Attached files

file filename
EX-23.1 - EX-23.1 - Yew Bio-Pharm Group, Inc.d30139_ex23-1.htm
EX-5.1 - EX-5.1 - Yew Bio-Pharm Group, Inc.fs1a1ex5i_yewbio.htm
EX-3.3 - EX-3.3 - Yew Bio-Pharm Group, Inc.fs1a1ex3iii_yewbio.htm

Table of Contents

As filed with the Securities and Exchange Commission on January 23, 2013

Registration No. 333-185320

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Amendment No. 1 to

FORM S-1

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933


Yew Bio-Pharm Group, Inc.

(Exact name of registrant as specified in its charter)

Nevada
           
0100            
   
26-1579105
(State or other jurisdiction
of incorporation)
           
(Primary Standard Industrial            
Classification Code Number)            
   
(I.R.S. Employer
Identification Number)
 


294 Powerbilt Avenue
Las Vegas, Nevada 89148
(702) 487-6727
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)


Zhiguo Wang
294 Powerbilt Avenue
Las Vegas, Nevada 89148
(702) 487-6727
(Name, address, including zip code, and telephone number,
including area code, of agent for service)


Copy to:
Lance Jon Kimmel, Esq.
SEC Law Firm
11693 San Vicente Boulevard, Suite 357
Los Angeles, California 90049
Tel: (310) 557-3059
Fax: (310) 388-1320

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X]

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o
           
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
           
Smaller reporting company  [X]
 


Calculation of Registration Fee


Title of Each Class Of
Securities to be Registered


  
Amount to be
Registered(1)
  
Proposed Maximum
Offering Price
per Share (2)
  
Proposed Maximum
Aggregate
Offering Price
  
Amount of
Registration Fee
Common stock, par value $0.001 per share
           
16,500,000
   
$0.25
      $ 4,125,000          $ 562.65   
 
(1)  
  This Registration Statement covers the resale by our selling shareholders of up to 16,500,000 shares of common stock previously issued to such selling shareholders.

(2)  
  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a), based on the last private sales price for common stock of the registrant, as there is currently no public market price for the registrant’s common stock. The last private sales price here is determined by the price per share sold in a private placement completed in September 2009 of $0.10 per share plus an arbitrary increase in value of $0.15, to account for the potential increased value of our stock as a result of such shares having increased liquidity and being registered with the SEC. The selling shareholders will sell at the fixed price of $0.25 per share until our common stock is quoted on the OTC Bulletin Board and thereafter at prevailing market prices or privately negotiated prices.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.





Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS
                 SUBJECT TO COMPLETION ON JANUARY 23, 2013   
 


16,500,000 Shares of Common Stock

Yew Bio-Pharm Group, Inc.


This prospectus relates to periodic offers and sales of 16,500,000 shares of our common stock by the selling security holders.

Our common stock is presently not traded on any market or securities exchange. The 16,500,000 shares of our common stock will be sold by selling security holders at a fixed price of $0.25 per share until our shares are quoted on the OTC Bulletin Board and thereafter at prevailing market prices or privately negotiated prices. The offering price of $0.25 per share for the shares of common stock was determined based on the price of our common stock of $0.10 during our most recently completed private offering. We arbitrarily added an additional $0.15 over the offering price of our common stock during our most recently completed private offering to account for the potential increased value of our stock as a result of such shares having increased liquidity and being registered with the SEC and unrestricted. Such increase in value is purely speculative and not based upon any rigorous analysis.

The offering price bears no relationship to the book value, assets or earnings of our company or any other recognized criteria of value. There can be no assurance that a market maker will agree to file the necessary documents with the Financial Industry Regulatory Authority, or FINRA, nor can there be any assurance that such an application for quotation will be approved. We have agreed to bear the expenses relating to the registration of the shares for the selling security holders. There is no assurance that an active trading market for our shares will develop, or, if developed, that it will be sustained. In the absence of a trading market or an active trading market, investors may be unable to liquidate their investment or make any profit from the investment.

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and are subject to reduced public company reporting requirements.

An investment in our securities is highly speculative, involves a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. See “Risk Factors” beginning on page 5 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is _______________, 2012



Table of Contents

TABLE OF CONTENTS

                 1    
                 5    
                 25   
                 25   
                 26   
                 26   
                 26   
                 27   
                 53   
                 74   
                 76   
                 78   
                 80   
                 81   
                 82   
                 103   
                 104   
                 104   
                 104   
                 F-1    
 


Please read this prospectus carefully. It describes our business, our financial condition and results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.

You should rely only on information contained in this prospectus. We have not authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.



Table of Contents


PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our securities. You should read the entire prospectus, including “Risk Factors” and the consolidated financial statements and the related notes before making an investment decision.

Unless otherwise noted, references in this registration statement to the “Company,” “we,” “our” or “us” means Yew Bio-Pharm Group, Inc. (or individually, YBP), a Nevada corporation; its wholly-owned subsidiaries, Yew Bio-Pharm Holdings Limited (or individually, Yew HK), a corporation organized under the laws of Hong Kong, and Heilongjiang Jinshangjing Bio-Technology Development Co., Limited (or individually, JSJ), a corporation organized in the People’s Republic of China, referred to as the PRC or China; and a deemed variable interest entity, or VIE, Harbin Yew Science and Technology Development Co., Ltd. (or individually, HDS), a corporation organized in the PRC; but such references to not include the shareholders of YBP.

Business Overview

The Company, through YBP; its wholly-owned subsidiaries Yew HK and JSJ; and its VIE, HDS; is a major grower and seller of yew trees and manufacturer of products made from yew trees in China. We also sell raw material, including the branches and leaves of yew trees, used in the manufacture of traditional Chinese medicine, or TCM. The yew raw material contains taxol, and TCM containing yew raw material 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 regulated in the PRC because the yew tree is considered an endangered species.

We believe that our business is built upon five unique components:

  We have entered into several land use agreements with various parties, which provide the potential for us to grow a large number of yew trees on approximately 1,017,713.5 mu (approximately 169,619 acres) over the next few decades, although we cannot currently estimate the total number of trees we will grow or the total amount of land we will put into production over such period. (Mu is a Chinese measurement of land that is equivalent to approximately 0.167 acres.)

  We employ proprietary, patented accelerated growth technology, “Northeast Yew Asexual Reproduction Method”, or the Asexual Reproduction Method, to bring yew trees to commercialization decades faster than growing yew trees naturally.

  Because of our more productive and faster rate of yew cultivation, we have a sufficient supply of raw material to allow us to use the branches and leaves, rather than the bark, of yew trees, to sell to customers for the purpose of making TCM. The yew industry is highly regulated in the PRC because the yew tree is considered an endangered species. By harvesting only branches and leaves of yew trees we respond to both environmental sensitivities and regulations, because cutting the bark of the yew trees will damage the trees and stop it from growing new branches.

  We have permits from the Heilongjiang provincial government to sell our yew trees and manufacture handicrafts using yew timber. We believe that we are one of only a handful of companies in the PRC with permissions to manufacture handicrafts using yew timber.

  The TCM raw materials and yew tree segments of our business are tax-free in the PRC.

Using patented accelerated growth technology developed by our founder and President, Zhiguo Wang, based on principles of asexual propagation and cloning, we can bring yew trees to maturity and commercialize them in as little as two-to-three years, compared to more than 50 years needed for naturally grown yew trees. Additionally, we have permits from the Heilongjiang provincial government to sell our yew trees and products made from yew trees. We believe that we are one of only a few companies in the PRC with such permission.

1



Table of Contents


We operate in three business segments: TCM raw materials, yew trees and handicrafts. We sell raw materials in the form of yew tree branches and leaves to our customers, primarily an affiliate, to manufacture TCM containing taxol. We began the TCM raw materials segment in 2010.

Our TCM raw materials business became our largest operating segment in 2011 and is expected to continue to contribute an increasing percentage of net revenue in future periods.

In December 2009, another company owned directly and indirectly primarily by Mr. Wang, Heilongjiang Yew Pharmaceutical Co., Ltd., or Yew Pharmaceutical, received approval from the Heilongjiang Food and Drug Agency, or HFDA, to sell Zi Shan, a TCM to be sold under both prescription and over-the-counter drug categories. Zi Shan contains taxol, and the TCM is approved in the PRC as a secondary treatment of cancer, meaning it must be administered in combination with other pharmaceutical drugs. In February 2010, we began selling to Yew Pharmaceutical branches and leaves of yew trees, which is more environmentally responsible than using the bark of yew trees, to extract taxol.

We also derive a significant amount of our revenue from the sale of yew seedlings and trees to state-owned enterprises and private businesses for reforestation in Heilongjiang Province and Jilin Province, in northeastern China, as well as the sale of potted yew trees to retail customers. Additionally, we generate revenue from the sale of handicrafts, including furniture, made from yew timber. All of our revenue is derived from the Chinese domestic market.

For the nine months ended September 30, 2012, our TCM raw materials revenue represented approximately 59.2% of consolidated revenue (including 12.4% of consolidated revenues to related parties); sale of yew trees represented approximately 38.3% of consolidated revenue; and the sale of handicrafts represented approximately 2.5% of consolidated revenue (including 0.1% of consolidated revenues to related parties). For the nine months ended September 30, 2011, our TCM raw materials revenue represented approximately 60.2% of consolidated revenue (including 26.5% of consolidated revenues to related parties); sale of yew trees represented approximately 37.7% of consolidated revenue; and the sale of handicrafts represented approximately 2.1% of consolidated revenue. For the year ended December 31, 2011, our TCM raw materials revenue represented approximately 58.0% of consolidated revenue (including 23.3% of consolidated revenues to related parties); sale of yew trees represented approximately 40.3% of consolidated revenue; and the sale of handicrafts represented approximately 1.7% of consolidated revenue. For the year ended December 31, 2010, our TCM raw materials revenue represented approximately 55.5% of consolidated revenue (including 25.9% of consolidated revenues to related parties); sale of yew trees represented approximately 41.6% of consolidated revenue; and the sale of handicrafts represented approximately 2.9% of consolidated revenue. We expect that sales from our TCM raw materials segment will become an increasingly important source of revenue for us.

Under Article 27 of the Law of the PRC on Enterprises Income Tax and Article 15 of the provisional regulations of the PRC on Value Added Tax, we do not pay any tax, including income tax and value added tax, or VAT, in our TCM raw materials and yew tree segments. Our current VAT exemption certificate is valid from July 1, 2005 through December 31, 2016 and our current income tax exemption certificate is valid from January 1, 2008 through December 31, 2058. We pay taxes on handicrafts made from yew timber.

Zhiguo Wang, the founder of the Company and our President, does not devote all of his time to the Company’s business. We estimate that Mr. Wang devotes approximately 71% of his time, or approximately 120 hours per month, to the Company’s business. He devotes about 12% of his time, or approximately 20 hours per month, to the business of Yew Pharmaceutical and the balance of his time, or approximately 28 hours per month, to the business of other companies in which he is involved. These allocations are approximate only and are subject to change depending upon the particular projects and changing needs of the individual businesses in which he is involved.

The executive offices of HDS, our operating entity, are located in Harbin City, the capital of Heilongjiang Province in the PRC. Our four nurseries used to cultivate yew trees, and our production facilities to manufacture products made from yew trees, are located in and around Harbin. We also have a facility in Harbin where we exhibit and warehouse potted yew trees, handicrafts and furniture.

2



Table of Contents


YBP was incorporated in Nevada on November 5, 2007.

Risk Factors

Our ability to successfully operate our business and achieve our goals and strategies is subject to numerous risks as discussed in the section titled “Risk Factors,” beginning on page 5.

Corporate Information

YBP’s executive offices are located at 294 Powerbilt Avenue, Las Vegas, Nevada 89148 and our telephone number is (702) 487-4683. Our website is www.yewchina.com. No part of our website is incorporated into this registration statement, the prospectus forming a part thereof, or any other report we file with the Securities and Exchange Commission, or the SEC, from time to time.

Implications of Being an Emerging Growth Company

We qualify as an emerging growth company as that term is used in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

  A requirement to have only two years of audited financial statements and only two years of related MD&A;

  Exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002;

  Reduced disclosure about the emerging growth company’s executive compensation arrangements; and

  No non-binding advisory votes on executive compensation or golden parachute arrangements.

We have already taken advantage of these reduced reporting burdens in this prospectus, which are also available to us as a smaller reporting company as defined under Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. We have elected to use the extended transition period provided above and therefore our financial statements may not be comparable to companies that comply with public company effective dates.

We could remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

For more details regarding this exemption, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies.”

3



Table of Contents


The Offering

Shares of common stock offered by selling shareholders
           
16,500,000
Shares of common stock outstanding before the offering
           
50,000,000
Shares of common stock outstanding after the offering
           
50,000,000
Terms of the offering
           
The selling shareholders will determine when and how they will sell the securities offered in this prospectus.
Trading Market
           
There is currently no trading market for our common stock. We intend to apply soon for quotation on the OTC Bulletin Board. We will require the assistance of a market-maker to apply for quotation and there is no guarantee that a market-maker will agree to assist us.
Use of proceeds
           
We will not receive proceeds from the resale of shares by the selling shareholders.
Risk Factors
           
The common stock offered hereby involves a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See “Risk Factors” below.
 

4



Table of Contents

RISK FACTORS

An investment in the Company is highly speculative in nature and involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision with regard to our securities. The statements contained in or incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, you may lose all or part of your investment.

Risks Related to our Business

Our products may not achieve or maintain widespread market acceptance.

Success of our products is highly dependent on market acceptance. We believe that continued market acceptance of our products will depend on many factors, including:

  the perceived advantages of our products over competing products and the availability and success of competing products;

  the effectiveness of our sales and marketing efforts;

  our product pricing and cost effectiveness;

  the safety and efficacy of our products and the prevalence and severity of adverse side effects, if any; and

  publicity concerning our products, product candidates or competing products.

If our products fail to achieve or maintain market acceptance, or if new products are introduced by others that are more favorably received than our products, are more cost effective or otherwise render our products obsolete, we may experience a decline in the demand for our products. If we are unable to market and sell our products successfully, our business, financial condition, results of operation and future growth would be adversely affected.

Our operating results may fluctuate and our future revenues and profitability are uncertain.

Our operating results have varied in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include the following:

  current and changing economic and financial conditions in China;

  market acceptance of our products;

  The effectiveness of distribution channels for our products;

  the impact of price changes in our products and services or our competitors’ products and services;

  the impact of decisions by distributors to offer competing or replacement products or modify or cease their marketing practices;

  the availability of alternatives to our products;

  seasonal fluctuations in business activity;

  changes in marketing expenses related to promoting and distributing our services

  limitations on sales of yew raw materials and yew trees during certain times of the year due to the seasonal growth cycle of yew trees; and

  potential disruptions in commerce due to catastrophic natural events or political conflict.

5



Table of Contents

Our operating expenses may increase. If an increase in our expenses is not accompanied by a corresponding increase in our revenues, our net profit will decrease and our financial condition may be adversely affected.

Due to all of the above factors, our revenues and operating results are difficult to forecast. Therefore, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful, and you should not rely upon them as an indication of future performance. Also, operating results may fall below our expectations and the expectations of securities analysts or investors in one or more future periods. If this were to occur, the market price of our common stock would likely decline.

Our future research and development projects may not be successful.

The successful development of TCM and pharmaceutical products can be affected by many factors. Products that appear to be promising at their early phases of research and development may fail to be commercialized for various reasons, including the failure to obtain the necessary regulatory approvals. In addition, the research and development cycle for new products for which we may obtain an approval certificate is long.

There is no assurance that our future research and development projects will be successful or completed within the anticipated time frame or budget or that we will receive the necessary approvals from relevant authorities for the production of these newly developed products, or that these newly developed products will achieve commercial success. Even if such products can be successfully commercialized, they may not achieve the level of market acceptance that we expect.

We have limited insurance coverage and may incur losses resulting from product liability claims or business interruptions.

The nature of our business exposes us to the risk of product liability claims that is inherent in the research and development, manufacturing and marketing of pharmaceutical products. These risks are greater for our products that receive regulatory approval for commercial sale. Even if a product were approved for commercial use by an appropriate governmental agency, there can be no assurance that users will not claim effects other than those intended resulted from the use of our products. While to date no material claim for personal injury resulting from allegedly defective products has been brought against us, a substantial claim or a substantial number of claims, if successful, could have a material adverse impact on our business, financial condition and results of operations.

We have a high concentration of sales to a small number of customers, one of which is an affiliate of our founder and President.

For the nine months ended September 30, 2012, Yew Pharmaceutical accounted for approximately 21% of our TCM raw materials revenue and approximately 13% of our consolidated revenue. For the year ended December 31, 2011, Yew Pharmaceutical accounted for approximately 40% of our TCM raw materials revenue and approximately 23% of our consolidated revenue. Yew Pharmaceutical is directly and indirectly owned primarily by our founder and President, Zhiguo Wang, and his wife, Guifang Qi.

The following customers accounted for 10% or more of our consolidated revenue for the nine months ended September 30, 2012:

  Anhui Bairun Medication Company, or Anhyui Bairun, accounted for approximately 16% of our consolidated revenue

  Shenzhen City Lianchengfa Keiji Corporation, or Shenzhen Keiji, accounted for approximately 14% of our consolidated revenue

  Changchun Hengtai Medication Corporation, or Changchun Hengtai, accounted for approximately 14% of our consolidated revenue

  Wuchang Hongyi Co., Ltd., or Wuchang Hongyi, accounted for approximately 13% of our consolidated revenue

6



Table of Contents

  Yew Pharmaceutical accounted for approximately 12% of our consolidated revenue

  Shenzhen Tianyitang Company, or Shenzhen Tianyitang, accounted for approximately 11% of our consolidated revenue

For the year ended December 31, 2011, the following customers accounted for 10% or more of our consolidated revenue:

  Yew Pharmaceutical accounted for approximately 23% of our consolidated revenue

  Anhui Bairun accounted for approximately 29% of our consolidated revenue

  Changchun Hengtai accounted for approximately 10% of our consolidated revenue

  Wuchang Hongyi accounted for approximately 13% of our consolidated revenue.

The loss of any of our largest customers could have a material adverse effect on our results of operations unless and until we can replace such customers.

The concentration of sales of yew trees to a small number of large customers could subject us to loss of significant revenues in the event that we were to lose one or more of our larger customers.

Additionally, many of our customers purchase trees from us in the spring but are not able to pay their bills until after harvest in the fall. Accordingly, our accounts receivable tend to increase during the second and third quarters of the year. If we are unable to collect the amounts owed to us by our major customers, there could be a material adverse effect on our results of operations and liquidity.

We owe amounts to related parties that are unsecured and payable on demand.

We owe certain amounts to related parties, including Zishan Technology Co., Ltd., or ZTC, Yew Pharmaceutical, Zhiguo Wang and Guifang Qi, that are payable on demand. As of December 31, 2011, the aggregate amount of these payables was approximately $266,488 and at September 30, 2012, the aggregate amount of these payables was approximately $56,098. If one or more of the parties demanded payment of the amounts due to them, we would be required to use cash on hand or other assets to satisfy these obligations. While we believe that we presently have more than adequate resources to satisfy all of these obligations, there is no assurance that, in the future, the use of resources to satisfy then-current amounts owed to such parties or other related parties would not require us to modify our operations should such obligations then constitute a significant amount of our then-available resources.

We face substantial competition in connection with the marketing and sale of our products.

