaceutical
  $ 88,706     $ 442,467     $ 1,409,141     $ 602,159  
Total
  $ 88,706     $ 442,467     $ 1,409,141     $ 602,159  
 
At September 30, 2013 and December 31, 2012, the Company had accounts receivable from Yew Pharmaceutical of $1,172,091 and $284,986, respectively, which was included in accounts receivable–related party on the accompanying consolidated balance sheets.
 
Purchases
 
For the three and nine months ended September 30, 2013 and 2012, the Company did not make any material purchases from its related party companies.
 
 
16

 
 
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 leases 361 mu (approximately 60 acres) 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 $26,000). 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, 2013 and 2012, rent expense related to the ZTC Lease amounted to $6,583 and $6,414, respectively. For the nine months ended September 30, 2013 and 2012, rent expense related to the ZTC Lease amounted to $19,583 and $19,255, respectively. At September 30, 2013 and December 31, 2012, prepaid rent to ZTC amounted to $39,613 and $57,870, respectively, which was included in prepaid expenses–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 $2,000) is due for each of the second and third years thereof. The term of the Store Lease was three years and it 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 $2,500) 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, 2013 and 2012, rent expense related to the Store Lease amounted to $633 and $616, respectively. For the nine months ended September 30, 2013 and 2012, rent expense related to the Store Lease amounted to $1,881 and $1,849, respectively. Since December 2012, the premises subject to the Store Lease have been used as warehouse and exhibition space rather than retail space.
 
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 year 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, 2013 and 2012, rent expense related to the Office Lease amounted $608 and $592, respectively. For the nine months ended September 30, 2013 and 2012, rent expense related to the Office Lease amounted $1,808 and $1,778, respectively.
 
On July 1, 2012, JSJ entered into a lease for office space with Mr. Wang (the “JSJ Lease”). Pursuant to the JSJ Lease, JSJ leases approximately 320 square feet of office space from Mr. Wang in Harbin. Rent under the JSJ Lease is RMB 10,000 (approximately $1,600) annually. The term of the JSJ Lease is three years and expires on June 30, 2015. For the three months ended September 30, 2013 and 2012, rent expense related to the JSJ Lease amounted to $405 and $395, respectively. For the nine months ended September 30, 2013 and 2012, rent expense related to the JSJ Lease amounted to $1,205 and $395, respectively. At September 30, 2013 and December 31, 2012, prepaid rent to Mr. Wang amounted to $1,219 and $2,375, respectively, which was included in prepaid expenses-related parties on the accompanying consolidated balance sheets.
 
The principal executive offices of YBP are located at 294 Powerbilt Avenue, Las Vegas, Nevada, a property owned by the Company’s President, Zhiguo Wang, which he provides rent-free to the Company. However, the Company pays utilities, property insurance, real estate tax, association dues and certain other expenses on the property to third parties, which, in the three months ended September 30, 2013 and 2012, aggregated approximately $3,762 and $3,684, respectively, and in the nine months ended September 30, 2013 and 2012, aggregated approximately $11,112 and $8,754, respectively. The space provided by Mr. Wang to use as principal executive offices is less than 500 square feet and a significant portion of the property is used by Mr. Wang for his personal use. The Company estimates that the market value of a gross and full service lease for an equivalent executive office rent in the same geographic area is approximately $800 to $1,000 per month. The landlord of a gross and full service lease typically would be responsible for paying utilities, property tax and insurance and other expenses associated with maintaining the property. However, the Company pays these expenses, as well as association dues, on behalf of Mr. Wang, to third parties in lieu of making rent payments. The Company believes that the difference between the annual market rent for the space used by the Company and the amount of $3,762 and $3,684 for the three months ended September 30, 2013 and 2012, respectively, and the amount of $11,112 and $8,754 for the nine months ended September 30, 2013 and 2012, respectively, that the Company paid to third parties for expenses related to the property in the three and nine months ended September 30, 2013 and 2012, is not material.
 