Our products compete with products with similar medical efficacy in similar market areas. Most of our competitors are well established, have greater financial, marketing, personnel and other resources, have been in business for longer periods of time than us, and have products that have gained wide customer acceptance in the marketplace. The TCM and pharmaceutical industries are also characterized by the frequent introduction of new products. We may be unable to compete successfully or our competitors may develop products which have greater medical efficacy or gain wider market acceptance than ours.

We may not be able to manage our expansion of operations effectively.

We anticipate significant continued expansion of our business to address growth in demand for our products, as well as to capture new market opportunities. To manage the potential growth of our operations, we will be required to improve our operational and financial systems, procedures and controls, increase manufacturing capacity and output, and expand, train and manage our growing employee base. Furthermore, we need to maintain and expand our relationships with our customers, suppliers and other third parties. In addition, the success of our growth strategy depends on a number of internal and external factors, such as the expected growth of the pharmaceutical market in the PRC and the competition from other pharmaceutical companies. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures.

7



Table of Contents

In addition, our personnel, systems, procedures and controls may be inadequate to support our future operations. The improvements required to manage our growth will require us to make significant expenditures, expand, train and manage our employee base and allocate valuable management resources. If we fail to effectively manage our growth, our operating performance will suffer and we may lose clients, key vendors and key personnel.

We may incur substantial debt which could adversely affect our financial condition.

It is possible that we may incur substantial debt in order to expand our business, which could adversely affect our financial condition. Incurring a substantial amount of debt may require us to use a significant portion of our cash flow to pay principal and interest on such debt, which will reduce the amount available to fund working capital, capital expenditures and general corporate purposes. Our indebtedness may negatively impact our ability to operate our business and limit our ability to borrow additional funds by increasing our borrowing costs, and impact the terms, conditions and restrictions contained in possible future debt agreements, including the addition of more restrictive covenants; impact our flexibility in planning for and reacting to changes in our business as covenants and restrictions contained in possible future debt arrangements may require that we meet certain financial tests; and place restrictions on the incurrence of additional indebtedness and place us at a disadvantage compared to similar companies in our industry that have less debt.

We may not be able to raise additional capital as it is needed to fund our operations. In such an event, we may have to curtail some of our existing and planned business activities.

While we are profitable and have adequate financial resources to fund our business for at least the next 12 months, we may need additional capital in the future to expand our existing operations, including growing yew trees under the Joint Venture Agreement, which could require capital beyond our available resources from operations. We have no current plans to raise additional capital at this time. No assurance can be given that we will be able to raise any additional capital that may be needed in any public or private offering of our securities, or secure debt through banks or other lenders.

If adequate additional financing is not available on reasonable terms, we may not be able to expand our business and we would have to modify our business plans accordingly. There is no assurance that additional financing will be available to us.

In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs.

In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, our securities can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If we need additional funding we will, most likely, seek such funding in the United States, and the market fluctuations affect on our stock price could limit our ability to obtain equity financing.

If we cannot obtain additional funding, we may be required to: (i) limit our expansion; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business and our ability to compete.

Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are favorable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and

8



Table of Contents


privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.

Our results of operations may be affected by fluctuations in availability and price of raw materials.

The raw materials we use are subject to price fluctuations due to various factors beyond our control, including, among other pertinent factors:

  increasing market demand;

  inflation;

  severe climatic and environmental conditions;

  seasonal factors, and

  changes in governmental regulations and programs.

We also expect that our raw material prices will continue to fluctuate and be affected by inflation in the future. Changes to our raw materials prices may result in increases in production and packaging costs, and we may be unable to raise the prices of our products to offset the increase costs in the short-term or at all. As a result, our results of operations may be materially and adversely affected.

We purchase yew cuttings from third parties to grow our yew trees. The cost of yew cuttings has been rising significantly in recent years and is expected to continue.

We purchase yew cuttings from third parties to grow our yew trees. Because yew cuttings are scarce, the cost of yew cuttings has been rising approximately 20% per year in recent years and we expect this to continue for at least the next few years. Scarcity in the supply of yew cuttings or significantly increased costs for yew cuttings, or both, could have a material adverse effect on our ability to do business or our cost of doing business.

Changes in certain current favorable tax treatment we receive could adversely affect our business.

Under current PRC national laws and regulations, we do not pay any tax, including income tax, on (i) the raw materials we sell for the manufacture of TCM or (ii) the yew trees we sell for reforestation or transplanting, or on the cultivate yew trees we sell as potted yew trees. If these laws and regulations change and we become subject to tax on any of these operations, our costs of doing business would increase, which would decrease our profits and could have a material adverse effect on our results of operations and financial condition.

Developments by competitors may render our products or technologies obsolete or non-competitive.

The TCM and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. A large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that our TCM raw materials are targeting. We face competition from TCM and pharmaceutical companies in the PRC and other countries. In addition, companies pursuing different but related fields represent substantial competition. Many of these organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, longer drug development history in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures or other collaborations.

We rely substantially on our founder and President. We may be adversely affected if we lose his services or the services of other key personnel or are unable to attract and retain additional personnel.

Our success is substantially dependent on the efforts of our senior management, particularly Zhiguo Wang, our founder and President. The loss of the services of Mr. Wang or other members of our senior management may significantly delay or prevent the achievement of our business objectives. If we lose the

9



Table of Contents


services of, or do not successfully recruit, key sales and marketing, technical and corporate personnel, the growth of our business could be substantially impaired. At present, we do not maintain key man insurance for any of our senior management.

Mr. Wang will not devote 100% of his time to the business affairs of the Company.

Zhiguo Wang, the founder of the Company and our President, does not devote all of his time to the Company’s business. As a result, he may not provide as much management and attention as would be the case if he devoted 100% of his time to our business. We estimate that Mr. Wang devotes approximately 71% of his time, or approximately 120 hours per month, to the Company’s business. He devotes about 12% of his time, or approximately 20 hours per month, to the business of Yew Pharmaceutical and the balance of his time, or approximately 28 hours per month, to the business of other companies in which he is involved. These allocations are approximate only and are subject to change depending upon the particular projects and changing needs of the individual businesses in which he is involved.

There may be conflicts of interest between management and other stockholders of the Company.

Zhiguo Wang, the founder of our company, our President and a director, is also our principal stockholder. As a result of this conflict of interest, management may have an incentive to act in a manner that is in its best interest, which could be adverse to the interests of any other stockholders of the Company. In addition, a conflict of interest may arise between Mr. Wang’s personal pecuniary interest directly, as the lessor of certain premises we rent, or indirectly through companies he controls and with whom we do business, such as Yew Pharmaceutical, Shanghai Kairun Bio-Pharmaceutical Co., Ltd., or Kairun, and ZTC, and his fiduciary duty to our stockholders.

We have engaged, and are likely to continue to engage, in certain transactions with related parties. These transactions are not negotiated on an arms’ length basis.

We have engaged in certain transactions with our founder and President, Zhiguo Wang, and his wife, Guifang Qi. These include renting office space from Mr. Wang and retail space from Madame Qi, the aggregate rental expense incurred for which was approximately $4,022 for the nine months ended September 30, 2012 and $4,171 for the year ended December 31, 2011, respectively; an agreement whereby Yew Pharmaceutical, a company controlled by Mr. Wang, purchases raw materials including yew branches and leaves of yew trees from us to manufacture TCM and with respect to which we generated approximately $602,000 or 13% of our total revenue for the nine months ended September 30, 2012 and $1.4 million or 23% of our total revenue for the year ended December 31, 2011, respectively; the purchase of yew trees from a company majority-controlled by Mr. Wang and Madame Qi, of which the total purchase amount was approximately $3,400 for the year ended December 31, 2011; and the lease of from a company majority-controlled by Mr. Wang and Madame Qi for the growing of yew trees, the lease of which was approximately $19,300 for the nine months ended September 30, 2012 and $25,000 for the year ended December 31, 2011, respectively. We are likely to continue to engage in these arrangements and may enter into new arrangements with Mr. Wang and/or Madame Qi. None of these arrangements has been negotiated as a result of arms’ length transactions. It is possible that we could have received more favorable terms had these agreements been entered into with third parties.

We may need to hire additional employees.

Our future success also depends upon our continuing ability to attract and retain highly qualified personnel. Expansion of our business and the management and operation will require additional managers and employees with industry experience, and our success will be highly dependent on our ability to attract and retain skilled management personnel and other employees. There can be no assurance that we will be able to attract or retain highly qualified personnel. Competition for skilled personnel in our industries is significant. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees.

10



Table of Contents

Reporting requirements under the Exchange Act and compliance with the Sarbanes-Oxley Act of 2002, including establishing and maintaining acceptable internal controls over financial reporting, are costly and may increase substantially.

The rules and regulations of the SEC require a public company to prepare and file periodic reports under the Exchange Act, which will require that the Company engage legal, accounting, auditing and other professional services. The engagement of such services is costly. Additionally, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires, among other things, that we design, implement and maintain adequate internal controls and procedures over financial reporting. The costs of complying with the Sarbanes-Oxley Act and the limited technically qualified personnel we have may make it difficult for us to design, implement and maintain adequate internal controls over financial reporting. In the event that we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls, we may not be able to produce reliable financial reports or report fraud, which may harm our overall financial condition and result in loss of investor confidence and a decline in our share price.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act of 2010 and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.

We are working with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. However, we anticipate that the expenses that will be required in order to adequately prepare for being a public company could be material. We estimate that the aggregate cost of increased legal services; accounting and audit functions; personnel, such as a chief financial officer familiar with the obligations of public company reporting; consultants to design and implement internal controls; and financial printing alone will be a few hundred thousand dollars per year and could be several hundred thousand dollars per year. In addition, if and when we retain independent directors and/or additional members of senior management, we may incur additional expenses related to director compensation and/or premiums for directors’ and officers’ liability insurance, the costs of which we cannot estimate at this time. We may also incur additional expenses associated with investor relations and similar functions, the cost of which we also cannot estimate at this time. However, these additional expenses individually, or in the aggregate, may also be material.

In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

The increased costs associated with operating as a public company may decrease our net income or increase our net loss, and may cause us to reduce costs in other areas of our business or increase the prices of our products or services to offset the effect of such increased costs. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, we may be subject to sanctions by regulatory authorities.

Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with our annual report for fiscal year 2013, provide a management report on the internal control over financial reporting. We are in the preliminary stages of seeking

11



Table of Contents


consultants to assist us with a review of our existing internal controls and the design and implementation of additional internal controls that we may determine are appropriate. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We will be evaluating our internal controls systems to allow management to report on, and eventually allow our independent auditors to attest to, our internal controls. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC or a stock exchange on which our securities may be listed in the future. Any such action could adversely affect our financial results or investors’ confidence in us and could cause our stock price to fall. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the SEC, any stock exchange on which our securities may be listed in the future, or other regulatory authorities, which would entail expenditure of additional financial and management resources and could materially adversely affect our stock price. Inferior internal controls could also cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, which could have a negative effect on our stock price.

We are an “emerging growth company” under the recently enacted JOBS Act and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We qualify as an “emerging growth company” under the recently enacted JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, among other things, we will not be required to:

  have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

  submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency”;

  obtain shareholder approval of any golden parachute payments not previously approved; and

  disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive’s compensation to median employee compensation.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion; (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

12



Table of Contents

Until such time, however, because the JOBS Act has only recently been enacted, we cannot predict whether investors will find our stock less attractive because of the more limited disclosure requirements that we may be entitled to follow and other exemptions on which we are relying while we are an “emerging growth company”. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

We must comply with the Foreign Corrupt Practices Act.

We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Although we intend to inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

The PRC historically has been deficient in Western-style management and financial reporting concepts and practices, as well as in modern banking and other control systems. We may have difficulty in hiring and retaining a sufficient number of locally-qualified employees to work in the PRC who are capable of satisfying the obligations of a U.S. public reporting company. As a result of these factors, we may experience difficulty in establishing adequate management, legal and financial controls (including internal controls over financial reporting), collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices in the PRC that meet U.S. standards as in effect from time to time.

If the Chinese regulatory bodies determine that the structure for operating our business in the PRC does not comply with Chinese regulatory restrictions on foreign investment, we could be subject to severe penalties, which may materially and adversely affect our business.

The Chinese government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new Chinese laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future Chinese laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

13



Table of Contents

If we are determined to be in violation of any existing or future Chinese laws, rules or regulations or fail to obtain or maintain any of the required governmental permits or approvals, the relevant Chinese regulatory authorities would have broad discretion in dealing with such violations, including:

  revoking the business and operating licenses of our Chinese entities;

  discontinuing or restricting the operations of our Chinese entities;

  imposing conditions or requirements with which YBP or our Chinese entities may not be able to comply;

  Requiring YBP or our Chinese entities to restructure the relevant ownership structure or operations;

  restricting or prohibiting our use of the proceeds from any offering to finance our business and operations in the PRC; or

  imposing fines.

The imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our financial condition, results of operations and prospects.

Special Risks Relating to Doing Business in the PRC

Because all of our operations are outside the United States, we are subject to additional significant risks.

We are subject to risks inherent in business operations outside the United States. These risks include but are not limited to geopolitical concerns, currency fluctuations, currency exchange controls, restrictions on repatriating foreign-derived profits to the United States, inflation, local regulatory compliance, punitive tariffs, unstable local tax policies, trade embargoes, import and export license requirements, trade restrictions, greater difficulty collecting accounts receivable and longer payment cycles, unfamiliarity with local laws and regulations, differing legal standards in enforcing or defending our rights in courts or otherwise, less favorable intellectual property protection than is provided in the United States, changes in labor conditions, difficulties in staffing and managing international operations, difficulties in finding personnel locally who are capable to complying with the requirements of reporting by a U.S. reporting company, risks related to shipment of raw materials and finished goods across national borders, and cultural and language differences. Foreign economies may differ favorably or unfavorably from the United States economy in growth of gross domestic product, rate of inflation, market development, rate of savings, capital investment, resource self-sufficiency and balance of payments positions, and in many other respects.

The Chinese government exerts substantial influence over business activities.

We are dependent on relationships with the local government in the provinces in which we operate in the PRC. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in the PRC may be harmed by changes in the PRC’s laws and regulations, including those relating to taxation, environmental regulations, land use rights, real property, intellectual property and other matters. We intend to continue to conduct our business in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that could require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC generally or particular regions thereof, and could have an adverse impact on our business prospects, results of operations and financial condition.

14



Table of Contents

The production, sale and distribution of TCM are subject to Chinese regulation.

Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Some changes that could have this effect are: (i) level of government involvement in the economy; (ii) control of foreign exchange; (iii) methods of allocating resources; (iv) balance of payment positions; (v) international trade restrictions; and (vi) international conflict.

We depend upon governmental laws and regulations that may be changed in ways that will harm our business.

Our business and products are subject to government regulations mandating the manufacturing of pharmaceuticals in the PRC and other countries. Changes in the laws or regulations in the PRC, or other countries we may sell into, that govern or apply to our operations could have a materially adverse effect on our business. For example, the law could change so as to prohibit the use of certain pharmaceuticals. If one of our pharmaceuticals or medical products is prohibited, this change would reduce our productivity of that product.

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC only recently has permitted provincial and local economic autonomy and private economic activities. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in the PRC may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, pharmaceutical regulations, and other matters. We believe that our operations in the PRC are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Our operations and assets in the PRC are subject to significant political and economic uncertainties.

Our operations may be adversely affected by the political environment in the PRC. The PRC has operated as a socialist and Communist state since 1949 and is controlled by the Communist Party of the PRC. In recent years, however, the government has introduced reforms aimed at creating a “socialist market economy” and policies have been implemented to allow business enterprises greater autonomy in their operations. Changes in the political leadership of the PRC may have a significant effect on laws and policies related to the current economic reforms program, other policies affecting business and the general political, economic and social environment in the PRC, including the introduction of measures to control inflation, changes in the rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad, and foreign investment. These effects could substantially impair our business, profits or prospects in the PRC. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increases of such disparities could affect the political or social stability of the PRC.

Changes in Chinese laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under current leadership, the Chinese government has

15



Table of Contents


been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

We derive virtually all of our revenues from the PRC and we are therefore susceptible to the strength of the Chinese economy.

We derive virtually all of our revenues from the sale of products within the PRC. Any significant decline in the condition of the Chinese economy could adversely affect consumer demand of our services, among other things, which in turn would have a material adverse effect on our business and financial condition.

Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese currency into foreign currencies and, if the Chinese currency were to decline in value, reducing our revenue in U.S. dollar terms.

Our reporting currency is the U.S. dollar and our operations use the RMB as our primary functional currency in our operations. We are subject to the effects of exchange rate fluctuations with respect to either of these currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and the PRC’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of RMB to the U.S. dollar had generally been stable and the RMB had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of RMB to the U.S. dollar. Under the new policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of RMB against the U.S. dollar. We can offer no assurance that RMB will be stable against the U.S. dollar or any other foreign currency.

The income statements of our operations in the PRC will be translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.

Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of RMB in the future. Because a significant amount of our future revenue may be in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in RMB to fund any business activities outside of the PRC or to repay foreign currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.

16



Table of Contents

Chinese currency is not freely convertible, which may limit our ability to obtain financing for expansion on favorable terms, and may limit our ability to pay dividends in the future.

The RMB is not a freely convertible currency at present and, based solely on our understanding of the news that is widely and publicly available, it does not appear that the RMB will become a freely convertible currency in the foreseeable future. Some, and perhaps a significant amount, of the revenue generated by our future operations in the PRC will be paid in RMB, which may need to be converted to other currencies, primarily U.S. dollars, and remitted outside the PRC from time to time. The Chinese government strictly regulates conversion of RMB into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control over routine foreign exchange transactions under current accounts.

SAFE regulates the conversion of RMB into foreign currencies. Effective July 1, 1996, foreign currency “current account” transactions by foreign investment enterprises are no longer subject to the approval of SAFE, but need only a ministerial review, according to the Administration of the Settlement, Sale and Payment of Foreign Exchange Provisions promulgated in 1996. “Current account” items include international commercial transactions, which occur on a regular basis, such as those relating to trade and provision of services. Distributions to joint venture parties also are considered a “current account” transaction. Other non-current account items, known as “capital account” items, remain subject to SAFE approval. Under current regulations, we believe that we can obtain foreign currency in exchange for RMB from swap centers authorized by the Chinese government. We cannot assure you that foreign currency shortages or changes in currency exchange laws and regulations by the Chinese government will not restrict us from freely converting RMB in a timely manner or at all, as needed.

HDS is subject to restrictions on making payments to us.

We are a holding company incorporated in Nevada and do not have any assets or conduct any business operations other than our investments in JSJ and Yew HK, which also do not have operations of their own. HDS is our operating entity, which we control through contractual arrangements. As a result of our holding company structure, we rely entirely on payments from HDS to us. The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. Furthermore, if Yew HK, JSJ or HDS were to incur debt on their own in the future, the instruments governing the debt may restrict their ability to make payments. If we are unable to receive all of the revenues from our operations through these contractual arrangements, we may be unable to pay dividends on our ordinary shares.

Future fluctuation in the value of the RMB may negatively affect our ability to convert our return on operations to U.S. dollars in a profitable manner.

In recent years, the value of the RMB has appreciated significantly against the U.S. dollar. Many countries, including the United States, have argued that the RMB is artificially undervalued due to the PRC’s current monetary policies and have pressured the PRC to allow the RMB to float freely in world markets. If any devaluation of the RMB were to occur in the future, our returns on our operations in the PRC, to the extent they are paid in RMB, will be negatively affected upon conversion to U.S. dollars. Conversely, although we will attempt to have certain future payments to us paid in U.S. dollars to mitigate the foregoing risk, any increase in the value of the RMB in the future would increase the cost of purchasing goods or services within the PRC when we convert U.S. dollars to RMB to pay for such items.

We may be unable to enforce our rights due to policies regarding the regulation of foreign investments in the PRC.

The PRC’s legal system is a civil law system based on written statutes in which decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and

17



Table of Contents


variation, and may be subject to influence by external forces unrelated to the legal merits of a particular matter. The PRC’s regulations and policies with respect to foreign investments are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks which may affect our ability to achieve our business objectives. We cannot assure you that we will be able to enforce any legal rights we may have under our contracts or otherwise. Our failure to enforce our legal rights may have a material adverse impact on our operations and financial position, as well as our ability to compete with other companies in our industry.

Inflation in the PRC may inhibit economic activity in such places and adversely affect our operations.

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation which have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. Because of a strong currency, a large trade surplus, strong domestic growth and increasing wages, the PRC is currently experiencing inflationary pressures, despite the global economic crisis. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action which could inhibit economic activity in the PRC generally, and thereby adversely affect our future business operations and prospects in the PRC. Inflation in the PRC may inhibit economic activity in such places and adversely affect our operations. Inflation in the PRC may inhibit economic activity in such places and adversely affect our operations.

The Chinese legal system may have inherent uncertainties that could materially and adversely impact our ability to enforce the agreements governing our operations.

We are subject to oversight at the provincial and local levels of government. Our operations and prospects would be materially and adversely affected by the failure of the local government to honor our agreements or an adverse change in the laws governing them. In the event of a dispute, enforcement of these agreements could be difficult in the PRC. The PRC tends to issue legislation, which is followed by implementing regulations, interpretations and guidelines that can render immediate compliance difficult. Similarly, on occasion, conflicts arise between national legislation and implementation by the provinces that take time to reconcile. These factors can present difficulties in our ability to achieve compliance. Unlike the United States, the PRC has a civil law system based on written statutes in which judicial decisions have limited precedential value. The Chinese government has enacted laws and regulations to deal with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, our experience in interpreting and enforcing our rights under these laws and regulations is limited, and our future ability to enforce commercial claims or to resolve commercial disputes in the PRC is therefore unpredictable. These matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces and factors unrelated to the legal merits of a particular matter or dispute may influence their determination.

It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in the PRC.

Substantially all of our assets are located outside of the United States and most of our officers and directors reside outside the United States. As a result, it may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under Federal securities laws of the United States. Moreover, we have been advised that the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement of criminal penalties of the Federal securities laws of the United States.

18



Table of Contents

We may have limited legal recourse under Chinese law if disputes arise with third parties.

The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, mergers and acquisitions, intellectual property, commerce, taxation and trade. However, the PRC’s experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If any new business ventures in which we may become involved are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and business operations of any acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies and other instrumentalities of the Chinese government or those acting on its behalf, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.

Because Chinese law will govern almost all of our material agreements, we may not be able to enforce our legal rights internationally, which could result in a significant loss of business, business opportunities, or capital.

Chinese law will govern almost all of our material agreements. We cannot assure you that we will be able to enforce any of our material agreements or that remedies will be available outside of the PRC. The system of laws and the enforcement of existing laws in the PRC may not be as certain in implementation and interpretation as in the United States. The Chinese judiciary is relatively inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital.

National, provincial and local governments have established many regulations governing our business operations.

We are also subject to numerous national, provincial and local governmental regulations, including environmental, labor, waste management, health and safety matters and product specifications and regulatory approvals from healthcare agencies. We are subject to laws and regulations governing our relationship with our employees including: wage requirements, limitations on hours worked, working and safety conditions, citizenship requirements, work permits and travel restrictions. These local labor laws and regulations may require substantial resources for compliance. We are subject to significant government regulation with regard to property ownership and use in connection with our facilities in the PRC, import restrictions, currency restrictions and restrictions on the volume of domestic sales and other areas of regulation. These regulations can limit our ability to react to market pressures in a timely or effective way, thus causing us to lose business or miss opportunities to expand our business.

Our contractual arrangements with HDS and its shareholders may not be as effective in providing control over HDS as direct ownership of it.

Our contractual arrangements with HDS and its respective shareholders provide us with effective control over this company. As a result of these contractual arrangements, we are considered to be the primary beneficiary of HDS; we consolidate the results of operations, assets and liabilities of HDS in our financial statements. However, these contractual arrangements may not be maximally effective in providing us with control over HDS as direct ownership of these companies. If HDS or its shareholders fail to perform their respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective.

19



Table of Contents

The approval of the China Securities Regulatory Commission may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot predict whether we will be able to obtain such approval.

In 2006, six PRC regulatory agencies jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule. This rule requires that, if an overseas company established or controlled by PRC domestic companies or citizens intends to acquire equity interests or assets of any other PRC domestic company affiliated with the PRC domestic companies or citizens, such acquisition must be submitted to the Ministry of Commerce, rather than local regulators, for approval. In addition, this regulation requires that an overseas company controlled directly or indirectly by PRC companies or citizens and holding equity interests of PRC domestic companies needs to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to listing its securities on an overseas stock exchange. On September 21, 2006, the CSRC, published a notice on its official website specifying the documents and materials required to be submitted by overseas special purpose companies seeking CSRC’s approval of their overseas listings.

While the application of the M&A Rule remains unclear, based on their understanding of current PRC laws, regulations, and the notice published on September 21, 2006, since JSJ was established by means of direct investment rather than by merger or acquisition of the equity interest or assets of any “domestic company” as defined under the M&A Rules, and no provision in the M&A Rules classifies our contractual arrangements with HDS as a type of acquisition transaction falling under the M&A Rules, we are not required to submit an application to the Ministry of Commerce of the PRC, or MOFCOM, or the CSRC for its approval for our contractual control on HDS.

If the CSRC or another PRC regulatory agency subsequently determines that the approvals from MOFCOM and/or CSRC were required our contractual control over HDS, we may need to apply for a remedial approval from the CSRC and may be subject to certain administrative punishments or other sanctions from PRC regulatory agencies. The regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of our foreign currency in our offshore bank accounts into the PRC, or take other actions that could materially and adversely affect our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock.

The M&A Rule sets forth complex procedures for acquisitions conducted by foreign investors that could make it more difficult to pursue acquisitions.

The M&A Rule sets forth complex procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

We may be subject to penalties, including restriction on our ability to inject capital into our PRC subsidiaries and our PRC subsidiaries’ ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules.

In October 2005, SAFE issued a public notice requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of the PRC for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose vehicle PRC residents that are shareholders and/or beneficial owners of offshore special purpose companies established before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006. In addition, any PRC resident that is a shareholder of an offshore special purpose vehicle is required to amend its SAFE registration with respect to that offshore special purpose company in connection with any

20



Table of Contents


increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in the PRC or other material changes in share capital.

Zhiguo Wang, Guifang Qi and Xingming Han, collectively referred to as the HDS Shareholders, completed their respective registrations under SAFE Circular 75 on April 15, 2011. We have requested our other shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall within the ambit of the SAFE notice and urge those who are PRC residents to register with the local SAFE branch as required under the SAFE notice. To date, we have not received any notice from any of our other shareholders or beneficial owners that he or she is subject to the SAFE Circular 75 registration requirement. However, we cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents will comply with our request to make, obtain or update any applicable registrations or comply with other requirements required by the SAFE notice or other related rules. In case of any non-compliance on any of our PRC resident shareholders or beneficial owners, our PRC subsidiary, JSJ, and such shareholders and beneficial owners may be subject to fines and other legal sanctions.

If our previous offerings of stock to PRC residents are found to have violated PRC laws and regulations, we could be subject to fines and other legal sanctions.

We believe that our previous offerings of YBP common stock to PRC residents are not subject to regulation in the PRC, because (i) the offering was made by a non-PRC entity and (ii) it did not involve a public offering in the PRC. However, should the M&A Rule and/or the PRC Securities Law be interpreted to apply to our previous offerings of stock and were it also determined that we violated these laws and/or regulations, we could face fines of up to five times the proceeds of the offerings (other than the proceeds from the HDS Shareholders) and other penalties.

Additionally, SAFE Circular 75 could be interpreted broadly to require each PRC person who owns stock directly or indirectly in a non-PRC company to complete a registration with SAFE in respect of such stock. The HDS Shareholders have completed their respective SAFE registration. However, to our knowledge, no other PRC person has filed a SAFE registration with respect to their YBP common stock. The failure by these persons to complete a SAFE registration could subject HDS to fines of 30%, or 100% in certain extreme situations, of the proceeds of the offerings (other than the proceeds from the HDS Shareholders), and legal sanctions, including without limitation restrictions on converting foreign currency it receives from YBP into RMB.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

On December 25, 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC and non-PRC citizens) under either the current account or the capital account. On January 5, 2007, SAFE issued implementation rules for the Administrative Measures of Foreign Exchange Matters for Individuals which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly listed company. On March 28, 2007, SAFE promulgated the Operation Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rules. Under this rule, PRC citizens who participate in an employee stock ownership plan or a stock option plan of an overseas publicly listed company are required to register with SAFE and complete certain other procedures. For participants of an employee stock ownership plan, an overseas custodian bank should be retained by PRC agent, which could be the PRC subsidiary of such overseas publicly-listed company or other qualified entity, to hold on trusteeship all overseas assets held by such participants under the employee stock ownership plan. In the case of a stock option plan, a financial institution with stock brokerage qualification at the place where the overseas publicly listed company is listed or a qualified institution designated by the overseas publicly listed company is required to be retained to handle matters in connection with the exercise or sale of stock options for the stock option plan participants. We and our PRC citizen employees who participate in an

21



Table of Contents


employee stock ownership plan or a stock option plan will be subject to these regulations when our company becomes a publicly listed company in the United States. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and other legal or administrative sanctions.

Our failure to fully comply with the requirement of making employee housing fund contribution may be subject us to fines and other costs.

Pursuant to the “Housing Fund Management Regulation” issued by the State Council of the PRC in April 1999 and subsequently amended in March 2002, and other relevant regulations, for corporate employers in the PRC, both the employers and their employees are required to make contributions to a government administered housing fund. Currently we have not fully paid the employee housing funds and hence may be required to make up the unpaid amount and be subject to administrative penalties up to RMB 50,000 in addition to the unpaid contribution of approximately RMB 40,000.

Risks Related to our Stockholders and Shares of Common Stock

The offering price of our common stock should not be used as an indicator of the future market price of the securities. The offering price bears no relationship to our actual value, and may make our shares difficult to sell.

Since our common stock is not currently listed or quoted on any exchange or quotation system, the offering price of $0.25 per share for the shares of common stock is arbitrary and includes an arbitrary, speculative increase in value of $0.15 over the price of our common stock during our most recent private offering of $0.10 per share, to account for the potential increased value of our stock as a result of such shares having increased liquidity and being registered with the SEC and unrestricted. The offering price and the increase in value over the private offering price bear no relationship to the book value, assets or earnings of our company or any other recognized criteria of value. As such, investors may be unable to sell any shares or make any profit from the investment.

We may issue more securities in one or more capital raises in the future, which will result in substantial dilution to all stockholders prior to such issuance.

YBP’s Articles of Incorporation authorizes the Company to issue an aggregate of 50,000,000 shares of common stock. Any capital raise effected by us is likely to result in the issuance of additional securities and substantial dilution in the percentage of the equity held by our then existing stockholders. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees or consultants, future acquisitions, future sales of our securities for capital raising purposes or for other business purposes. Our board of directors has the power to issue any or all of such authorized but unissued shares without stockholder approval.

There is currently no trading market for our common stock, and liquidity of shares of our common stock is limited.

Shares of our common stock are not registered under the securities laws of any state or other jurisdiction, and there is no public trading market for our common stock. Furthermore, no public trading market is expected to develop in the foreseeable future unless and until the Company files and obtains effectiveness of a registration statement under the Securities Act. Therefore, outstanding shares of our common stock cannot be offered, sold, pledged or otherwise transferred unless subsequently registered pursuant to, or exempt from registration under, the Securities Act and federal or applicable state securities laws or regulations. Compliance with the criteria for securing exemptions under federal securities laws and applicable state securities laws is extremely complex, especially in respect of those exemptions affording flexibility and the elimination of trading restrictions in respect of securities received in exempt transactions and subsequently disposed of without registration under the Securities Act or state securities laws.

22



Table of Contents

If and when our common stock becomes trading, it is likely that it will be considered a “penny stock”, which may make it more difficult for investors to sell their shares due to suitability requirements.

Our common stock may be deemed to be “penny stock” as that term is defined under the Exchange Act. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000, not including their primary residence, or an annual income exceeding $200,000 (or $300,000 jointly with their spouse).

The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. A broker/dealer must receive a written agreement to the transaction from the investor setting forth the identity and quantity of the penny stock to be purchased. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.

The market price of our common stock is likely to be subject to significant price and volume fluctuations.

The price of our common stock may be subject to wide fluctuations due to variations in our operating results, news announcements, our limited trading volume, general market trends both domestically and internationally, currency movements, sales of common shares by our officers, directors and our principal stockholders, and sales of common shares by existing investors. Certain events, such as the issuance of common shares upon the exercise of our outstanding stock options, could also materially and adversely affect the prevailing market price of our common shares. Further, the stock markets in general have recently experienced extreme price and volume fluctuations that have affected the market prices of equity securities of many companies and that have been unrelated or disproportionate to the operating performance of such companies. In addition, a change in sentiment by U.S. investors for PRC-based companies could have a negative impact on the stock price. These fluctuations may materially and adversely affect the market price of our common shares and the ability to resell shares at or above the price paid, or at any price.

We cannot assure you that our common stock will be quoted on the OTC Bulletin Board or eventually listed on any stock exchange.

Until our common stock is listed on the Nasdaq or another stock exchange, we expect that our common stock would be eligible to be quoted on the Over-The-Counter Bulletin Board, or the OTCBB; another over-the-counter quotation system or on the “pink sheets”, where our stockholders may find it more difficult to effect transactions in our common stock or obtain accurate quotations as to the market value of our common stock. There can be no assurance that a market maker will agree to file the necessary documents with FINRA, which operates the OTC Bulletin Board, nor can there be any assurance that such an application for quotation will be approved or that a regular trading market will develop or that if developed, will be sustained. In the absence of a trading market, an investor may be unable to liquidate their investment. We may ultimately seek the listing of our common stock on Nasdaq or the NYSE AMEX. However, we cannot assure you that we will be able to meet the initial listing standards of either of those or any other stock exchange, or that we will be able to maintain a listing of our common stock on either of those or any other stock exchange.

In addition, we would be subject to an SEC rule that, if we failed to meet the criteria set forth in such rule, imposes various practice requirements on broker-dealers who sell securities governed by such rule to persons other than established customers and accredited investors. Consequently, such rule may deter broker-dealers from recommending or effecting transactions in our common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital.

23



Table of Contents

We should have filed a registration statement on Form 10 with the SEC on or before April 30, 2010. Our failure to do so was a violation of Section 12(g) of the Exchange Act and could subject us to liability under federal securities laws.

Based upon our previous sales of common stock to an aggregate of more than 500 persons and our having more than $10 million in assets, we should have filed a registration statement on Form 10 with the SEC pursuant to Section 12(g) of the Exchange Act, as then in effect, on or before April 30, 2010. Our failure to do so was a violation of this provision of the Exchange Act. We could be subject to enforcement action by the Commission for our failure to make this filing in a timely manner, resulting in, among other things, fines, injunctions and/or criminal penalties for our directors and officers and others responsible for our failure to make this filing in a timely manner.

We have never paid dividends on our common stock and do not intend to do so in the foreseeable future. Moreover, our holding company structure may hinder the payments of dividends.

We have never paid dividends on our common stock and do not presently intend to pay any dividends in the foreseeable future. We anticipate that any funds available for payment of dividends will be re-invested into the Company to further our business strategy. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.

YBP has no direct business operations, other than its ownership of our subsidiaries. Should we decide to pay dividends in the future, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our subsidiaries, our VIE and other holdings and investments. In addition, our subsidiaries and VIE, may, from time to time, be subject to restrictions on their ability to make distributions to us due to restrictive covenants in agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions applicable to our subsidiaries. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of the RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

The HDS Shareholders currents have effective, but not absolute, control of the Company. If the Founders’ Options are exercised by the HDS Shareholders, they — and Mr. Wang by himself — will have both effective and absolute control of the Company and be able to determine the outcome of most actions by the Company and its shareholders.

Presently, the HDS Shareholders collectively own 22,805,512 shares, or 45.61%, of YBP’s common stock, not including certain additional shares they are deemed to beneficially own under applicable SEC rules. They serve as the sole directors and executive officers of the Company, other than the chief financial officer, or CFO, position. The Founders’ Options were approved by our shareholders at a special meeting of shareholders, or the Special Meeting, on December 13, 2012, and issued to the HDS Shareholders in December 2012. As a result, the HDS Shareholders may, upon exercise, own as many as 45,611,024 shares, or 62.65%, of YBP’s common stock. In such event, the HDS Shareholders would have both effective and absolute control of the Company, allowing them, by themselves, to elect all directors of the Company and determine the outcome of most matters placed before the shareholders for action. In fact, Mr. Wang himself could own as many as 40,206,950 shares, or 55.23%, of YBP’s common stock, meaning he could take all such actions by himself.

24



Table of Contents

FORWARD-LOOKING STATEMENTS

This prospectus 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 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 PRC generally; and

  any change in the rate of exchange of the Chinese Renminbi, or RMB, to the U.S. dollar, which could affect currency translations of our results of operations, which are earned in RMB but reported in dollars;

  industry-wide market factors and regulatory and other developments affecting our operations;

  a slowdown in the Chinese economy; and

  risks related to changes in accounting interpretations.

For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see the section entitled “Risk Factors,” beginning on page 5 of this Registration Statement on Form S-1.

USE OF PROCEEDS

The selling stockholders are selling shares of common stock covered by this prospectus for their own account. We will not receive any of the proceeds from the sale of these shares. We have agreed to bear the expenses relating to the registration of the shares for the selling security holders.

25



Table of Contents

DETERMINATION OF OFFERING PRICE

Since our common stock is not listed or quoted on any exchange or quotation system, the offering price of the shares of common stock was determined by the price of the common stock that was sold to our security holders pursuant to an exemption under Section 4(2) of the Securities Act or Regulation D or Regulation S promulgated under the Securities Act.

The offering price of the shares of our common stock does not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value.

Although our common stock is not listed on a public exchange, we will be filing to obtain a quotation on the OTC Bulletin Board concurrently with the filing of this prospectus. In order to be quoted on the OTC Bulletin Board, a market maker must file an application on our behalf in order to make a market for our common stock. There can be no assurance that a market maker will agree to file the necessary documents with FINRA, which operates the OTC Bulletin Board, nor can there be any assurance that such an application for quotation will be approved.

In addition, there is no assurance that our common stock will trade at market prices in excess of the initial offering price as prices for the common stock in any public market which may develop will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity.

DILUTION

The common stock to be sold by the selling shareholders is common stock that is currently issued. Accordingly, there will be no dilution to our existing shareholders. However, in the future if we decide to issue more shares, our existing shareholders will experience dilution.

MARKET FOR OUR SECURITIES AND RELATED SHAREHOLDER MATTERS

There is presently no established public trading market for our shares of common stock. We anticipate on applying for trading of our common stock on the OTC Bulletin Board upon the effectiveness of the registration statement of which this prospectus forms apart. However, we can provide no assurance that our shares of common stock will be traded on the Bulletin Board or, if traded, that a public market will materialize.

Holders

As of January 15, 2013, we had 998 shareholders of our common stock.