 
17

 
 
At September 30, 2013 and December 31, 2012, the total prepaid rent for the above operating leases with related parties amounted to $40,832 and $60,245, respectively, which amount was included in prepaid expenses-related parties on the accompanying consolidated balance sheets.
 
Amounts Due to Related Parties
 
Certain of the Company’s officers and directors, from time to time, have provided advances to the Company for working capital purpose. These advances are short-term in nature, non-interest bearing, unsecured and payable on demand. The due to related parties amount at September 30, 2013 and December 31, 2012 was as follows:
 
Name of related parties
 
September 30, 2013
   
December 31, 2012
 
Zhiguo Wang
  $ 47,804     $ 45,976  
Guifang Qi
    3,853       1,900  
Total
  $ 51,657     $ 47,876  
 
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 initially 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 (approximately $32,000) 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, the Company 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, 2013, Kairun has not yet completed the services provided for in the Technology Agreement and, therefore, no payment was made to Kairun.
 
NOTE 9 – 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, 2013 and 2012, the Company appropriated to statutory reserve the amount of $63,772 and $102,361, respectively. For the nine months ended September 30, 2013 and 2012, the Company appropriated to statutory reserve the amount of $311,256 and $363,819, respectively. The accumulated balance of the statutory reserve of the Company as of September 30, 2013 and December 31, 2012 was $2,490,750 and $2,179,494, respectively.
 
 
18

 
 
NOTE 10 – 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.
 
During the three and nine months ended September 30, 2013 and 2012, 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, 2013 and 2012 was as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Revenues:
                       
   TCM raw materials
  $ 1,005,323     $ 893,909     $ 3,171,814     $ 2,860,552  
   Yew trees
    448,810       396,416       2,102,417       1,853,504  
   Handicrafts
    90,194       82,699       175,402       118,734  
      1,544,327       1,373,024       5,449,633       4,832,790  
Cost of revenues:
                               
   TCM raw materials
    226,616       158,354       841,667       446,436  
   Yew trees
    348,040       21,395       753,718       320,410  
   Handicrafts
    63,572       51,188       127,034       69,863  
      638,228       230,937       1,722,419       836,709  
Depreciation and amortization
                               
   TCM raw materials
    92,764       84,334       271,581       253,157  
   Yew trees
    8,723       14,573       25,949       41,638  
   Handicrafts
    7,795       7,428       23,358       23,532  
   Other
    28,309       36,017       98,474       99,396  
      137,591       142,352       419,362       417,723  
                                 
Net income (loss)
                               
   TCM raw materials
    778,707       735,555       2,330,147       2,414,116  
   Yew trees
    100,770       375,021       1,348,699       1,533,094  
   Handicrafts
    26,622       31,511       48,368       48,871  
   Other
    (313,887 )     (262,428 )     (869,982 )     (636,211 )
    $ 592,212     $ 879,659     $ 2,857,232     $ 3,359,870  
 
 
19

 
 
Information with respect to identifiable long-lived assets, net, as of September 30, 2013 and December 31, 2012 was as follows:
 
   
September 30,
 2013
   
December 31,
2012
 
TCM raw materials
 
$
15,755,289
   
$
14,983,045
 
Yew trees
   
3,900,951
     
4,357,203
 
Handicrafts
   
913,414
     
817,917
 
Other
   
6,196,128
     
5,438,286
 
   
$
26,765,782
   
$
25,596,451
 
 
Information with respect to expenditures for segment assets for the nine months ended September 30, 2013 and 2012 was as follows:
 
   
Nine Months Ended September 30,
 
   
2013
   
2012
 
TCM raw materials
  $ 513,685     $ 65,749  
Yew trees
    183,235       83,098  
Handicrafts
    -       -  
Other
    34,369       125,426  
    $ 731,289     $ 274,273  
 
The Company does not allocate any selling, general and administrative expenses, other income/expenses to its reportable segments because these activities are managed at a corporate level. In addition, the specified amounts for interest expense and income tax expense are not included in the measure of segment profit or loss reviewed by the chief operating decision maker and these specified amounts are not regularly provided to the chief operating decision maker. Therefore, the Company has not disclosed interest expense and income tax expense for each reportable segment.
 