Transfer Agent and Registrar

Globex Transfer, LLC is currently the transfer agent and registrar for our common stock. Its address is 780 Deltona Blvd., Suite 202, Deltona, Florida 32725 and its phone number is 813-344-4490.

Dividends

Since inception we have not paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock, when issued pursuant to this offering. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

We are authorized to issue up to 15,000,000 shares of common stock for grants under the 2012 Equity Incentive Plan, or the 2012 Plan, which was adopted by our Board of Directors on September 25, 2012 and approved by our shareholders at the Special Meeting on December 13, 2012. No grants have been made under the 2012 Plan to date.

26



Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Overview

We are a major grower and seller of yew trees and manufacturers of products made from yew trees, including potted yew trees for display in homes and offices, and handicrafts. We also sell branches and leaves of yew trees for the manufacture of TCM containing taxol, which TCM has been approved in the PRC for use as a secondary treatment of certain cancers, meaning it must be administered in combination with other pharmaceutical drugs. The yew industry is highly regulated in the PRC because the Northeast yew tree is considered an endangered species.

For the nine months ended September 30, 2012 and 2011 and for the years ended December 31, 2011 and 2010, we operated in three reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees, including potted miniature yew trees; and (3) the handicrafts segment, consisting of the manufacture and sale of furniture and handicrafts made of yew timber. Our reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of our operations are conducted in the PRC. We are located in Harbin, Heilongjiang Province, China.

For the three months ended September 30, 2012, revenues from the sale of TCM raw materials represented approximately 65.1% of consolidated revenue (including 32.2% of consolidated revenues to related parties); sale of yew trees represented approximately 28.9% of consolidated revenue; and the sale of handicrafts represented approximately 6.0% of consolidated revenue. For the nine months ended September 30, 2012, revenues from the sale of TCM raw materials represented approximately 59.2% of consolidated revenue (including 12.4% of consolidated revenues to related parties); sale of yew trees represented approximately 38.3% of consolidated revenue; and the sale of handicrafts represented approximately 2.5% of consolidated revenue (including 0.1% of consolidated revenues to related parties).

For the three months ended September 30, 2011, revenues from the sale of TCM raw materials represented approximately 71.3% of consolidated revenue (including 20.9% of consolidated revenues to related parties); sale of yew trees represented approximately 26.7% of consolidated revenue; and the sale of handicrafts represented approximately 2.0% of consolidated revenue. For the nine months ended September 30, 2011, revenues from the sale of TCM raw materials represented approximately 60.2% of consolidated revenue (including 26.5% of consolidated revenues to related parties); sale of yew trees represented approximately 37.7% of consolidated revenue; and the sale of handicrafts represented approximately 2.1% of consolidated revenue.

For the year ended December 31, 2011, revenues from the sale of TCM raw materials represented approximately 58.0% of consolidated revenue (including 23.3% of consolidated revenues to related parties); sale of yew trees represented approximately 40.3% of consolidated revenue; and the sale of handicrafts represented approximately 1.7% of consolidated revenue. For the year ended December 31, 2010, revenues from the sale of TCM raw materials represented approximately 55.5% of consolidated revenue (including 25.9% of consolidated revenues to related parties); sale of yew trees represented approximately 41.6% of consolidated revenue; and the sale of handicrafts represented approximately 2.9% of consolidated revenue. We expect that sales from our TCM raw materials segment will become an increasingly important source of revenue for us.

All of our revenues were generated by HDS. Other than expenses (approximately $182,000 and $98,000 for the nine months ended September 30, 2012 and 2011, respectively) and approximately $153,000 and $201,000 for the year ended December 31, 2011 and 2010, respectively) incurred primarily related to meeting its reporting requirements in the U.S., YBP has no other significant business operations. At September 30, 2012, YBP has approximately $23,000 in cash and holds the 100% equity interests in its subsidiaries Yew HK and JSJ. Yew HK itself has no business operations or assets other than holding of equity interests in JSJ. JSJ has no business operations and assets with a book value of approximately $54,000, including approximately $37,000 in cash at September 30, 2012. JSJ also holds the VIE interests in HDS through the contractual

27



Table of Contents


arrangements, or the Contractual Arrangements, described in Note 1 to Notes to Consolidated Financial Statements. In the event we are unable to enforce the Contractual Agreements, we may not be able to exert effective control over HDS, and our ability to conduct our business may be materially and adversely affected. If the applicable PRC authorities invalidate our Contractual Agreements for violation of PRC laws, rules and regulations, in such an event, we would lose control of the VIE resulting in its deconsolidation in financial reporting and severe loss in our marked valuation.

Critical accounting policies and estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.

Variable interest entities

Pursuant to ASC 810 and related subtopics related to the consolidation of variable interest entities, we are required to include in our consolidated financial statements the financial statements of VIEs. The accounting standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity. HDS is considered a VIE, and we are the primary beneficiary. We entered into agreements with the HDS pursuant to which we shall receive 100% of HDS’s net income. In accordance with these agreements, HDS shall pay consulting fees equal to 100% of its net income to our wholly-owned subsidiary, JSJ and JSJ shall supply the technology and administrative services needed to service the HDS.

The accounts of HDS are consolidated in the accompanying financial statements. As VIEs, HDS’ sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of HDS’ net income, and their assets and liabilities are included in our consolidated balance sheets. The VIEs do not have any non-controlling interest and, accordingly, we did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in HDS that require consolidation of HDS’ financial statements with our financial statements.

As required by ASC 810-10, we perform a qualitative assessment to determine whether we are the primary beneficiary of HDS which is identified as a VIE of the Company. A quality assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and the parties involved in the design of the entity. The significant terms of the agreements between us and HDS are discussed above in the “Corporate Structure and Recapitalization — Second Restructure” section. Our assessment on the involvement with HDS reveals that we have the absolute power to direct the most significant activities that impact the economic performance of HDS. JSJ, our wholly own subsidiary, is obligated to absorb a majority of the risk of loss from HDS activities and entitles JSJ to receive a majority of HDS’s expected residual returns. In addition, HDS’s shareholders have pledged their equity interest in HDS to JSJ, irrevocably granted JSJ an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in HDS and agreed to entrust all the rights to exercise their voting power to the

28



Table of Contents


person(s) appointed by JSJ. Under the accounting guidance, we are deemed to be the primary beneficiary of HDS and the results of HDS are consolidated in our consolidated financial statements for financial reporting purposes.

Accordingly, as a VIE, HDS’s sales are included in our total sales, its income from operations is consolidated with our income from operations and our net income includes all of HDS’s net income. All the equity (net assets) and profits (losses) of HDS are attributed to us. Therefore, no non-controlling interest in HDS is presented in the Company’s consolidated financial statements. As we do not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income attributable to us. Because of the Contractual Arrangements, YBP has a pecuniary interest in HDS that requires consolidation of HDS’s financial statements with those of ours.

Additionally, pursuant to ASC 805, as YBP and HDS are under the common control of the HDS Shareholders, the Second Restructure was accounted for in a manner similar to a pooling of interests. As a result, our historical amounts in the accompanying consolidated financial statements give retrospective effect to the Second Restructure, whereby our assets and liabilities are reflected at the historical carrying values and their operations are presented as if they were consolidated for all periods presented, with our results of operations being consolidated from the date of the Second Transfer Agreement. The accounts of HDS are consolidated in the accompanying financial statements.

Accounts receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. The Company recognized the probability of the collection for each customer and believes the amount of the balance as of September 30, 2012 could be collected and accordingly, the Company did not record any allowance for doubtful accounts.

Inventories

Inventories consisted of raw materials, work-in-progress, finished goods-handicrafts, yew seedlings and other trees (consisting of larix, spruce and poplar trees). The Company classifies its inventories based on its historical and anticipated levels of sales; any inventory in excess of its normal operating cycle of one year is classified as long-term on its consolidated balance sheets. Inventories are stated at the lower of cost or market value utilizing the weighted average method. Raw materials primarily include yew timber used in the production of products such as handicrafts, furniture and other products containing yew timber. Finished goods-handicraft and yew seedlings include direct materials, direct labor and an appropriate proportion of overhead.

We estimate the amount of the excess inventories by comparing inventory on hand with the estimated sales that can be sold within our normal operating cycle of one year. Any inventory in excess of our current requirements based on historical and anticipated levels of sales is classified as long-term on our consolidated balance sheets. Our classification of long-term inventory requires us to estimate the portion of inventory that can be realized over the next 12 months.

To estimate the amount of slow-moving or obsolete inventories, we analyze movement of our products, monitor competing products and technologies and evaluate acceptance of our products. Periodically, we will identify inventories that cannot be sold at all or can only be sold at deeply discounted prices. An allowance will be established if management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record reserves for the difference between the carrying cost and the estimated market value.

29



Table of Contents

Our handicraft and yew furniture products are hand-made by traditional Chinese artisans and many are one-of-a-kind pieces that do not decrease in market value. Much of the furniture that we produce is reproductions of popular Ming and Qing Dynasty style antique furnishings with high collection value; therefore we believe that the market value will increase from time to time. Currently, we have an adequate supply rare Northeast yew timber on hand for approximately five years’ worth of production. Northeast yew trees are considered an endangered species with a relatively slow growing nature and are officially protected in the PRC. Because of the scarcity of Northeast yew timber supply, the cost to acquire new inventory of yew timber is rising. We had minimal manufacturing activities and minimal sales of exclusive and expensive handicraft and yew furniture in 2010 and 2011 and accordingly, the yew timber and certain handicrafts and yew furniture pieces are considered slow-moving. In 2010 and 2011, we concentrated on the sale of our TCM products and did not actively market our handicraft products. In August 2012, we began to increase our marketing efforts for our handicraft products. Historically, we have never sold our handicraft products below cost and we believe the current selling price which is higher than historical cost can be obtained. Additionally, we believe that we are one of only a few companies in the PRC to have received approval for the manufacture of items made from yew timber. In short, we may have difficulties finding reasonable cost Northeast yew timber suppliers if the handicraft finished goods sell out due to our market development activities.

In connection with the inventory of our Northeast yew timber, in February 2012, we engaged a third party independent appraiser and they prepared a report which indicated that the current fair value of such timber is greater than our historical cost. The appraiser was comprised of several forestry experts and approved by the Price Authentication Center of Heilongjiang Province of China, a provincial government institute.

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

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

Property and equipment

Property and equipment are carried at cost and are depreciated on a straight-line basis (after taking into account their respective estimated residual value) over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The estimated useful lives are as follows:

Building
           
15 years
Machinery and equipment
           
10 years
Office equipment
           
3 years
Leasehold improvement
           
5 years
Motor vehicles
           
4 years
 

Land and yew forest use rights

All land in the PRC is owned by the PRC government and cannot be sold to any individual or company. We have recorded the amounts paid to the PRC government to acquire long-term interests to utilize land and yew forests as land and yew forest use rights. This type of arrangement is common for the use of land in the PRC. Yew trees on land containing yew tree forests will be used to supply raw materials such as branches, leaves and fruit to us that will be used to manufacture our products. We amortize these land and yew forest use rights over the term of the respective land and yew forest use right, which ranges from 45 to 50 years. The lease agreements do not have any renewal option and we have no further obligations to the lessor. We record the amortization of these land and forest use rights as part of its cost of revenues.

30



Table of Contents

Revenue recognition

We generate our revenue from sales of yew seedling products, sales of yew raw materials for medical application, and sales of yew craft products. Pursuant to the guidance of ASC 605 and ASC 360, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured, and no significant obligations remain.

Income taxes

We are governed by the Income Tax Law of the PRC, Hong Kong and the United States. We account for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence; it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

We apply the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to our liability for income taxes. Any such adjustment could be material to our results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. Currently, we have no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

Stock-based compensation

Stock based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award. The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.

Recent accounting pronouncements

In July 2012, the Financial Accounting Standards Board (FASB) amended ASC 350, “Intangibles — Goodwill and Other”. This amendment is intended to simplify how an entity tests indefinite-lived assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The amended provisions will be effective for us beginning in the first quarter of 2014, and early adoption is permitted. This amendment impacts impairment testing steps only, and therefore adoption will not have an impact on our consolidated financial position, results of operations or cash flows.

In August 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and

31



Table of Contents


Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04 (“ASU 2012-04”). The amendments in this update cover a wide range of topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

Currency exchange rates

Our functional currency is the U.S. dollar, and the functional currency of our operating subsidiaries and VIEs is the RMB. All of our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect our reported levels of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.

Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating subsidiaries. Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.

Our financial statements are expressed in U.S. dollars, which is the functional currency of our parent company. The functional currency of our operating subsidiaries and affiliates is RMB. To the extent we hold assets denominated in U.S. dollars, any appreciation of the RMB against the U.S. dollar could result in a charge in our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results.

Recently Enacted JOBS Act

We qualify as an “emerging growth company” under the recently enacted JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, among other things, we will not be required to:

  Have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

  Submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency”;

  Obtain shareholder approval of any golden parachute payments not previously approved; and

  Disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive’s compensation to median employee compensation.

32



Table of Contents

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion; (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

Until such time, however, because the JOBS Act has only recently been enacted, we cannot predict whether investors will find our stock less attractive because of the more limited disclosure requirements that we may be entitled to follow and other exemptions on which we are relying while we are an “emerging growth company”. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Results of Operations

The following tables set forth key components of our results of operations for the periods indicated, in dollars, and key components of our revenue for the periods indicated, in dollars. The discussion following the table is based on these results.

        For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
    For the Years
Ended December 31,
   
        2012
    2011
    2012
    2011
    2011
    2010
Revenue — third parties
              $ 930,557          $ 954,122          $ 4,230,631          $ 3,246,602          $ 4,564,426          $ 3,789,181   
Revenue — related party
                 442,467             251,876             602,159             1,169,688             1,396,613             1,338,871   
Total revenues
                 1,373,024             1,205,998             4,832,790             4,416,290             5,961,039             5,128,052   
Cost of revenues —
third parties
                 146,409             220,121             726,957             691,588             741,508             1,178,382   
Cost of revenues —
related party
                 84,528             41,009             109,572             297,004             384,457             459,681   
Total cost of revenues
                 230,937             261,130             836,709             988,592             1,125,965             1,638,063   
Gross profit
                 1,142,087             944,868             3,996,081             3,427,698             4,835,074             3,489,989   
Operating expenses
                 262,656             230,109             637,666             576,235             788,408             909,296   
Income from operations
                 879,431             714,759             3,358,415             2,851,463             4,046,666             2,580,693   
Other income (expenses)
                 228              (2,454 )            1,455             (13,126 )            (6,355 )            5,267   
Net income
                 879,659             712,305             3,359,870             2,838,337             4,040,311             2,585,960   
Other comprehensive income
                                                                                                       
Unrealized foreign currency translation gain (loss)
                 (59,359 )            158,519             108,308             582,653             778,392             463,826   
Comprehensive income
              $ 820,300          $ 870,824          $ 3,468,178          $ 3,420,990          $ 4,818,703          $ 3,049,786   
 

33



Table of Contents

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011

Revenues

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

        Three Months Ended
September 30,
   
        2012
    2011
    Increase
    Percentage
Change
TCM raw materials
              $ 893,909          $ 859,497          $ 34,412             4.0 %  
Yew trees
                 396,416             322,015             74,401             23.1 %  
Handicrafts
                 82,699             24,486             58,213             237.7 %  
Total
              $ 1,373,024          $ 1,205,998          $ 167,026             13.8 %  
 
        Nine Months Ended
September 30,
   
        2012
    2011
    Increase
    Percentage
Change
TCM raw materials
              $ 2,860,552          $ 2,659,234          $ 201,318             7.6 %  
Yew trees
                 1,853,504             1,665,665             187,839             11.3 %  
Handicrafts
                 118,734             91,391             27,343              29.9 %  
Total
              $ 4,832,790          $ 4,416,290          $ 416,500             9.4 %  
 

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

Cost of Revenues

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

34



Table of Contents

Cost of revenues by product categories were as follows:

        Three Months Ended
September 30,
   
        2012
    2011
    Increase
(Decrease)
    Percentage
Change
TCM raw materials
              $ 158,354          $ 161,226          $ (2,872 )            (1.8 )%  
Yew trees
                 21,395             88,380             (66,985 )            (75.8 )%  
Handicrafts
                 51,188             11,524             39,664             344.2 %  
Total
              $ 230,937          $ 261,130          $  (30,193 )            (11.6 )%   
 
        Nine Months Ended
September 30,
   
        2012
    2011
    Increase
(Decrease)
    Percentage
Change
TCM raw materials
              $ 446,436          $ 640,843          $ (194,407 )            (30.3 )%  
Yew trees
                 320,410             287,681             32,729              11.4 %  
Handicrafts
                 69,863             60,068             9,795             16.3 %  
Total
              $ 836,709          $ 988,592          $ (151,883 )            15.4 %  
 

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

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

Gross Profit

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

        Three Months Ended
September 30,
   
        2012
    2011
    Increase
(Decrease)
TCM raw materials
                 82.3 %            81.2 %            1.1 %  
Yew trees
                 94.6 %            72.6 %            22.0 %  
Handicrafts
                 38.1 %            52.9 %            (14.8 )%  
Total
                 83.2 %            78.3 %            4.9 %  
 
        Nine Months Ended
September 30,
   
        2012
    2011
    Increase
TCM raw materials
                 84.4 %            75.9 %            8.5 %  
Yew trees
                 82.7 %            82.7 %            0.0 %  
Handicrafts
                 41.2 %            34.3 %            6.9 %  
Total
                 82.7 %            77.6 %            5.1 %  
 

The overall increase in our gross profit margin for the three months ended September 30, 2012 was primarily attributable to the increase in the TCM raw materials and yew trees segments, partially offset by a decrease in our handicrafts segment. The overall increase in our gross profit margin for the nine months ended September 30, 2012 was primarily attributable to the increase in the TCM raw materials and handicrafts segments.

35



Table of Contents

For the three and nine months ended September 30, 2012, the increase in our gross margin percentage related to the sale of TCM raw materials was primarily attributable to the operational efficiency improvements as we have had longer operation experience in the TCM raw materials segment as compared to the same periods in 2011.

The increase in our gross margin percentage related to the sale of yew trees for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 is primarily attributable to the fact that the average unit selling price for our yew trees was higher, which contributed to the higher gross profit margin in 2012. For the nine months ended September 30, 2012, the gross margin percentage related to the sale of yew trees remained consistent as compared to 2011.

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

Selling Expenses

Selling expenses consisted of the following:

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

For the three months ended September 30, 2012, selling expenses were $6,643, as compared to $8,455 for the three months ended September 30, 2011, a decrease of $1,812 or 21.4%. The decrease in our selling expenses for the three months ended September 30, 2012 was primarily attributable to the decreases in advertising and shipping and handling expenses, partially offset by the increases in salary and related benefit and other expenses. For the nine months ended September 30, 2012, selling expenses were $17,880 as compared to $42,640 for the nine months ended September 30, 2011, a decrease of $24,760 or 58.1%. The decrease in our selling expenses for the nine months ended September 30, 2012 was primarily attributable to the decreases in advertising, shipping and handling and other expenses, partially offset by an increase in salary and related benefit.

For the three months ended September 30, 2012, salary and related benefit increased by $887 as compared to the three months ended September 30, 2011. The increase was attributable to the increase in salary expenses and bonuses paid, as we had more sales staff on our sales team during the three months ended September 30, 2012 as compared to the same period in 2011. For the nine months ended September 30, 2012, salary and related benefit increased by $3,004 as compared to the nine months ended September 30, 2011, which was primarily attributable to an increase in salary expenses and bonus paid, as we had more sales staff on our sales team during the nine months ended September 2012 as compared to the corresponding period in 2011.