Asset information by reportable segment is not reported to or reviewed by the chief operating decision maker and, therefore, the Company has not disclosed asset information for each reportable segment. The Company’s operations are located in the PRC. All revenues are derived from customers in the PRC. All of the Company’s operating assets are located in the PRC.
 
NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS
 
In March 2013, the FASB issued ASU 2013-05 “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s consolidated financial statements.
 
 
20

 
 
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. These amendments provide that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.
 
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
 
NOTE 12 - SUBSEQUENT EVENTS
 
The Company has evaluated all other subsequent events through November 12, 2013, the date these consolidated financial statements were issued, and determined that there were no other subsequent events or transactions that require recognition or disclosures in the financial statements.
 
 
21

 
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
           The following discussion of our consolidated results of operations for the three and nine months ended September 30, 2013 and 2012, and cash flows for the nine months ended September 30, 2013 and 2012, and consolidated financial conditions as of September 30, 2013 and December 31, 2012 should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this document.
 
Overview
 
We are a major grower and seller of yew trees and manufacturer 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, 2013 and 2012, 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 and nine months ended September 30, 2013 and 2012, revenue by segment as a percentage of consolidated revenues is summarized as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
TCM raw materials
    65.1 %     65.1 %     58.2 %     59.2 %
Yew trees
    29.1 %     28.9 %     38.6 %     38.3 %
Handicrafts
    5.8 %     6.0 %     3.2 %     2.5 %
Total
    100.0 %     100.0 %     100.0 %     100.0 %
 
For the three and nine months ended September 30, 2013 and 2012, revenue by segment as a percentage of consolidated revenues is summarized by third party and related party revenues as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
TCM raw materials - Total
    65.1 %     65.1 %     58.2 %     59.2 %
   TCM raw materials – third parties
    59.4 %     32.9 %     32.3 %     46.8 %
   TCM raw materials – related party
    5.7 %     32.2 %     25.9 %     12.4 %
                                 
Handicrafts - Total
    5.8 %     6.0 %     3.2 %     2.5 %
   Handicrafts– third parties
    5.8 %     6.0 %     3.2 %     2.4 %
   Handicrafts – related party
    -       -       -       0.1 %
 
 
22

 
 
All of our revenues were generated by HDS and in the PRC. Other than expenses (approximately $243,000 and $182,000 for the nine months ended September 30, 2013 and 2012, respectively) incurred primarily related to meeting its reporting requirements in the U.S., YBP has no other significant business operations. At September 30, 2013, YBP has approximately $15,000 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 $11,000, including approximately $3,000 in cash at September 30, 2013. JSJ also holds the VIE interests in HDS through the contractual arrangements (the “Contractual Arrangements”) described in Note 2 of Notes to Consolidated Financial Statements. In the event that 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 any violation of PRC laws, rules and regulations, we would lose control of the VIE resulting in its deconsolidation in financial reporting and severe loss in our market valuation.
 
Results of Operations
 
The following tables set forth key components of our results of operations for the periods indicated and key components of our revenue for the periods indicated, in dollars. The discussion following the table is based on these results.
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Revenues - third parties
  $ 1,455,621     $ 930,557     $ 4,040,492     $ 4,230,631  
Revenues - related party
    88,706       442,467       1,409,141       602,159  
    Total revenues
    1,544,327       1,373,024       5,449,633       4,832,790  
Cost of revenues - third parties
    618,059       146,409       1,320,028       726,957  
Cost of revenues - related party
    20,169       84,528       402,391       109,752  
    Total cost of revenues
    638,228       230,937       1,722,419       836,709  
Gross profit
    906,099       1,142,087       3,727,214       3,996,081  
Operating expenses
    315,967       262,656       871,529       637,666  
Income from operations
    590,132       879,431       2,855,685       3,358,415  
Other income (expenses)
    2,080       228       1,547       1,455  
Net income
    592,212       879,659       2,857,232       3,359,870  
Other comprehensive income:
                               
Foreign currency translation adjustment
    180,344       (59,359 )     777,867       108,308  
Comprehensive income
  $ 772,556     $ 820,300     $ 3,635,099     $ 3,468,178  
 
Three and Nine Months Ended September 30, 2013 Compared to Three and Nine Months Ended September 30, 2012
 
Revenues
 
For the three months ended September 30, 2013, we had total revenues of $1,544,327, as compared to $1,373,024 for the three months ended September 30, 2012, an increase of $171,303 or 12.5%. For the nine months ended September 30, 2013, we had total revenues of $5,449,633, as compared to $4,832,790 for the nine months ended September 30, 2012, an increase of $616,843 or 12.8%. As more fully described in segment financial data below, the increase in total revenue was attributable to an increase in revenues from all three of our business segments.
 
 
23

 
 
Total revenue is summarized as follows:
 
   
Three Months Ended September 30,
             
   
2013
   
2012
   
Increase
   
Percentage Change
 
TCM raw materials
  $ 1,005,323     $ 893,909     $ 111,414       12.5 %
Yew trees
    448,810       396,416       52,394       13.2 %
Handicrafts
    90,194       82,699       7,495       9.1 %
Total
  $ 1,544,327     $ 1,373,024     $ 171,303       12.5 %
 
   
Nine Months Ended September 30,
             
   
2013
   
2012
   
Increase
   
Percentage Change
 
TCM raw materials
  $ 3,171,814     $ 2,860,552     $ 311,262       10.9 %
Yew trees
    2,102,417       1,853,504       248,913       13.4 %
Handicrafts
    175,402       118,734       56,668       47.7 %
Total
  $ 5,449,633     $ 4,832,790     $ 616,843       12.8 %
 
During the nine months ended September 30, 2013, Yew Pharmaceutical, an affiliate, has been our single largest customer. For the three months ended September 30, 2013 and 2012, we had revenue from the sale of TCM raw materials of $88,706, or 5.7% of consolidated revenue, and $442,467, or 32.2% of consolidated revenue, respectively, from Yew Pharmaceutical, a related party, a decrease of $353,761. Additionally, for the nine months ended September 30, 2013 and 2012, we had revenue from the sale of TCM raw materials of $1,409,141, or 25.9% of consolidated revenues, and $600,556, or 12.5% of consolidated revenues, respectively, to Yew Pharmaceutical, an increase of $808,585.
 
As more fully described in segment information below, revenue from TCM raw materials and the allocation of sales between related and third parties may fluctuate from period to period depending upon the then current inventory and other purchasing needs of our third-party customers and Yew Pharmaceutical. Accordingly, in some periods we may have more sales to Yew Pharmaceutical and in other periods we may have more sales to third-party customers. During the three months ended September 30, 2013, Yew Pharmaceutical had sufficient inventory of yew raw materials for the production of Zi Shan and did not make significant purchases from us. Revenue generated from Yew Pharmaceutical increased during the nine months ended September 30, 2013 because Yew Pharmaceutical needed to replenish its inventory of yew raw materials in connection with its manufacture of Zi Shan. The sale of TCM raw materials to third party customers increased during the three months ended September 30, 2013 because our customers indicated to us that they needed additional inventory of yew raw materials to sell to their customers.  The sale of TCM raw materials to third party customers decreased during the nine months ended September 30, 2013 because our customers indicated to us that they had sufficient inventory of yew raw materials to sell to their customers. We expect that, as a percentage of revenue, sales of TCM raw materials will increase to third party customers and decrease to Yew Pharmaceutical during the remainder of 2013; however, the purchasing requirements of our customers could change.
 