For the three and nine months ended September 30, 2012, we did not incur any advertising expenses, while we recorded advertising expenses of $61 and $9,482 for the three and nine months ended September 30, 2011, respectively. We primarily relied on our sales staff to promote our products and did not have any advertising activities during 2012.

For the three months ended September 30, 2012, shipping and handling expenses decreased by $3,265 as compared to the three months ended September 30, 2011. In the third quarter of 2012, the majority of the shipping fees were either paid directly or reimbursed by our customers, while in the third quarter of 2011

36



Table of Contents


shipping fees were paid by us. For the nine months ended September 30, 2012, shipping and handling expenses decreased by $9,621 as compared to the nine months ended September 30, 2011. For the nine months ended September 30, 2012, a majority of the shipping fees were either paid directly by our customers or reimbursed to us by our customers, while in the nine months ended September 30, 2011 shipping fees were paid by us.

For the three months ended September 30, 2012, other miscellaneous selling expenses increased by $627 as compared to the three months ended September 30, 2011. This increase was primarily attributable to the increase in materials expenditure related to handicrafts selling activities during the three months ended September 30, 2012. For the nine months ended September 30, 2012, other miscellaneous selling expenses decreased by $8,661 as compared to the nine months ended September 30, 2011. This decrease was primarily attributable to the overall decrease in materials expenditure related to selling activities.

General and Administrative Expenses

For the three months ended September 30, 2012, general and administrative expenses amounted to $256,013, as compared to $221,654 for the three months ended September 30, 2011, an increase of $34,359 or 15.5%. For the nine months ended September 30, 2012, general and administrative expenses amounted to $619,786, as compared to $533,595 for the nine months ended September 30, 2011, an increase of $86,191 or 16.2%. General and administrative expenses consisted of the following:

        Three Months Ended
September 30,
    Nine Months Ended
September 30,
   
        2012
    2011
    2012
    2011
Compensation and related benefits
              $ 52,056          $ 42,568          $ 152,061          $ 124,205   
Depreciation
                 48,634             38,153             137,624             110,336   
Travel and entertainment
                 27,819             25,305             68,120             77,013   
Professional fees
                 98,374             68,674             183,628             127,902   
Research and development
                              694                           15,968   
Other
                 29,130             46,260             78,353             78,171   
Total
              $ 256,013          $ 221,654          $ 619,786          $ 533,595   
 

The increase in our general and administrative expenses for the three months ended September 30, 2012, as compared to the comparable period in 2011, was primarily attributable to increases in compensation and related benefits, depreciation and professional fees, partially offset by decreases in other expenses. The increase in our general and administrative expenses for the nine months ended September 30, 2012, as compared to the corresponding period in 2011, was primarily attributable to increases in compensation and related benefits paid, depreciation expenses, and professional fees, partially offset by the decreases in travel and entertainment expenses and research and development expenses. The changes in these expenses for the three and nine months ended September 30, 2012, as compared to the three and nine months ended September 30, 2011, consisted of the following:

  For the three months ended September 30, 2012, compensation and related benefits increased by $9,488 or 22.3% as compared to the three months ended September 30, 2011. For the nine months ended September 30, 2012, compensation and related benefits increased by $27,856 or 22.4% as compared to the nine months ended September 30, 2011. These increases were primarily attributable to an increase in salaries paid to our management and other administrative staff resulting from the expansion of our business.

  For the three months ended September 30, 2012, depreciation increased by $10,481 or 27.5% as compared to the three months ended September 30, 2011. For the nine months ended September 30, 2012, depreciation increased by $27,288 or 24.7% as compared to the nine months ended September 30, 2011. These increases were primarily attributable to an increase in depreciable assets. Since later part of 2011, we purchased more fixed assets as a result of the expansion of our business. As such, we had more depreciable assets during the three and nine months ended September 30, 2012 as compared to the corresponding periods in 2011.

37



Table of Contents

  For the three months ended September 30, 2012, travel and entertainment increased by $2,514 or 9.9% as compared to the three months ended September 30, 2011. The increase was due to more travel activities incurred during the three months ended September 30, 2012. For the nine months ended September 30, 2012, travel and entertainment decreased by $8,893 or 11.5% as compared to the nine months ended September 30, 2011. These decreases were primarily attributable to less travel and entertainment activities incurred during the first nine months of 2012 as compared to the same period in 2011.

  Professional fees consisted primarily of legal, accounting and other fees associated with preparing to and becoming a reporting company in the United States. For the three months ended September 30, 2012, professional fees increased by $29,700 or 43.2%, as compared to the three months ended September 30, 2011. For the nine months ended September 30, 2012, professional fees increased by $55,726 or 43.6%, as compared to the nine months ended September 30, 2011. This increase was primarily attributable to the increase in legal and accounting fees as a result of our becoming a reporting company in the United States in 2012.

  For the three months ended September 30, 2012, other general and administrative expense decreased by $17,130 or 37.0%, as compared to the three months ended September 30, 2011. The decrease was primarily due to less office and communication expenses incurred during the three months ended September 30, 2012 as a result of our cost cutting effort. For the nine months ended September 30, 2012, other general and administrative expense remained materially consistent.

Income from Operations

For the three months ended September 30, 2012, income from operations was $879,431 as compared to $714,759 for the three months ended September 30, 2011, an increase of $164,672 or 23.0%. For the nine months ended September 30, 2012, income from operations was $3,358,415 as compared to $2,851,463 for the nine months ended September 30, 2011, an increase of $506,952 or 17.8%. These increases were primarily due to higher overall gross margins and a decrease in selling expenses incurred and offset by the increase in general and administrative expenses.

Other Income (Expenses)

For the three months ended September 30, 2012, total other income amounted to $228 as compared to total other expenses of $2,454 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, total other income amounted to $1,455 as compared to total other expenses of $13,126 for the nine months ended September 30, 2011. The change in total other income (expenses) was primarily attributable to the following:

  For the three months ended September 30, 2012, interest income amounted to $474 as compared to interest income of $263 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, interest income amounted to $2,062 as compared to interest income of $1,712 for the nine months ended September 30, 2011. These increases were the result of more money being deposited in interest-bearing accounts.

  For the three months ended September 30, 2012, other expense amounted to $246 as compared to other expense of $2,717 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, other expense amounted to $607 as compared to other expense of $14,838 for the nine months ended September 30, 2011. The decrease was a result of better costs control related to non-operational expenses.

Net Income

As a result of the factors described above, our net income was $879,659 or $0.02 per share (basic and diluted), for the three months ended September 30, 2012, as compared to $712,305 or $0.02 per share (basic) and $0.01 per share (diluted), for the three months ended September 30, 2011. Our net income was $3,359,870 or $0.07 per share (basic and diluted), for the nine months ended September 30, 2012, as

38



Table of Contents


compared to $2,838,337 or $0.07 per share (basic) and $0.06 per share (diluted), for the nine months ended September 30, 2011.

Foreign Currency Translation Adjustment

For the three months ended September 30, 2012, we reported an unrealized loss on foreign currency translation of $59,359, as compared to unrealized gain of $158,519 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, we reported an unrealized gain on foreign currency translation of $108,308, as compared to $582,653 for the nine months ended September 30, 2011. 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 resulting from foreign exchange transactions, if any, are included in the consolidated statements of income.

Comprehensive Income

For the three months ended September 30, 2012, comprehensive income of $820,300 was derived from our net income of $879,659, partially offset by a foreign currency translation loss of $59,359. For the three months ended September 30, 2011, comprehensive income of $870,824 was derived from the sum of our net income of $712,305 plus a foreign currency translation gain of $158,519.

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. For the nine months ended September 30, 2011, comprehensive income of $3,420,990 was derived from the sum of our net income of $2,838,337 plus a foreign currency translation gain of $582,653.

Segment Operations

For the three and nine months ended September 30, 2012 and 2011, we operated in three reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees, including potted miniature yew trees; and (3) the handicrafts segment, consisting of the manufacture and sale of furniture and handicrafts made of yew timber. Our reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of our operations are conducted in the PRC.

Information with respect to these reportable business segments for the three months ended September 30, 2012 and 2011 was as follows:

Three months ended September 30, 2012:

        TCM raw
materials
    Yew trees
    Handicrafts
    Total
Revenues
              $ 451,442          $ 396,416          $ 82,699          $ 930,557   
Revenues — related parties
                 442,467                                       442,467   
Total revenues
                 893,909             393,416             82,699             1,373,024   
 
Cost of revenues
                 73,826             21,395             51,188             146,409   
Cost of revenues — related parties
                 84,528                                       84,528   
Total cost of revenues
              $ 158,354          $ 21,395          $ 51,188          $ 230,937   
 

39



Table of Contents

Three months ended September 30, 2011:

        TCM raw
materials
    Yew trees
    Handicrafts
    Total
Revenues
              $ 607,621          $ 322,015          $ 24,486          $ 954,122   
Revenues — related parties
                 251,876                                       251,876   
Total revenues
                 859,497             322,015             24,486             1,205,998   
 
Cost of revenues
                 120,217             88,380             11,524             220,121   
Cost of revenues — related parties
                 41,009                                       41,009   
Total cost of revenues
              $ 161,226          $ 88,380          $ 11,524          $ 261,130   
 

Information with respect to these reportable business segments for the nine months ended September 30, 2012 and 2011 is as follows:

Nine months ended September 30, 2012:

        TCM raw
materials
    Yew trees
    Handicrafts
    Total
Revenues
              $ 2,259,996          $ 1,853,504          $ 117,131          $ 4,230,631   
Revenues — related parties
                 600,556                          1,603             602,159   
Total revenues
                 2,860,552             1,853,504             118,734             4,832,790   
 
Cost of revenues
                 337,549             320,410             68,998             726,957   
Cost of revenues — related parties
                 108,887                          865              109,752   
Total cost of revenues
              $ 446,436          $ 320,410          $ 69,863          $ 836,709   
 

Nine months ended September 30, 2011:

        TCM raw
materials
    Yew trees
    Handicrafts
    Total
Revenues
              $ 1,489,546          $ 1,665,665          $ 91,391          $ 3,246,602   
Revenues — related parties
                 1,169,688                                       1,169,688   
Total revenues
                 2,659,234             1,665,665             91,391             4,416,290   
 
Cost of revenues
                 343,839             287,681             60,068             691,588   
Cost of revenues — related parties
                 297,004                                       297,004   
Total cost of revenues
              $ 640,843          $ 287,681          $ 60,068          $ 988,592   
 

TCM raw materials

In February 2010, we began selling yew branches and leaves that are used in the production of TCM. On January 9, 2010, we entered into a Cooperation and Development Agreement dated January 9, 2010, or the Development Agreement, with Yew Pharmaceutical, a related party, for the development, production and sale of yew-based TCM. Pursuant to the Development Agreement, we sell yew branches and leaves to Yew Pharmaceutical. Yew Pharmaceutical manufactures TCM at its own facilities in Harbin in accordance with the requirements of HFDA. Yew Pharmaceutical is also responsible for producing the finished product in accordance with the requirements of good manufacturing practices, or GMP. In this regard, Yew Pharmaceutical received a GMP certificate in November 2009, and has filed all applications with, and obtained all approvals from, the HFDA.

During the three months ended September 30, 2012, we sold 5,400 kg of TCM raw materials as compared to 5,160 kg of TCM raw materials during the three months ended September 30, 2011, a 4.7% increase in sales volume due to increased sales efforts and customer demand, while the average unit selling price remained constant. We sold TCM raw materials to Yew Pharmaceutical at a fixed price of RMB 1,000,000 (approximately $158,000) per metric ton pursuant to the Development Agreement, and we sold TCM raw materials to other customers at a price of RMB 1,100,000 (approximately $174,000) per metric ton.

40



Table of Contents

During the nine months ended September 30, 2012, we sold 16,800 kg of TCM raw materials as compared to 16,420 kg of TCM raw materials during the nine months ended September 30, 2011, a 2.3% increase in sales volume due to increased sales efforts and customer demand, with a 5.1% increase in our average unit selling price. The increase in our average unit selling price was attributable to the increase in the percentage of total TCM raw materials sales made to our third party customers. We sold TCM raw materials to Yew Pharmaceutical at a fixed price of RMB 1,000,000 (approximately $158,000) per metric ton pursuant to the Development Agreement, and we sold TCM raw materials to other customers at a price of RMB 1,100,000 (approximately $174,000) per metric ton.

For the three months ended September 30, 2012 and 2011, we had revenue of $442,467 and $251,876, respectively, from the sale of TCM raw materials to Yew Pharmaceutical pursuant to the Development Agreement. As Yew Pharmaceutical did not make TCM raw materials purchases from us during the second quarter of 2012, it made more purchases in the three months ended September 30, 2012 in order to meet its production needs. For the three months ended September 30, 2012 and 2011, revenue from the sale of TCM raw materials to third parties amounted to $451,442 and $607,621, respectively, as we had less third-party customer demand and seasonal limitations on the sale of TCM raw materials as a result of the growth rate of yew trees available for cutting branches and leaves.

Sales of yew raw materials to a related party customer, Yew Pharmaceutical, decreased during the first two quarters of 2012 because Yew Pharmaceutical had adequate inventory for its needs and as we focused our attention on expanding such sales to third party customers. During the third quarter of 2012, sales of yew raw materials to Yew Pharmaceutical increased because Yew Pharmaceutical required more yew raw material as its own inventory decreased, while sales of yew raw material to third party customers decreased because such customers now had adequate inventory. Accordingly, our revenue generated from the related party revenue increased and our revenue generated from the third party customers decreased during the third quarter of 2012.

For the nine months ended September 30, 2012 and 2011, pursuant to the Development Agreement, we had revenue of $600,556 and $1,169,688, respectively, from the sale of TCM raw materials to Yew Pharmaceutical. For the nine months ended September 30, 2012 and 2011, revenue from the sale of TCM raw materials to third parties amounted to $2,259,996 and $1,489,546, respectively, as we actively developed more sales to third party customers during 2012. Over the nine months ended September 30, 2012, the overall mix of sales of our yew raw materials consisted primarily of sales to third party customers compared to sales to the related party customer.

Sales volume is summarized as follows:

        Three Months Ended
September 30,
    Nine Months Ended
September 30,
   
        2012
    2011
    2012
    2011
Sales volume — third parties (kg)
                 2,600             3,560             13,000             8,810   
Sales volume — related party (kg)
                 2,800             1,600             3,800             7,610   
Total sales volume
                 5,400             5,160             16,800             16,420   
 

Additionally, in order to ensure the sustainability of our yew forests, we closely monitor the growth rate of our yew trees. The amount of TCM raw materials can be sold is limited by the seasonal growth rate of our yew trees that are available for cutting branches and leaves. Over time, as more yew trees reach maturity, these limits may be increased.

The decrease in our cost of revenues in the TCM raw materials segment for the three and nine months ended September 30, 2012 as compared to the corresponding periods of 2011 was primarily attributable to improved operational efficiencies in 2012. We have continued to find ways to improve our operational efficiencies and cost controls in the TCM raw materials segment since we first started this segment’s operations in 2010. As a result, we were able to reduce the cost of revenues as a percentage of our revenue.

41



Table of Contents

Yew trees

During the three months ended September 30, 2012, we sold approximately 42,000 yew seedlings and trees as compared to approximately 51,000 yew seedlings and trees in the three months ended September 30, 2011, a decrease in volume of 17.6%. For the three months ended September 30, 2012, demand for our yew trees decreased as our customers did not have as many reforestation or landscaping projects as a result of the current slowdown in the Chinese economy. In addition, because the supply of yew trees is relatively limited while our yew forests continue to grow and reach maturity, we have become more selective in selling to customers in 2012 who are capable of paying higher prices for yew trees, thereby generating greater profit margins for us, while maintaining the sustainability of our yew trees inventory for our future revenue growth. We sold more yew trees in the potted miniature trees form as a percentage of our yew tree revenues. Potted miniature trees are higher priced than yew seedlings and customers generally purchase potted miniature trees in smaller quantities. As a result, we saw an increase in the average unit selling price of yew trees of 49.8% for the third quarter of 2012 as compared to the third quarter of 2011. The increase in our average unit selling price for yew trees was primarily attributable to the different sales revenue mix with varying unit selling prices.

During the nine months ended September 30, 2012, we sold approximately 227,000 yew seedlings and trees as compared to approximately 349,000 yew seedlings and trees in the nine months ended September 30, 2011, a decrease in volume of 35.0%. During the nine months ended September 30, 2012, demand for our yew seedling products decreased as our customers did not have as many forestation or landscaping projects as a result of the current slowdown in the Chinese economy. Additionally, we sold more yew trees in the potted miniature trees form. Potted miniature trees are generally more mature and higher priced than yew seedlings and customers generally purchase potted miniature trees in smaller quantities. As such, the sales volume decreased in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. However, we saw an increase in the average unit selling price of yew trees of 71.3% for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The increase in our average unit selling price for yew trees was primarily attributable to the different sales revenue mix with varying unit selling price. The selling price of yew trees is dependent on the age, size and variety of the seedling or tree. For example, smaller, less developed yew seedlings or trees sell for less than more mature seedlings or trees. We sold more matured and larger yew seedlings as a percentage of total yew trees sales during the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011.

The decrease in our cost of revenues in the yew tree segment for the three months ended September 30, 2012 as compared to the comparable period of 2011 was because we sold less yew trees and the percentage of younger trees sold was higher for the three months ended September 30, 2012. The increase in our cost of revenues in the yew trees segment for the nine months ended September 30, 2012 as compared to the comparable period of 2011 was attributable to the increased cost of cultivating yew trees in 2012 and overall more mature yew trees with higher costs being sold in 2012. We sold approximately 42,000 and 227,000 yew seedlings and trees in the three and nine months ended September 30, 2012, respectively, as compared to approximately 51,000 and 349,000 yew seedlings and trees in the three and nine months ended September 30, 2011, respectively. The average cost per yew tree was approximately $0.51 and $1.41 in the three and nine months ended September 30, 2012, respectively, as compared to $1.73 and $0.82 per yew tree in the three and nine months ended September 30, 2011, respectively.

In connection with our entering into a land use agreement on July 18, 2012, or Fuye Field Agreement, we acquired more than 80,000 trees — which are not yew trees — located on that property. These trees consist of approximately 20,000 larix, 56,700 spruce and 3,700 poplar trees. Larix trees are used primarily in landscaping and we currently anticipate that we will begin selling larix trees to customers during 2013. Spruce and poplar trees are used primarily as building materials and we currently anticipate that we will begin selling these trees to customers in later periods, when these trees reach maturity in several years.

42



Table of Contents

Handicrafts

During the three months ended September 30, 2012 and 2011, revenue from the sale of handicrafts made from yew timber amounted to $82,699 and $24,486, respectively, an increase of $58,213 or 237.7%. During the nine months ended September 30, 2012 and 2011, revenue from the sale of handicrafts made from yew timber amounted to $118,734 and $91,391, including sales to a related party of $1,603 and $0, respectively, an increase of $27,343 or 29.9%. We sold more yew handicrafts, including furniture, during the three and nine months ended September 30, 2012 as compared to the comparable period in 2011. We increased our sales effort in promoting our high-priced yew handicrafts in the third quarter of 2012.

In August 2012, we began to more actively market our handicraft products. Specific steps taken to market our handicraft products include:

  We will begin to engage first tier distributors to distributor our handicraft products in provincial capital cities in 10 provinces; each first tier distributor is required to reach minimal annual sales volume of 2,000,000 RMB. First tier distributors will be able to purchase handicrafts from us at a price below the price that basic distributors pay for the handicraft products. In addition to the discounted first tier distributor pricing provided, we will also provide approximately 3%-5% commission (payable in yew seedling products) to these first tier distributors.