Because TCM raw materials is our largest business segment, any fluctuation in revenue from TCM raw materials may have a significant impact on net income in such periods. Currently, we are largely dependent on Yew Pharmaceutical and a small number of larger, third party customers of TCM raw materials, although we are attempting to expand our sales and marketing efforts to new customers as well. To date, sales of yew raw materials to new customers have been smaller in amount and we expect this situation to continue at least for the remainder of this year.
 
We currently have significant accounts receivable from Yew Pharmaceutical and certain of our third party customers of TCM raw materials. See “Liquidity and Capital Resources” below. Subject to Yew Pharmaceutical’s paying down a significant portion of amounts it owes to us, we expect sales of TCM raw materials to Yew Pharmaceutical to recommence in the fourth quarter of 2013.
 
Cost of Revenues
 
Our cost of revenues principally consists of the cost of raw materials such as wood plates and yews, amortization of land use rights and yew forest assets, labor, utilities, manufacturing costs, manufacturing related depreciation, machinery maintenance costs, purchasing and receiving costs, inspection costs, and other fixed costs.
 
 
24

 
 
As more fully described in segment information below:
 
For the three months ended September 30, 2013, total cost of revenues amounted to $638,228 as compared to $230,937 for the three months ended September 30, 2012, an increase of $407,291 or 176.4%.
 
For the nine months ended September 30, 2013, total cost of revenues amounted to $1,722,419 as compared to $836,709 for the nine months ended September 30, 2012, an increase of $885,710 or 105.9%.
 
For the three months ended September 30, 2013, total cost of revenues accounted for 41.3% of total revenues compared to 16.8% of total revenues for the three months ended September 30, 2012.
 
For the nine months ended September 30, 2013, total cost of revenues accounted for 31.6% of total revenues compared to 17.3 % of total revenues for the nine months ended September 30, 2012.
 
Cost of revenues by product categories was as follows:
 
   
Three Months Ended September 30,
             
   
2013
   
2012
   
Increase
   
Percentage Change
 
                         
TCM raw materials
  $ 226,616     $ 158,354     $ 68,262       43.1 %
Yew trees
    348,040       21,395       326,645       1,526.7 %
Handicrafts
    63,572       51,188       12,384       24.2 %
Total
  $ 638,228     $ 230,937     $ 407,291       176.4 %
 
   
Nine Months Ended September 30,
             
   
2013
   
2012
   
Increase
   
Percentage Change
 
TCM raw materials
  $ 841,667     $ 446,436     $ 395,231       88.5 %
Yew trees
    753,718       320,410       433,308       135.2 %
Handicrafts
    127,034       69,863       57,171       81.8 %
Total
  $ 1,722,419     $ 836,709     $ 885,710       105.9 %

Gross Profit
 
   For the three months ended September 30, 2013, gross profit was $906,099 as compared to $1,142,087 for the three months ended September 30, 2012, representing gross margins of 58.7% and 83.2%, respectively. For the nine months ended September 30, 2013, gross profit was $3,727,214 as compared to $3,996,081 for the nine months ended September 30, 2012, representing gross margins of 68.4% and 82.7%, respectively.
 
   Gross profit margins by product categories were as follows:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2013
   
2012
   
(Decrease)
   
2013
   
2012
   
(Decrease)
 
TCM raw materials
    77.5 %     82.3 %     (4.8 )%     73.5 %     84.4 %     (10.9 )%
Yew trees
    22.5 %     94.6 %     (72.1 )%     64.1 %     82.7 %     (18.6 )%
Handicrafts
    29.5 %     38.1 %     (8.6 )%     27.6 %     41.2 %     (13.6 )%
Total
    58.7 %     83.2 %     (24.5 )%     68.4 %     82.7 %     (14.3 )%
 
 
25

 
 
As more fully described in segment information below:
 
For the three months ended September 30, 2013, our gross margin percentage related to the sale of TCM raw materials decreased as compared to the three months ended September 30, 2012. The decrease was primarily attributable to an increase in the average unit cost of TCM raw materials, and partially offset by an increase in the average unit selling price for our TCM raw materials. For the nine months ended September 30, 2013, our gross margin percentage related to the sale of TCM raw materials decrease as compared to the nine months ended September 30, 2012. The decrease was mainly attributable to a decrease in the average unit selling price for our TCM raw materials and an increase in the average unit cost of TCM raw materials, which contributed to the lower gross profit margin in the 2013 period. During the 2013 and 2012 periods, we sold TCM raw materials to Yew Pharmaceutical, a related party, at a fixed price of RMB 1,000,000 (approximately $161,000) per metric ton pursuant to the Development Agreement, and we sold TCM raw materials to other customers at a price of approximately RMB 1,100,000 (approximately $177,000) per metric ton. During the three and nine months ended September 30, 2013, revenue from sales of TCM raw materials to Yew Pharmaceutical amounted to $8.8% and 44.4% of TCM raw materials revenue as compared to 49.5%, and 21.0% f or the comparable periods in 2012, respectively.  Accordingly, our average unit selling price may fluctuate from period to period depending on the allocation of sales between related and third parties. We currently expect that, as a percentage of revenue, sales of TCM raw materials will increase to third party customers and decrease to Yew Pharmaceutical during the remainder of 2013; however, the purchasing requirements of our customers could change.
 
For the three and nine months ended September 30, 2013, our gross margin percentages related to the sale of yew trees and seedlings decreased as compared to the comparable periods in the prior year. The decrease in these gross margin percentages was primarily attributable to a decrease in the average unit selling price for our yew trees and seedlings and an increase in the average unit cost of yew trees and seedlings, which contributed to the lower gross profit margin in the 2013 periods.
 
The decrease in our gross margin percentages related to the sale of handicrafts for the three and nine months ended September 30, 2013 was mainly due to the different sales revenue mix with different gross profit margins. During the three and nine months ended September 30, 2013, we sold fewer lower-priced handicrafts with higher profit margin and sold more higher-priced handicrafts, which generally have lower profit margins compared to lower-priced handicrafts. Therefore, our gross margin percentages related to the sale of handicrafts for the 2013 periods decreased. Additionally, during the nine months ended September 30, 2013, we sold two handicraft products with revenue of approximately $15,000 with a corresponding cost of revenue of $39,000. Accordingly, during the nine months ended September 30, 2013, we recognized a negative gross profit of approximately $24,000 from the transaction. The two handicraft products sold at a negative were observed as having some breakage and cracks, and accordingly, management decided to sell these products at a selling price that was lower than cost.
 
Selling Expenses
 
Selling expenses consisted of the following:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Salary and related benefit
  $ 5,417     $ 4,016     $ 13,536     $ 11,718  
Shipping and handling
    817       303       1,528       696  
Other
    1,122       2,324       3,985       5,466  
Total
  $ 7,356     $ 6,643     $ 19,049     $ 17,880  
 
For the three months ended September 30, 2013, selling expenses were $7,356 as compared to $6,643 for the three months ended September 30, 2012, an increase of $713, or 10.7%. For the nine months ended September 30, 2013, selling expenses were $19,049 as compared to $17,880 for the nine months ended September 30, 2012, an increase of $1,169, or 6.5%. The increase in our selling expenses for the three and nine months ended September 30, 2013 was primarily attributable to an increase in salary and related benefit and shipping and handling expenses, partially offset by a decrease in other miscellaneous selling expenses.
 