  We will engage second tier distributors in smaller cities. Each second tier distributor is required to reach minimal annual sales volume of 1,000,000 RMB. These distributors will also be offered beneficial pricing off the price that basic distributors pay. We will also provide approximately 2%-3% commission (payable in yew seedling products) to the second tier distributors.

  We have instructed our sales representative to make frequent visits to our distributors to promote our handicraft products.

The increase in our cost of revenues in the handicrafts segments for the three and nine months ended September 30, 2012 as compared to the corresponding periods of 2011 was due to increased costs incurred in connection with increased sales of handicrafts and a different product mix sold.

YEAR ENDED DECEMBER 31, 2011 COMPARED TO YEAR ENDED DECEMBER 31, 2010

Revenues

For the year ended December 31, 2011 (“fiscal 2011”), we had total revenues of $5,961,039, as compared to $5,128,052 for the year ended December 31, 2010 (“fiscal 2010”), an increase of $832,987 or 16.2%. In fiscal 2011, the increase in total revenue was attributable to the increase in revenue from our TCM raw material segment for which we began to produce and sell in June 2010 and the increase in revenue from the sale of yew trees, offset by the decrease in revenue from the sale of handicrafts, and is summarized as follows:

        Fiscal 2011
    Fiscal 2010
    Increase
(Decrease)
    Percentage
Change
TCM raw materials
              $ 3,458,093          $ 2,845,067          $ 613,026             21.5 %  
Yew trees
                 2,400,245             2,131,445             268,800             12.6 %  
Handicrafts
                 102,701             151,540             (48,839 )            (32.2 )%  
Total
              $ 5,961,039          $ 5,128,052          $ 832,987             16.2 %  
 

TCM raw materials

During fiscal 2011, we sold 21,170 kilogram of TCM raw materials as compared to 18,350 kilogram of TCM raw materials during fiscal 2010, a 15.4% increase in sales volume with minimal change in our average unit selling price. The increase in sales volume was primarily attributable to increased sales efforts and customer demand in fiscal 2011.

In February 2010, we began selling yew branches and leaves that are used in the production of TCM. On January 9, 2010, we entered into the Development Agreement with Yew Pharmaceutical, a related party, for

43



Table of Contents


the development, production and sale of yew-based TCM. Pursuant to the Development Agreement, we sell yew branches and leaves to Yew Pharmaceutical. Yew Pharmaceutical manufactures TCM at its own facilities in Harbin in accordance with the requirements of HFDA. Yew Pharmaceutical is also responsible for producing the finished product in accordance with the GMP requirements. In this regard, Yew Pharmaceutical received a GMP certificate in November 2009, and has filed all applications with, and obtained all approvals from, the HFDA. In fiscal 2011 and fiscal 2010, pursuant to the Development Agreement, we had revenue of $1,391,826 and $1,326,203, respectively, from the sale of TCM raw materials to Yew Pharmaceutical. Additionally, in fiscal 2011 and fiscal 2010, revenue from the sale of TCM raw materials to third parties amounted to $2,066,267 and $1,518,864, respectively. Sales volume is summarized as follows:

        Years Ended
December 31,
   
        2011
    2010
Sales volume — third parties (kg)
                 12,160             9,360   
Sales volume — related party (kg)
                 9,010             8,990   
Total sales volume
                 21,170             18,350   
 

Yew trees

During fiscal 2011, we sold approximately 383,000 pieces of yew seedlings and trees as compared to approximately 953,000 pieces of yew seedlings and trees in fiscal 2010, a decrease in volume of 59.8%. The majority of the decrease in sales volume was due to an approximately 647,000 decrease in units sold for our least mature 2009 seedling product. However, we experienced an increase in the average unit selling price of yew trees of 167.4% for fiscal 2011 as compared to fiscal 2010. The increase in our average unit selling price for yew trees was primarily attributable to the different sales revenue mix with varying unit selling price. The selling price of yew trees is dependent on the age, size and variety of the seedling or tree. For example, smaller, less developed yew seedlings or trees sell for less than more mature seedlings or trees. As we had more mature seedlings and trees sold in 2011, the average unit selling price increased in 2011 accordingly.

Handicrafts

During fiscal 2011 and 2010, revenue from the sale of handicrafts made from yew timber amounted to $102,701 and $151,540, including sales to a related party of $4,787 and $12,668, respectively, a decrease of $48,839 or 32.2%.

The decrease in revenue from the sale of handicrafts was primarily attributable to the downturn in antique furniture and handicrafts market reflecting the overall impact of international economy environment, especially for higher priced items such as desks and high-end furniture, and our lack of marketing efforts. In August 2012, we began to increase our marketing efforts in this operating segment.

Cost of Revenues

For fiscal 2011, cost of revenues amounted to $1,125,965 as compared to $1,638,063 for fiscal 2010, a decrease of $512,098 or 31.3%. Our cost of revenues principally consists of the cost of raw materials such as wood plates and yews, amortization of land and yew forest use rights, labor, utilities, manufacturing costs, manufacturing related depreciation, machinery maintenance costs, purchasing and receiving costs, inspection costs, and other fixed costs. For fiscal 2011, cost of revenues accounted for 18.9% of total revenues compared to 31.9% of total revenues for fiscal 2010.

Cost of revenues by product categories were as follows:

        2011
    2010
    Decrease
    Percentage
Change
TCM raw materials
              $ 897,154          $ 924,547          $ (27,393 )            (3.0 )%  
Yew trees
                 172,460             633,027             (460,567 )            (72.8 )%  
Handicrafts
                 56,351             80,489             (24,138 )            (30.0 )%  
Total
              $ 1,125,965          $ 1,638,063          $ (512,098 )            (31.3 )%  
 

44



Table of Contents

The decrease in our cost of revenues in the TCM raw material segment in fiscal 2011 as compared to fiscal 2010 was primarily attributable to improved operational efficiencies in fiscal 2011.

The decrease in our cost of revenues in the Yew trees segments in fiscal 2011 as compared to fiscal 2010 was attributable to the less number of yew trees sold in 2011 and the cost of cultivating yew trees being less in 2011. We sold approximately 383,000 pieces of yew seedlings and trees as compared to approximately 953,000 pieces of yew seedlings and trees in fiscal 2010. The average cost per yew tree was approximately $0.45 in 2011 as compared to $0.66 per yew tree in 2010. As a result of improved operational efficiencies, we were able to reduce our cost per yew tree in 2011.

The decrease in our cost of revenues in the Handicrafts segments in fiscal 2011 as compared to fiscal 210 was due to the decrease in revenue generated from the sale of handicrafts.

Gross Profit

For fiscal 2011, gross profit was $4,835,074 as compared to $3,489,989 for fiscal 2010, representing gross margins of 81.1% and 68.1%, respectively. Gross profit margins by product categories were as follows:

        2011
    2010
    Increase
(Decrease)
TCM raw materials
                 74.1 %            67.5 %            6.6 %  
Yew trees
                 92.8 %            70.3 %            22.5 %  
Handicrafts
                 45.1 %            46.9 %            (1.8 )%  
Total
                 81.1 %            68.1 %            13.0 %  
 

The increase in our gross margin percentage related to the sale of TCM raw materials was primarily attributable operational efficiencies from the increase in our production in fiscal 2011 as compared to fiscal 2010.

The increase in our gross margin percentage related to the sale of yew trees for fiscal 2011 as compared to fiscal 2010 was because we had more mature yew seedlings and trees sold in 2011 and we had higher profit margin on those more mature yew tree products. As a result, we saw an increase in our average unit selling price and higher overall gross margin in our yew tree segment.

The decrease in our gross margin percentage related to the sale of handicrafts for fiscal 2011 as compared to fiscal 2010 was mainly due to the different sales revenue mix with different gross profit margin. During fiscal 2011, we sold more handicrafts with lower profit margin, which contributed to the decrease in gross profit margin.

Selling Expenses

        Year Ended
December 31,
   
        2011
    2010
Salary and related benefit
              $ 12,865          $ 2,672   
Advertising
                 8,604             2,571   
Shipping and handling
                 16,166             11,316   
Other
                 16,958             13,858   
Total
              $ 54,593          $ 30,417   
 

For fiscal 2011, selling expenses were $54,593 as compared to $30,417 for fiscal 2010, an increase of $24,176 or 79.5%. Selling expenses consisted of the following:

  For fiscal 2011, salary and related benefit increase by $10,193 which was primarily attributable to an increase in salaries paid to our sales staff due to the expansion in our sales team.

  For fiscal 2011, advertising expenses increase by $6,033 in order to enhance our visibility.

45



Table of Contents

  For fiscal 2011, shipping and handling expenses increased by $4,850 due to the increase in our revenue and sales activities.

  For fiscal 2011, other expenses increased by $3100 primarily due to the increase in travel and entertainment expenses.

General and Administrative Expenses

        Year Ended
December 31,
   
        2011
    2010
Compensation and related benefits
              $ 173,571          $ 76,584   
Depreciation
                 154,266             133,861   
Travel and entertainment
                 86,408             80,679   
Professional fees
                 195,044             453,642   
Research and development
                 16,048             24,404   
Other
                 108,478             109,709   
Total
              $ 733,815          $ 878,879   
 

For fiscal 2011, general and administrative expenses amounted to $733,815 as compared to $878,879 for fiscal 2010, a decrease of $145,064 or 16.5%. General and administrative expenses consisted of the following:

  For fiscal 2011, compensation and related benefits increased by $96,987 or 126.6%. The increase was primarily attributable to the increase in salaries paid to our management resulting from the expansion of our business in China. Additionally, during fiscal 2011 we hired our chief financial officer and other administrative staffs in connection with becoming a public company.

  For fiscal 2011, depreciation increased by $20,405 or 15.2%. The increase was mainly attributable to an increase in depreciable assets.

  Professional fees consisted of legal, accounting and other fees associated with preparing to be a public company. For fiscal 2011, professional fees decreased by $258,598 or 57.0% as compared to fiscal 2010. The decrease was primarily attributable to a decrease in legal fees of approximately $89,000, a decrease in accounting fees of approximately $93,000 and a decrease in consulting fees of approximately $77,000 related to our efforts to prepare to become a publicly listed company in the United States.

  For fiscal 2011, research and development expenses decreased by $8,356 or 34.2%. The decrease was because we had less research and development activities incurred.

  Travel and entertainment and other expenses remained materially consistent in fiscal 2011 as compared to fiscal 2010.

Income from Operations

For fiscal 2011, income from operations was $4,046,666 as compared to $2,580,693 for fiscal 2010, an increase of $1,465,973 or 56.8%.

Other Income (Expenses)

For fiscal 2011, total other expenses amounted to $6,355 as compared to total other income of $5,267 for fiscal 2010. The change in total other (expenses) income was primarily attributable to a loss on fixed asset disposals of $8,998 during fiscal 2011.

Net Income

As a result of the factors described above, our net income was $4,040,311, or $0.10 per basic share and $0.08 per diluted share for fiscal 2011, as compared to $2,585,960, or $0.06 per basic share and $0.05 per diluted share for fiscal 2010.

46



Table of Contents

Foreign Currency Translation Adjustment

For fiscal 2011, we reported an unrealized gain on foreign currency translation of $778,392 as compared to $463,826 for fiscal 2010. The change reflects the effect of the value of the U.S. dollar in relation to RMB. These gains are non-cash items. As described elsewhere herein, the functional currency of our operating 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 resulting from foreign exchange transactions, if any, are included in the consolidated statements of income.

Comprehensive Income

For fiscal 2011, comprehensive income of $4,818,703 was derived from the sum of our net income of $4,040,311 plus a foreign currency translation gain of $778,392. For fiscal 2010, comprehensive income of $3,049,786 was derived from the sum of our net income of $2,585,960 plus a foreign currency translation gain of $463,826.

Segment Operations

For the years ended December 31, 2011 and 2010, we operated in three reportable business segments: (1) the sale of yew raw materials for the production of TCM; (2) yew trees; and (3) handicrafts. 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 years ended December 31, 2011 and 2010 is as follows:

Year Ended December 31, 2011

        TCM raw
materials
    Yew trees
    Handicrafts
    Total
Revenues
              $ 2,066,267          $ 2,400,245          $ 97,914          $ 4,564,426   
Revenues — related parties
                 1,391,826                          4,787             1,396,613   
Total Revenue
                 3,458,093             2,400,245             102,701             5,961,039   
Cost of sales
                 515,323             172,460             53,724             741,508   
Cost of sales — related parties
                 381,831                          2,627             384,457   
Total Cost of sales
                 897,154             172,460             56,351             1,125,965   
 

Year Ended December 31, 2010

        TCM raw
materials
    Yew trees
    Handicrafts
    Total
Revenues
              $ 1,518,864          $ 2,131,445          $ 138,872          $ 3,789,181   
Revenues — related parties
                 1,326,203                          12,668             1,338,871   
Total Revenue
                 2,845,067             2,131,445             151,540             5,128,052   
Cost of sales
                 471,595             633,027             73,761             1,178,383   
Cost of sales — related parties
                 452,952                          6,728             459,680   
Total Cost of sales
                 924,547             633,027             80,489             1,638,063   
 

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At September 30, 2012 and December 31, 2011, we had cash balances of $567,798 and $732,371, respectively. These funds are primarily located in various financial institutions located in China. Our primary uses of cash have been for the purchase of yew trees, land

47



Table of Contents


use rights and yew forest assets. Additionally, we use cash for employee compensation, and for working capital.

In July 2012, we entered into the Fuye Field Agreement to acquire a land use right in the amount of approximately $2.4 million, payable in installments. We lease 117.5 mu (approximately 19.6 acres) located at Fuye Field, Beizhao Village, Hongxing Town, A’cheng District in Helongjiang Province, PRC. The term of the Fuye Field Agreement is 16 years, through March 2028. During the term of the Fuye Field Agreement, we have the right to develop the property for the production of yew trees. In addition, we acquired a building and more than 80,000 trees — which are not yew trees — located on the property. In connection with the Fuye Field Agreement, we paid approximately $1.5 million as of September 30, 2012 and there is an amount payable related to the Fuye Field Agreement of approximately $0.9 million as of September 30, 2012 which was included in accounts payable on the accompanying consolidated balance sheets. We presently expect to be able to make the additional payments required by the Fuye Field Agreement from cash-on-hand and net cash flow from operations.

Nine months Ended September 30, 2012 and 2011

The following table sets forth information as to the principal changes in the components of our working capital from December 31, 2011 to September 30, 2012:

                December 31, 2011 to
September 30, 2012
   
Category
        September 30,
2012
    December 31,
2011
    Change
    Percentage
change
Current assets:
                                                                      
Cash
              $ 567,798          $ 732,371          $ (164,573 )            (22.5 )%  
Accounts receivable
                 530,471                          530,471             100.0 %  
Inventories
                 899,783             710,844             188,939             26.6 %  
Prepaid rent — related party
                 67,292                          67,292             100.0 %  
Prepaid expenses and other assets
                 14,245             433              13,812             3,189.8 %  
Current liabilities:
                                                                      
Accounts payable
                 915,792             1,360,611             (444,819 )            (32.7 )%  
Accrued expenses and other payables
                 49,939             119,901             (69,962 )            (58.3 )%  
Taxes payable
                 11,303             500              10,803             2,160.6 %  
Refundable common stock subscription
                              950,000             (950,000 )            (100.0 )%  
Due to related parties
                 56,098             266,488             (210,390 )            (78.9 )%  
Working capital:
                                                                      
Total current assets
              $ 2,079,589          $ 1,443,648          $ 635,941             44.1 %  
Total current liabilities
                 1,033,132             2,697,500             (1,664,368 )            (61.7 )%  
Working capital (deficiency)
              $ 1,046,457          $ (1,253,852 )         $ 2,300,309             (183.5 )%  
 

Our working capital increased $2,300,309 to $1,046,457 at September 30, 2012, from a working capital deficiency of $(1,253,852) at December 31, 2011. This increase in working capital is primarily attributable to:

  An increase in accounts receivable of approximately $530,000;

  An increase in inventories of approximately $189,000;

  An increase in prepaid rent — related parties of approximately $67,000;

  An increase in prepaid expenses and other assets of approximately $14,000;

  A decrease in accounts payable of approximately $445,000;

  A decrease in accrued expenses and other payables of approximately $70,000;

  A decrease in refundable common stock subscription of approximately $950,000;

  A decrease in due to related parties of approximately $210,000;

48



Table of Contents

offset by:

  A decrease in cash of approximately $165,000; and

  An increase in taxes payable of approximately $11,000.

For the nine months ended September 30, 2012, net cash flow provided by operating activities was $345,813, as compared to net cash flow provided by operating activities of $4,368,029 for the nine months ended September 30, 2011, a decrease of $4,022,216. Because the exchange rate conversion is different for the balance sheet and the statements of cash flows, the changes in assets and liabilities reflected on the statements of cash flows is not necessarily identical with the comparable changes reflected on the balance sheets.

For the nine months ended September 30, 2012, net cash flow provided by operating activities of $345,813 was primarily attributable to:

  net income of approximately $3,360,000 adjusted for the add-back of non-cash items, such as: depreciation of approximately $159,000, and amortization of land use rights and yew forest assets of approximately $259,000, and

  the receipt of cash from operations from changes in operating assets and liabilities of approximately $34,000,

partially offset by:

  the use of cash from changes in operating assets and liabilities, such as: an increase in accounts receivable of approximately $531,000, an increase in inventories of approximately $2,335,000 mainly due to the acquired trees from Fuye Field Agreement, an increase in prepaid rent — related parties of approximately $67,000, a decrease in accounts payable of approximately $452,000 and a decrease in accrued expenses and other payables of approximately $67,000.

For the nine months ended September 30, 2011, net cash flow provided by operating activities of $4,368,029 was primarily attributable to:

  net income of approximately $2,838,000 adjusted for the add-back of non-cash items, such as depreciation of approximately $128,000, amortization of land use rights and yew forest assets of approximately $213,000, loss on disposal of fixed assets of approximately $10,000; and

  the receipt of cash from operations from changes in operating assets and liabilities, such as: a decrease in inventories of approximately $859,000, an increase in accounts payable of approximately $502,000,

  partially offset by the use of cash from changes in operating assets and liabilities, such as a decrease in advances from customers of approximately $174,000.

Net cash flow used by investing activities was approximately $274,000 for the nine months ended September 30, 2012, as compared to net cash flow used in investing activities of approximately $5,608,000 for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, we spent approximately $208,000 on purchase of property and equipment and spent approximately $66,000 on purchase of land use rights and yew forest assets. During the nine months ended September 30, 2011, we spent approximately $134,000 on purchase of property and equipment and spent approximately $5,495,000 on purchase of land use rights and yew forest assets, offset by proceeds from disposal of property and equipment of approximately $20,000.

Net cash flow used in financing activities was approximately $239,000 for the nine months ended September 30, 2012, as compared to net cash flow provided by financing activities of approximately $200,000 for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, we made repayments to a related party of approximately $239,000. During the nine months ended September 30, 2011, we received proceeds from related party advances of approximately $137,000 and received proceeds from a director’s advances of approximately $63,000.