 
26

 
 
General and Administrative Expenses
 
For the three months ended September 30, 2013, general and administrative expenses amounted to $308,611, as compared to $256,013 for the three months ended September 30, 2012, an increase of $52,598, or 20.5%. For the nine months ended September 30, 2013, general and administrative expenses amounted to $852,480, as compared to $619,786 for the nine months ended September 30, 2012, an increase of $232,694, or 37.5%. General and administrative expenses consisted of the following:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Compensation and related benefits
  $ 82,214     $ 76,056     $ 221,913     $ 224,061  
Depreciation
    35,781       48,634       120,870       137,624  
Travel and entertainment
    17,057       27,819       64,819       68,120  
Professional fees
    108,591       74,374       281,272       111,628  
Other
    64,968       29,130       163,606       78,353  
Total
  $ 308,611     $ 256,013     $ 852,480     $ 619,786  
 
The increase in our general and administrative expenses for the three and nine months ended September 30, 2013, as compared to the three and nine months ended September 30, 2012, was primarily attributable to the increase in professional fees and other miscellaneous general and administrative expenses, offset by the decrease in depreciation expense and travel and entertainment expense.
 
The changes in general and administrative expenses for the three and nine months ended September 30, 2013, as compared to the three and nine months ended September 30, 2012, consisted of the following:
 
For the three months ended September 30, 2013, compensation and related benefits increased by $6,158, or 8.1%, as compared to the three months ended September 30, 2012, which was mainly attributable to an increase in salaries paid to our management and other administrative staff resulting from our expanded business during the third quarter of 2013. For the nine months ended September 30, 2013, compensation and related benefits decreased by $2,148, or 1.0%, as compared to the nine months ended September 30, 2012.
 
For the three months ended September 30, 2013, depreciation decreased by $12,853, or 26.4%, as compared to the three months ended September 30, 2012. For the nine months ended September 30, 2013, depreciation decreased by $16,754, or 12.2%, as compared to the nine months ended September 30, 2012. The decreases were primarily attributable to a decrease in depreciable assets.
 
For the three months ended September 30, 2013, travel and entertainment decreased by $10,762 or 38.7%, as compared to the three months ended September 30, 2012. For the nine months ended September 30, 2013, travel and entertainment decreased by $3,301 or 4.8%, as compared to the nine months ended September 30, 2012. These decreases for the periods shown were primarily attributable to a decrease in travel activities.
 
Professional fees consisted primarily of legal, accounting, investor relations fees, investment banking fees and other fees associated with the cost of being a public company in the United States. For the three months ended September 30, 2013, professional fees increased by $34,217, or 46.0%, as compared to the three months ended September 30, 2012. The increase was primarily attributable to an increase in fees incurred and paid for investor relations service and investment banking fees in the aggregate amount of approximately $36,000, offset by a decrease in other miscellaneous professional fees of approximately $2,000 in the third quarter of fiscal 2013. For the nine months ended September 30, 2013, professional fees increased by $169,644, or 152.0%, as compared to the nine months ended September 30, 2012. The increase was mainly attributable to an increase in fees for investor relations, investment banking fees and consulting services of approximately $106,000, an increase in fees incurred for the Company’s 2013 Shareholders’ Meeting of approximately $19,000, an increase in fees related to SEC filing service of approximately $10,000, an increase in press release publication service charge of approximately $8,000, an increase in fees related to quarterly review and tax return preparation of approximately $14,000, and an increase in fees incurred for DTC advisory service of approximately $12,000.
 
 
 
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For the three months ended September 30, 2013, other miscellaneous general and administrative expense increased by $35,838, or 123.0%, as compared to the three months ended September 30, 2012. The increase was primarily due to an increase in research and development expense of approximately $6,000, an increase in non-capitalized maintenance expenses of approximately $27,000 and an increase in other miscellaneous items of approximately $3,000. For the nine months ended September 30, 2013, other miscellaneous general and administrative expense increased by $85,253, or 108.8%, as compared to the nine months ended September 30, 2012. The increase was primarily due to an increase in vehicle expenses of approximately $32,000, an increase in U.S. tax interest and penalties of approximately $11,000, an increase in office expense of approximately $6,000, an increase in research and development expense of approximately $9,000 and an increase in non-capitalized maintenance expenses of approximately $27,000.
 