49



Table of Contents

Years ended December 31, 2011 and 2010

The following table sets forth information as to the principal changes in the components of our working capital from December 31, 2010 to December 31, 2011:

                December 31, 2010 to
December 31, 2011
   
Category
        December 31,
2011
    December 31,
2010
    Change
    Percentage
Change
Current assets:
                                                                       
Cash
              $ 732,371          $ 1,850,488          $ (1,118,117 )            (60.4 )%  
Due from related parties
                              57,131             (57,131 )            (100.0 )%  
Inventories
                 710,844             972,048             (261,204 )            (26.9 )%  
Prepaid expenses and other assets
                 433              2,250             (1,817 )            (80.8 )%  
Current liabilities:
                                                                       
Accounts payable
                 1,360,611             1,810,092             (449,481 )            (24.8 )%  
Advance from customers
                              322,151             (322,151 )            (100.0 )%  
Accrued expenses and other payables
                 119,901             55,604             64,297             115.6 %  
Taxes payable
                 500              7,112             (6,612 )            (93.0 )%  
Refundable common stock subscription
                 950,000             950,000                             
Due to related parties
                 266,488             141,276             125,212             88.6 %  
Working capital:
                                                                       
Total current assets
              $ 1,443,648          $ 2,881,917          $ (1,438,269 )            (50.91 )%  
Total current liabilities
                 2,697,500             3,286,235             (588,735 )            (17.9 )%  
Working capital deficiency
              $ (1,253,852 )         $ (404,318 )         $ (849,534 )            (210.1 )%  
 

Our working capital deficiency increased by $436,242 to $(1,340,680) at December 31, 2011 from a working capital deficiency of $(404,318) at December 31, 2010. This increase in working capital deficiency is primarily attributable to:

  A decrease in cash of approximately $1,118,000,

  A decrease in inventories of approximately $347,962

  An increase in due to related parties of approximately $125,000,

offset by:

  A decrease in accounts payable of approximately $449,000, and

  A decrease in advances from customers of approximately $322,000.

For fiscal 2011, net cash flow provided by operating activities was $4,370,422 as compared to $7,777,324 for fiscal 2010, a decrease of $3,406,902. Because the exchange rate conversion is different for the balance sheet and the statements of cash flows, the changes in assets and liabilities reflected on the statements of cash flows is not necessarily identical with the comparable changes reflected on the balance sheets.

For fiscal 2011, net cash flow provided by operating activities of $4,370,422 was primarily attributable to:

  net income of approximately $4,040,000 adjusted for the add-back of non-cash items, such as: depreciation of approximately $178,000, and amortization of land use rights and yew forest assets of approximately $293,000, and

  the receipt of cash from operations from changes in operating assets and liabilities, such as: a decrease in inventories of approximately $606,000, a decrease in due from related parties of approximately $26,000, and an increase in accrued expenses and other payable of approximately $62,000,

50



Table of Contents

  
  offset primarily by:

  the use of cash from changes in operating assets and liabilities, such as: a decrease in accounts payable of approximately $511,000 and a decrease in advances from customers of approximately $329,000.

For fiscal 2010, net cash flow provided by operating activities of $7,777,324 was primarily attributable to:

  net income of approximately $2,586,000 adjusted for the add-back of non-cash items, such as depreciation of approximately $158,000, amortization of land use rights and yew forest assets of approximately $48,000, stock-based compensation expense of $50,000, and

  the receipt of cash from operations from changes in operating assets and liabilities, such as: a decrease in accounts receivable of approximately $2,354,000 related to the collection of outstanding accounts receivable balances, a decrease in advance to suppliers of approximately $633,000, an increase in accounts payable of approximately $1,737,000 and an increase in advances from customers of approximately $314,000.

  offset by the use of cash from changes in operating assets and liabilities, such as: an increase in inventories of approximately $222,000.

Net cash flow used in investing activities was $5,687,716 for fiscal 2011 as compared to net cash flow used in investing activities of $9,164,038 for fiscal 2010. During fiscal 2011, we spent approximately $192,000 on purchase of property and equipment and spent approximately $5,516,000 on purchase of land use and yew forest assets rights, offset by proceeds from disposal of property and equipment of approximately $20,000. During fiscal 2010, we spent approximately $169,000 on purchase of property and equipment and spent approximately $9,022,000 on purchase of land use and yew forest assets rights, offset by proceeds from disposal of property and equipment of approximately $27,000.

Net cash flow provided by financing activities was $88,119 for fiscal 2011 as compared to net cash flow provided by financing activities of $1,326,624 for fiscal 2010. During fiscal 2011, we received proceeds from related party advances of approximately $88,000. During fiscal 2010, we received proceeds from refundable common stock subscription of $950,000 and received proceeds from related party advances of approximately $434,000, offset by repayments made for directors’ advances of approximately $57,000.

We have historically financed our operations and capital expenditures through cash flows from operations, bank loans and advances from related parties. From March 2008 to September 2009, we received approximately $2.9 million of proceeds in the aggregate from offerings and sales of our common stock. Except for the portion used to pay for professional and other expenses in the U.S., substantial portions of the proceeds we received through selling of our common stock were retained in the PRC and used to fund our working capital requirements. As the PRC government imposes controls on PRC companies’ ability to convert RMB into foreign currencies and the remittance of currency out of China, from time to time, in order to fund our corporate activities in the U.S., our CEO Zhiguo Wang advanced funds to us in the U.S. and we repaid the amount owed to him in RMB in the PRC.

It is management’s intention to expand our operations as quickly as reasonably practicable to capitalize on the demand opportunity for our products. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations and any potential available bank borrowings. We believe that we can continue meeting our cash funding requirements for our business in this manner over at least the next twelve months. The majority of our funds are maintained in RMB in bank accounts in China. We receive all of our revenue in the PRC. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies by complying with certain procedural requirements. However, approval from the SAFE or its local counterparts is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also, at its discretion, restrict access to foreign currencies for current account transactions. Approximately $24.5 million of our net

51



Table of Contents


assets are located in the PRC. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, and we may not be able to move funds deposited within the PRC to fund working capital requirements in the U.S. or pay dividends, which we have declared not but might declare in the future, in currencies other than the RMB, to our shareholders.

Contractual Obligations and Off-Balance Sheet Arrangements

We have certain potential commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

The following tables summarize our contractual obligations as of September 30, 2012, and the effect these obligations are expected to have on our liquidity and cash flows in future periods:

Contractual obligations:
        Total
    1 year
    1–3 years
    3–5 years
    5+ years

   
Operating leases
              $ 667,293          $ 36,004          $ 69,561          $ 63,924          $ 497,804   
Land and yew forest rights (1)
                 895,532             105,778             789,754                             
Total
              $ 1,562,825          $ 141,782          $ 859,315          $ 63,924          $ 497,804   
 


(1)  
  On July 18, 2012, we entered into the Fuye Field Agreement, pursuant to which we acquired the right to use land with an area of 117.5 mu (approximately 19.6 acres), for a term of 16 years, through March 2028. We also acquired a building, and more than 80,000 trees — which are not yew trees — located on the property. During the term of the Fuye Field Agreement, we have the right to develop the property for the production of yew trees. The aggregate purchase price of RMB 15,002,300 (approximately $2,377,000) was divided into three installments. As of September 30, 2012, we made payment of RMB 9,330,000 (approximately $1.5 million) and we are required to pay RMB 670,000 (approximately $106,000) on December 25, 2012 and RMB 5,002,300 (approximately $790,000) on or before December 25, 2013.

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

52


Table of Contents

OUR BUSINESS

General

The Company, through YBP; its wholly-owned subsidiaries Yew HK and JSJ; and its VIE, HDS; is a major grower and seller of yew trees and manufacturer of products made from yew trees in China. We also sell raw material, including the branches and leaves of yew trees, used in the manufacture of TCM. The yew raw material contains taxol, and TCM containing yew raw material 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 regulated in the PRC because the yew tree is considered an endangered species.

We believe that our business is built upon five unique components:

  We have entered into several land use agreements with various parties, which provide the potential for us to grow a large number of yew trees on large areas of land over the next few decades, although we cannot currently estimate the number of trees we will grow or the total amount of land we will put into production over such period.

  We employ proprietary, patented accelerated growth technology, the Asexual Reproduction Method, to bring yew trees to commercialization decades faster than growing yew trees naturally.

  Because of our more productive and faster rate of yew cultivation, we have a sufficient supply of raw material to allow us to use the branches and leaves, rather than the bark, of yew trees, to sell to customers for the purpose of making TCM. The yew industry is highly regulated in the PRC because the yew tree is considered an endangered species. By harvesting only branches and leaves of yew trees we respond to both environmental sensitivities and regulations, because cutting the bark of the yew trees will damage the trees and stop it from growing new branches.

  We have permits from the Heilongjiang provincial government to sell our yew trees and manufacture handicrafts using yew timber. We believe that we are one of only a handful of companies in the PRC with permissions to manufacture handicrafts using yew timber.

  The TCM raw materials and yew tree segments of our business are tax-free in the PRC.

Using patented accelerated growth technology developed by our founder and President, Zhiguo Wang, based on principles of asexual propagation and cloning, we can bring yew trees to maturity and commercialize them in as little as two-to-three years, compared to more than 50 years needed for naturally grown yew trees. Additionally, we have permits from the Heilongjiang provincial government to sell our yew trees and products made from yew trees. We believe that we are one of only a few companies in the PRC with such permission.

We operate in three business segments: TCM raw materials, yew trees and handicrafts. We sell raw materials in the form of yew tree branches and leaves to our customers, primarily an affiliate, to manufacture TCM containing taxol. We began the TCM raw materials segment in 2010.

Our TCM raw materials business became our largest operating segment in 2011 and is expected to continue to contribute an increasing percentage of net revenue in future periods.

In December 2009, another company owned directly and indirectly primarily by Mr. Wang, Yew Pharmaceutical, received approval from HFDA to sell Zi Shan, a TCM to be sold under both prescription and over-the-counter drug categories. Zi Shan contains taxol, and the TCM is approved in the PRC as a secondary treatment of cancer, meaning it must be administered in combination with other pharmaceutical drugs. In February 2010, we began selling to Yew Pharmaceutical branches and leaves of yew trees, which is more environmentally responsible than using the bark of yew trees, to extract taxol.

We also derive a significant amount of our revenue from the sale of yew seedlings and trees to state-owned enterprises and private businesses for reforestation in Heilongjiang Province and Jilin Province, in the northeastern China, as well as the sale of potted yew trees to retail customers. Additionally, we generate revenue from the sale of handicrafts, including furniture, made from yew timber. All of our revenue is derived from the Chinese domestic market.

53



Table of Contents

For the nine months ended September 30, 2012, our TCM raw materials revenue represented approximately 59.2% of consolidated revenue (including 12.4% of consolidated revenues to related parties); sale of yew trees represented approximately 38.3% of consolidated revenue; and the sale of handicrafts represented approximately 2.5% of consolidated revenue (including 0.1% of consolidated revenues to related parties). For the nine months ended September 30, 2011, our TCM raw materials revenue represented approximately 60.2% of consolidated revenue (including 26.5% of consolidated revenues to related parties); sale of yew trees represented approximately 37.7% of consolidated revenue; and the sale of handicrafts represented approximately 2.1% of consolidated revenue.

For the year ended December 31, 2011, revenues from the sale of TCM raw materials represented approximately 58.0% of consolidated revenue (including 23.3% of consolidated revenues to related parties); sale of yew trees represented approximately 40.3% of consolidated revenue; and the sale of handicrafts represented approximately 1.7% of consolidated revenue. For the year ended December 31, 2010, our TCM raw materials revenue represented approximately 55.5% of consolidated revenue (including 25.9% of consolidated revenues to related parties); sale of yew trees represented approximately 41.6% of consolidated revenue; and the sale of handicrafts represented approximately 2.9% of consolidated revenue. We expect that sales from our TCM raw materials segment will become an increasingly important source of revenue for us.

Under Article 27 of the Law of the PRC on Enterprises Income Tax and Article 15 of the provisional regulations of the PRC on Value Added Tax, we do not pay any tax, including income tax and VAT, in our TCM raw materials and yew tree segments. Our current VAT exemption certificate is valid from July 1, 2005 through December 31, 2016 and our current income tax exemption certificate is valid from January 1, 2008 through December 31, 2058. We pay taxes on handicrafts made from yew timber.

Zhiguo Wang, the founder of the Company and our President, does not devote all of his time to the Company’s business. We estimate that Mr. Wang devotes approximately 71% of his time, or approximately 120 hours per month, to the Company’s business. He devotes about 12% of his time, or approximately 20 hours per month, to the business of Yew Pharmaceutical and the balance of his time, or approximately 28 hours per month, to the business of other companies in which he is involved. These allocations are approximate only and are subject to change depending upon the particular projects and changing needs of the individual businesses in which he is involved.

The executive offices of HDS, our operating entity, are located in Harbin City, the capital of Heilongjiang Province in the PRC. Our four nurseries used to cultivate yew trees, and our production facilities to manufacture products made from yew trees, are located in and around Harbin. We also have a facility in Harbin where we exhibit and warehouse potted yew trees, handicrafts and furniture.

YBP was incorporated in Nevada on November 5, 2007. YBP’s executive offices are located at 294 Powerbilt Avenue, Las Vegas, Nevada 89148 and our telephone number is (702) 487-4683. Our website is www.yewchina.com. No part of our website is incorporated into this registration statement or any other report we file with the SEC from time to time.

Industry Overview

Since 1996, we have grown Japanese yew trees (also referred to in China as Northeast yew trees), taxus cuspidata, on mountain hillsides near Harbin and cultivate them in four nurseries we operate near Harbin. We have successfully cultivated more than eight million yew nursery seedlings in four nurseries. These nurseries occupy approximately 17,596 Mu (approximately 2,933 acres) of forested land. We currently have the capacity to grow up to two million yew nursery seedlings annually. We also have an additional 1,000,000 Mu (approximately 166,667 acre) site in Wuchang, which we currently do not utilize, for future expansion of our growing operations.

Northeast yew trees grow well in the climate of Northeast China. Using our patented Asexual Reproduction Method, developed by our founder and President, Zhiguo Wang, based on principles of asexual propagation and cloning, we can bring yew trees to maturity and commercialize them in as little as two-to-three years, compared to more than 50 years of maturity period for naturally grown yew trees. We believe that

54



Table of Contents


utilizing the Asexual Reproduction Method addresses an imbalance between supply and demand for yew trees, both for reforestation and use in the production of cancer-fighting TCM.

The Northeast yew is a small- to medium-sized evergreen tree, typically growing from between 35 and 65 feet tall, with a trunk up to 6-1/2 feet in diameter. The bark is thin and scaly brown. The leaves are lanceolate, flat and dark green, typically between 1/2 and 1-1/2 inches long and about 0.1 inches broad, arranged in a spiral pattern on the stem. The Northeast yew tree is relatively slow growing compared to other species of yew trees, but can be very long-lived. It is estimated that a Northeast yew tree can live up to 2,000 years. The growing cycle of a Northeast yew tree is extremely long and regeneration is difficult.

Yew trees are scarce and, traditionally, it takes a long time to bring them to commercialization. It can take more than 50 years for a yew tree to mature naturally for pharmaceutical use. Our Asexual Reproduction Method shortens this period significantly. We begin with cuttings from natural yew trees, which we transplant at our nurseries. By using our Asexual Reproduction Method, the success rate of maturation is enhanced and in approximately two-to-three years the yew tree is able to be used for commercialization. We use some trees in their entirety and parts of other yew trees that we need and take the rest of the tree itself back to the forest to finish full growth to maturity in 10-15 years, creating a new generation of mature yew trees.

Because the Northeast yew trees are categorized as an endangered species and are protected in the PRC as a Level 2 preserved tree, the operation of the yew industry in the PRC is strictly regulated by the PRC Forest Law and its Implementing Regulations, Rules on Permit for Felling of Forest Trees, Regulations on Wild Plants Protection and other PRC laws and regulations. The available sources for yew trees for commercialization are scarce and costs of production are relatively high.

In accordance with the Notification about Key Points of Forestry Policies from National Forestry Bureau Registered (2007) No.173, or the Notification, issued on August 10, 2007 jointly by the National Forestry Bureau, the National Development and Reform Commission, the Finance Ministry, the Commerce Department, the State Administration of Taxation, the China Banking Regulatory Commission, and China Security Regulatory Commission, the Chinese government encourages the development of technologies promoting the cultivation of rare trees and plant-based pharmaceuticals; encourages the cultivation of fast growing timber species, especially rare and large diameter timber; and accelerates the reorganization and integration of existing wood-based panels, furniture, wood products manufacturing enterprises. The Notification also provides that the forestry industry shall enjoy state preferential taxation policies. According to the provisions of the relevant tax laws and regulations on enterprises engaged in agriculture and forestry projects, the enterprise income tax can be reduced or eliminated.

The Ministry of Science and Technology of the PRC implemented the Spark Program, or the Spark Program, in 1986. The major task of the Spark Program is to rejuvenate the rural economy by relying on science and technology and popularizing advanced and applicable scientific and technological findings in the rural areas. To encourage the Spark Program, the Chinese government set up the National Spark Prize in 1987, including Spark Science and Technology Prize, Spark Talent Training Prize, Spark Management Prize, Spark Outstanding Youth Prize and Spark Demonstrating Enterprise Prize. In 2001 the project of cultivation of yew trees has been recognized by the Ministry of Science and Technology of PRC as the Spark Program.

We have entered into several land use agreements with various parties, which provide the potential for us to grow a large number of yew trees on approximately 1,017,713.5 mu (approximately 169,619 acres) over the next few decades, although we cannot currently estimate the total number of trees we will grow or the total amount of land we will put into production over such period. Among these land use agreements, on March 21, 2004, we entered into a Joint-Stock Construct Rare Plant Northeast Yew Contract, or the Joint Venture Agreement, with the Heilongjiang Province Wuchang City Forestry Bureau, or the Wuchang Forestry Bureau, pursuant to which the Wuchang Forestry Bureau has given us access to 1,000,000 mu (approximately 166,667 acres) of forest land located in Wuchang City to develop yew tree forests and produce yew seedlings. Pursuant to the Joint Venture Agreement, we have permission to plant yew trees on this land from 2004 through 2034. Under the Joint Venture Agreement, any profits from the planting of yew trees and other agriculture shall be distributed 80% to the Company and 20% to the Wuchang Forestry Bureau. We have not yet cultivated this land or generated any revenue under the Joint Venture Agreement. Because of the profit-

55



Table of Contents


sharing feature of this agreement, we presently intend to focus on cultivating yew trees on other land subject to existing and possibly future land use agreements as our priority for at least the next few years.

Our business is sustainable and environmentally responsible. We accelerate the growth of yew trees utilizing our Asexual Reproduction Method, more than replenishing the number of yew trees we cultivate and put into production. We harvest yew trees twice a year. We do not use the bark of yew trees in production, which would kill the yew tree; instead, we use the branches and leaves of the yew tree.

Traditional Chinese Medicine

There is a long-established, scientifically recognized relationship between the Pacific yew, taxus brevifolia, and similar species of yew (including the Northeast yew), and certain cancer drugs, most notably paclitaxel, also known as taxol. Paclitaxel is a broad-spectrum mitotic inhibitor used in cancer chemotherapy. It was discovered in a U.S. National Cancer Institute program at the Research Triangle Institute in 1967 when Monroe E. Wall and Mansukh C. Wani isolated it from the bark of the Pacific yew tree and named it taxol. Taxol is found in the root, stem, leaf, seed and bark of the taxus family of trees, including the Pacific and Northeast yews. It was developed commercially by Bristol-Myers Squibb under the brand name Taxol®. The PRC State Food and Drug Administration, or the SFDA, approved a new drug certification for taxol in 1995.