Income from Operations
 
For the three months ended September 30, 2013, income from operations was $590,132, as compared to income from operations of $879,431 for the three months ended September 30, 2012, a decrease of $289,299, or 32.9%. For the nine months ended September 30, 2013, income from operations was $2,855,685, as compared to income from operations of $3,358,415 for the nine months ended September 30, 2012, a decrease of $502,730, or 15.0%. These decreases for the periods shown were primarily attributable to a decrease in overall gross profit and an increase in general and administrative expenses.
 
Other Income (Expenses)
 
For the three months ended September 30, 2013, total other income was $2,080, as compared to total other income of $228 for the three months ended September 30, 2012. For the nine months ended September 30, 2013, total other income was $1,547, as compared to total other income of $1,455 for the nine months ended September 30, 2012.
 
Net Income
 
As a result of the factors described above, our net income was $592,212 or $0.01 per share (basic and diluted), for the three months ended September 30, 2013, as compared to net income of $879,659, or $0.02 per share (basic and diluted), for the three months ended September 30, 2012. Our net income was $2,857,232 or $0.06 per share (basic and diluted), for the nine months ended September 30, 2013, as compared to net income of $3,359,870, or $0.07 per share (basic and diluted), for the nine months ended September 30, 2012.
 
Foreign Currency Translation Adjustment
 
 For the three months ended September 30, 2013, we reported an unrealized gain on foreign currency translation of $180,344, as compared to an unrealized loss of $59,359 for the three months ended September 30, 2012. For the nine months ended September 30, 2013, we reported an unrealized gain on foreign currency translation of $777,867, as compared to an unrealized gain of $108,308 for the nine months ended September 30, 2012. The change reflects the effect of the value of the U.S. dollar in relation to the RMB. These gains (loss) are non-cash items. As described elsewhere herein, the functional currency of our subsidiary, JSJ, and our VIE, HDS, is the RMB. The accompanying consolidated financial statements have been translated and presented in U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange for the period for net revenues, costs, and expenses. Net gains or losses resulting from foreign exchange transactions, if any, are included in the consolidated statements of income.
 
 
28

 
 
Comprehensive Income
 
For the three months ended September 30, 2013, comprehensive income of $772,556 was derived from the sum of our net income of $592,212 plus a foreign currency translation gain of $180,344. For the three months ended September 30, 2012, comprehensive income of $820,300 was derived from the sum of our net income of $879,659, partially offset by a foreign currency translation loss of $59,359.
 
For the nine months ended September 30, 2013, comprehensive income of $3,635,099 was derived from the sum of our net income of $2,857,232 plus a foreign currency translation gain of $777,867. For the nine months ended September 30, 2012, comprehensive income of $3,468,178 was derived from the sum of our net income of $3,359,870 plus a foreign currency translation gain of $108,308.
 
Segment Information
 
Overview
 
For the three and nine months ended September 30, 2013 and 2012, 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.
 
Information with respect to these reportable business segments for the three months ended September 30, 2013 and 2012 was as follows:
 
   
For the three months ended
September 30, 2013
   
For the three months ended
September 30, 2012
 
   
Revenues-
third parties
   
Revenues – related party
   
Total
   
Revenues-
third parties
   
Revenues – related party
   
Total
 
Revenues:
                                   
TCM raw materials
  $ 916,617     $ 88,706     $ 1,005,323     $ 451,442     $ 442,467     $ 893,909  
Yew trees
    448,810       -       448,810       396,416       -       396,416  
Handicrafts
    90,194       -       90,194       82,699       -       82,699  
Total revenues
  $ 1,455,621     $ 88,706     $ 1,544,327     $ 930,557     $ 442,467     $ 1,373,024  
                                                 
Cost of revenues:
                                               
TCM raw materials
  $ 206,447     $ 20,169     $ 226,616     $ 73,826     $ 84,528     $ 158,354  
Yew trees
    348,040       -       348,040       21,395       -       21,395  
Handicrafts
    63,572       -       63,572