The improvement on the extraction and isolation technology of the biological properties of taxol made it a breakthrough in the treatment of cancer in the 1990s, providing a non-intrusive alternative to the more radical techniques of radiotherapy and surgery. Taxol is used to treat patients with lung, ovarian, breast, head and neck cancer, and advanced forms of Kaposi’s sarcoma.

Taxol, derived from certain species of yew tree including the Northeast yew tree, is a taxane drug and mitotic inhibitor that is used to treat cancer. All cells grow by a process called mitosis (cell division). Taxol targets rapidly growing cancer cells, sticks to them while they are trying to divide and prevents them from completing the division process. Since the cancer cells cannot divide into new cells, they cannot grow and the cancer cannot metastasize. Taxol may suppress tumor growth through regulating microtubule stabilization, inducing apoptosis and adjusting immunologic mechanism. Taxol can promote the polymerization of microtubule and inhibit their degradation, through which taxol can block cell division in the G2/M stage and induce apoptosis of tumor cells.

Taxol is a clear, colorless fluid that is given intravenously as a chemotherapy injection or as an infusion pumped from a dose bag. Taxol can be administered as high-dose chemotherapy, once every two or three weeks, or in low doses on a weekly basis. In the treatment of certain soft tissue cancers, such as breast cancer, taxol is given for early stage and metastatic breast cancer after combination anthracycline and cytoxan therapy and is also given as neoadjuvant treatment to shrink a tumor before surgery. Taxol can also be used together with a drug called Cisplatin to treat advanced ovarian cancer and non-small cell lung cancer, or NSCLC. The U.S. Food and Drug Administration has approved taxol as the primary and secondary treatment for NSCLC. There are other generally accepted protocols for the use of taxol as a cancer drug alone or in combination with other drugs depending upon the diagnosis, staging and type of cancer, as well as a patient’s medical history, tolerances and allergies, among other relevant factors.

The Chinese Herbal Medicine Standard (manual) of Heilogjiang Province (2011 version), edited by the HFDA, states that the Northeast yew has a secondary effect on treating cancer, meaning that while it has an impact on treating cancer, yew tree extract by itself (as distinguished from processed taxol) cannot be used as a stand-alone treatment of cancer. While the TCM raw material we sell contains taxol naturally, the companies to whom we sell such raw materials do not extract taxol from our TCM raw materials to produce pharmaceutical taxol.

Certain species of yew trees are the only natural source of taxol. Initially, taxol was extracted from the bark of the yew tree, but harvesting the bark usually kills the tree. Moreover, taxol is extracted from the bark of yew trees in extremely small amounts, often requiring the destruction of several yew trees to extract enough taxol to treat a single patient. Accordingly, taxol extracted from the yew is both very expensive and environmentally harmful. Because of environmental concerns about the adverse impact on forests in the Pacific Northwest in the United States, by the 1990s taxol ceased being derived from the bark of the Pacific

56



Table of Contents


yew. Alternative ways to develop taxol from renewable resources is ongoing. These include taxol-producing fungi from the yew tree and using other parts of the yew tree that may contain taxol.

We believe using yew trees that have been grown using our Asexual Reproduction Method significantly shortens the maturity cycle of naturally-grown yew trees and allows earlier commercialization of yew trees as a source of taxol. We further believes that using the branches and leaves of yew trees in large quantities, as we do, provides the key to solving the need for additional sources of taxol while not further endangering the PRC’s natural supply of yew trees, which themselves were over-forested in previous decades since the discovery of taxol.

The founder and President of our company, Zhiguo Wang, with the support of the Ministry of Forest and Science, and the Technology Department of Heilongjiang Province, successfully completed a project from 1984 to 1995 for asexual reproduction of the Northeast yew, and developed the first artificial cloned yew forest in the world. Tests conducted by the Ministry of Education’s Key Laboratory of Forest Plant Ecology in Northeast Forestry University have shown that the growing cycle of a cloned yew is significantly shorter than that of a natural yew and the concentration is taxol is higher. In 1995, this project received the Second Scientific and Technological Progress Award of Heilongjiang Province.

In December 2009, Yew Pharmaceutical received authorization from HFDA approving the sale of a yew-based TCM as a secondary treatment of cancer and certain other disorders, including uric disorders, certain liver diseases and menstrual discomfort. This TCM, sold under the brand name Zi Shan, has been approved to be sold under both prescription and over-the-counter drug categories. We also believe that Zi Shan may provide general beneficial effects on overall health. According to the Quintessence of Materia Medica, published in August 2006 by the Chinese Academy of Medical Sciences — Institute of Medicinal Plants, the Northeast yew plays a role as a diuretic, detumescence and in restoring menstrual flow. The approval from HFDA allows Yew Pharmaceutical to sell Zi Shan throughout the PRC.

In November 2010, Yew Pharmaceutical applied to the SFDA to approve an upgrade of Zi Shan from provincial to national standard, which we believe will enhance its general market acceptance and therefore could create additional demand for the raw materials we sell to Yew Pharmaceutical. As of the date of this registration statement, the application is pending.

We entered into the Development Agreement with Yew Pharmaceutical, a related party, for the development, production and sale of yew-based TCM. Under the Development Agreement, we sell yew branches and leaves to Yew Pharmaceutical. Yew Pharmaceutical manufactures TCM at its own facilities in Harbin in accordance with the requirements of HFDA. Yew Pharmaceutical is also responsible for producing the finished product in accordance with GMP requirements (in this regard, it received a GMP certificate in November 2009), and filing all applications with and obtaining all approvals from the HFDA.

Yew Pharmaceutical is the primary purchaser of the raw materials we sell in our TCM raw materials business. Pursuant to the Development Agreement, Yew Pharmaceutical pays us RMB 1,000,000 per ton of raw material, whereas the current market price for such raw material is approximately RMB 1,100,000 per ton. The term of the Development Agreement is ten years, terminating on January 9, 2020. We began selling raw material in the form of branches and leaves of yew trees to Yew Pharmaceutical commencing in February 2010.

Yew Pharmaceutical is owned 95% by Heilongjiang Hongdoushan Ecology Forest Co., Ltd, a Chinese company, or HEFS, which itself is owned 63% by our founder, President and one of our directors, Zhiguo Wang, and 34% by his wife, Guifang Qi, who is also one of our directors. The remaining 5% is owned directly by Madame Qi. See “Certain Relationships and Related Transactions, and Director Independence”.

Yew Pharmaceutical is the exclusive manufacturer of Zi Shan in the PRC. Zi Shan is sold in sachets in HFDA-approved dosages of two grams per sachet. It is consumed as a tea twice a day for therapeutic purposes or once a day for general health benefits. Approximately 30% of Zi Shan sales to date are in Heilongjiang Province and approximately 70% of such sales are from other provinces.

Starting in June 2010, other pharmaceutical companies started purchasing yew raw materials from us to manufacture and sell TCM similar to Zi Shan in other provinces.

57



Table of Contents

Yew Trees

We have developed a detailed process of yew tree breeding. We start growing yew trees from seedlings that we purchase from various third parties, including certain affiliates. These seedlings come from naturally-grown mature yew trees. Because yew trees are protected, yew seedlings are scarce. Prices have been rising for yew seedlings by approximately 20% per year in recent years and we expect that to continue for at least the next few years. Our largest supplier of yew seedlings is a company that is directly and indirectly owned primarily by Mr. Wang and Madame Qi. See “Suppliers” below and “Certain Relationships and Related Transactions, and Director Independence”.

We cultivate the yew seedlings at our nurseries for at least three to four years. Most of the land we lease from various parties for the growth of yew trees is location in and around Harbin. We have entered into several land use agreements with various parties, which provide the potential for us to grow a large number of yew trees on large areas of land over the next few decades, although we cannot currently estimate the number of trees we will grow or the total amount of land we will put into production over such period. Among these land use agreements, pursuant to the Joint Venture Agreement, we have been granted permission to grow yew trees on up to 1,000,000 mu (approximately 166,667 acres) and to share profits 80% to the Company and 20% to the Wuchang Forestry Bureau. In addition, we have been provided two areas to use as nurseries for the cultivation of yew seedlings in the aggregate amount of 1,400 mu (approximately 233 acres). See “Properties”.

When the yew trees are mature enough for transplanting, we prepare survey and design specifications for an afforestation plan. Once this has been prepared and approved, we clean and divide the reproducing area, clearing brushwood and weeds, and mark off breeding areas of between five and eight meters in width and less than one meter in length. We typically plant stock in the spring, when the defrosted soil is a depth of at least 15 centimeters.

The cut materials are then dried for a period of 18-20 hours at a temperature of between 55°C and 60°C, with the temperature monitored every three hours. After the drying process, the moisture content of the plant material should not exceed 8.0%. We then use a crusher to grind the plant material into a powder. The powder is mixed before being put into sealed plastic bags. The sealed plastic bags are put into outer shipping material and the package undergoes a final inspection before being ready for shipment.

By using our patented Asexual Reproduction Method, developed by our founder and President, Zhiguo Wang, we are able to accelerate the commercial viability of a yew tree, so that it is able to be used for commercialization starting in approximately three years, compared to more than 50 years for naturally grown yew trees. For example, the branches and leaves from an accelerated growth yew tree can be used in the production of TCM in three to five years, and a cutting from an accelerated growth yew tree will develop into a small yew tree that can be sold as a potted tree starting in approximately three years. We are authorized sell cuttings of cloned yew trees without a government permit.

We sell yew trees primarily to state-owned enterprises and private businesses for reforestation in Heilongjiang Province and Jilin Province, in Northeast China. Historically, we have sold the majority of our yew trees to a small number of larger customers. However, even though we have a number of long-term customers, we do not enter into long-term agreements for the sale of our yew trees. Because our profit margin is smaller for larger customers due to volume price discounts, we are making efforts to increase sales to smaller customers. Our business relating to the sale of yew trees is seasonal. March to May, November and December are our strongest months.

After a period of three-to-seven years under cultivation, we also transplant some yew trees into decorative ceramic pots and sell these to retail customers for display in homes and offices. The Chinese people believe that in addition to its aesthetic qualities, yew trees help cleanse the air and reduce pollution. Accordingly, yew trees are purchased by individuals for personal use in their home or office and are often given as gifts. Yew trees can be found at landmarks around the world, including the White House and Lincoln Memorial.

We purchase high quality ceramic pots from third parties into which the yew trees are transplanted. We believe that there is a readily available supply of high-quality ceramic pots at relatively low and stable prices.

58



Table of Contents

Because of the limited supply of yew trees and restrictions on the commercial use of yew trees, combined with the high quality of the ceramic pots we purchase from third-party sources, primarily in South China, used for the transplanted trees, the potted yew trees that we sell are highly prized and we charge premium retail prices by Chinese standards. Retail prices of potted yew trees vary based on the age, shape and other desirable qualities of the tree, and range from approximately RMB 280 to approximately RMB 3,080.

In connection with our entering into the Fuye Field Agreement in July 2012, we acquired more than 80,000 trees — which are not yew trees — located on that property. These trees consist of approximately 20,000 larix, 56,700 spruce and 3,700 poplar trees. Larix trees are used primarily in landscaping and we currently anticipate that we will begin selling larix trees to customers during 2013. Spruce and poplar trees are used primarily as building materials and we currently anticipate that we will begin selling these trees to customers in later periods, when these trees reach maturity in several years.

Handicrafts

Yew wood is of medium strength, making it possible to fashion products from the yew tree without undue effort or expense requiring special equipment. To create our current inventory of handicrafts, including furniture, historically we employed between 15 and 20 artisans from throughout the PRC, principally from Fujian Province and Jiangxi Province in southern China, annually from summer through late fall, to manufacture handicrafts made from yew timber at our production facility near Harbin. Since we currently have an adequate inventory of handicrafts, we now manufacture additional handicrafts only when orders are placed. We had minimal manufacturing activities in 2010 and 2011.

We begin the process of manufacturing handicrafts by selecting yew timber with greater variation in molding, which is indicative of a more attractive grain to the wood. The selected timber is then placed in a drying chamber and steam is injected to accelerate water evaporation until moisture content is only 3%. Depending upon the size and thickness of the timber, this process can take as long as one week.

The process of designing the item to be created begins with rough basing, based on geometrical form to summarize the overall artistic idea. During the entire process of carving the timber it is important to minimize knife scarring. Our crafted pieces typically go through a dying process; this not only can address certain small imperfections in the wood but is also done to aesthetically enhance the finished piece. After waiting at least twelve hours following dyeing, the carved item is then polished with sandpapers of different roughness and finally finishing cloths.

All of our products are hand-made, using yew tree timber of different maturities. Much of the furniture that we produce is reproductions of popular Ming and Qing Dynasty styles. We have acquired an inventory of yew timber from various parties over a number of years and have an adequate supply on hand for approximately five more years’ worth of production. Because of the scarcity of yew timber needed to produce handicrafts, it is very expensive to acquire new inventory of yew timber and supplies are extremely limited, if available at all. Accordingly, we plan to reduce and eventually eliminate our handicraft segment over the next several years.

Pursuant to the Department of Forestry of Heilongjiang Province (2003) Document No.188, issued by Department of Forestry of Heilongjiang Province on October 25, 2003, we have been granted rights to develop comprehensively and use Northeast yew resources. We believe that we are one of only a few companies in the PRC to have received approval for the manufacture of items made from yew timber.

Because of the limited supply of yew timber and restrictions on the commercial use of yew trees, combined with the high quality of artisans we employ, the handicrafts and furniture we manufacture are highly prized and we charge premium retail prices to our customers. Examples of retail prices for some of our products are as follows:

  a pair of yew chopsticks sells for approximately RMB198;

  a fountain pen sells for approximately RMB 2480;

  sculptures can sell for tens of thousands of RMB; and

  large pieces of furniture can sell for more than RMB 100,000.

59



Table of Contents

Suppliers

We obtain yew seedlings from several sources. Prior to January 1, 2011, our largest supplier was ZTC, a related party. We believe that we pay market rate for the seedlings and cuttings we purchase from our suppliers. Mr. Wang and Madame Qi own approximately 39.4% and 30.7%, respectively, of ZTC. See “Certain Relationships and Related Transactions, and Director Independence”. We do not plan on making significant purchases from ZTC in the future.

None of the agreements we have with our suppliers are long-term contracts, meaning they can be canceled at any time. We believe that the supply of yew seedlings is readily available and if we lost one of our suppliers, we could readily find a replacement.

Sales and Marketing

We primarily serve the Chinese domestic market. The sale of yew trees for reforestation in Heilongjiang Province and Jilin Province is to both state-owned enterprises and private businesses.

We sell yew trees to a relatively small number of customers. For the nine months ended September 30, 2012, the following customers accounted for 10% or more of our consolidated revenue:

  Anhui Bairun accounted for approximately 16% of our consolidated revenue

  Shenzhen Keiji accounted for approximately 14% of our consolidated revenue

  Changchun Hengtai accounted for approximately 14% of our consolidated revenue

  Wuchang Hongyi Co., Ltd. accounted for approximately 13% of our consolidated revenue

  Yew Pharmaceutical accounted for approximately 12% of our consolidated revenue

  Shenzhen Tianyitang accounted for approximately 11% of our consolidated revenue

For the year ended December 31, 2011, the following customers accounted for 10% or more of our consolidated revenue:

  Anhui Bairun accounted for approximately 29% of our consolidated revenue

  Yew Pharmaceutical accounted for approximately 23% of our consolidated revenue

  Wuchang Hongyi accounted for approximately 13% of our consolidated revenue

  Changchun Hengtai accounted for approximately 10% of our consolidated revenue.

Yew Pharmaceutical is the manufacturer of Zi Shan and other pharmaceutical products, and is owned, directly and indirectly, primarily by Zhiguo Wang and Guifang Qi. Anhui Baiyun and Changchun Hengchai are large pharmaceutical distribution companies engage in producing and distributing western and TCM pharmaceutical products. Wuchang Hongyi is a mid-size mining company engaged in iron ore mining and the iron ore fine processing business. Wuchang Hongyi purchases yew seedlings and trees from us for forestation in mining areas.

While we generally do not enter into written agreements for the purchasers of our yew trees and other products, we have entered into written agreements for the sale of yew seedlings, cuttings, branches, raw materials for medicinal use and handicrafts with some of our larger customers.

The sale of furniture and handicrafts from our cultivated yew trees, as well as the sale of potted yew trees for display in homes and offices, is to the Chinese domestic market. We exhibit and warehouse potted yew trees, handicrafts and furniture at a facility located in Harbin.

Retail prices for potted yew trees are high by Chinese standards, but have remained stable. We provide the potted yew trees that we sell, from our nurseries. the supply of ceramic pots that we purchase from third-parties suppliers that we use to transplant cultivated yew trees is good and prices are stable.

The sale of handicrafts is not seasonal. Until December 2012, our store in Harbin maintained inventory of a range of handicrafts and furniture, for sale and can also take orders for products custom-made to the

60



Table of Contents


specifications of our customers. We currently use this facility to exhibit and warehouse our products. Prices and delivery time for custom pieces vary depending upon the item and time of year, since our artisans work primarily during the warmer months from April to September.

We also sell our products through a network of distributors throughout the PRC. Generally, we appoint one distributor in a given province for all of our products. Anhui Bairun and Changchun Hengtai are both distributors accounting for more than 10% of our revenue. We believe that if one or both of these distributors ceased purchasing our products, we would be able to find other large distributors because yew products are unique and in high demand.

Beginning in August 2010, we began the direct sale of handicrafts, including furniture, through the Internet, to supplement the sale of handicrafts in our store in Harbin and through distributors.

In August 2012, we began to more actively market our handicraft products. Specific steps taken to market our handicraft products include:

•  
  We will begin to engage first tier distributors to distributor our handicraft products in provincial capital cities in 10 provinces; each first tier distributor is required to reach minimal annual sales volume of 2,000,000 RMB. First tier distributors will be able to purchase handicrafts from us at a price below the price that basic distributors pay for the handicraft products. In addition to the discounted first tier distributor pricing provided, we will also provide approximately 3%-5% commission (payable in yew seedling products) to these first tier distributors.

•  
  We will engage second tier distributors in smaller cities. Each second tier distributor is required to reach minimal annual sales volume of 1,000,000 RMB. These distributors will also be offered beneficial pricing off the price that basic distributors pay. We will also provide approximately 2%-3% commission (payable in yew seedling products) to the second tier distributors.

•  
  We have instructed our sales representatives to make frequent visits to our distributors to promote our handicraft products.

In December 2012, we closed our store in Harbin, although we continue to use the facility to exhibit and warehouse our products.

Zi Shan is marketed and sold exclusively through Yew Pharmaceutical, under the Development Agreement. Yew Pharmaceutical is also our major purchaser of yew raw material used in the production of TCM. Yew Pharmaceutical is owned directly and indirectly primarily by Mr. Wang and Madame Qi.

Other TCM that is produced by manufacturers who buy yew raw material from us is marketed and sold by them to third party users, including hospitals.

Intellectual Property

We believe that we are able to cultivate and grow yew trees successfully and faster by using our patented Asexual Reproduction Method, based on principles of asexual propagation and cloning, developed by our founder and President, Zhiguo Wang. Our patented Asexual Reproduction Method functions through cell replication with identical genes, sometimes referred to as cloning, of Northeast Yew with only a single parent present.

Mr. Wang first studied yew cloning techniques in 1982, for the purpose of addressing the long reproduction time, low reproduction rates and weak survival rates for yew trees in general. With the support of the Ministry of Forest and Science, and the Technology Department of Heilongjiang Province, Mr. Wang successfully completed a project from 1984 to 1995 for asexual cultivation and cloning technology of the yew, and developed the first artificial cloned yew forest in the world. Tests conducted by the Ministry of Education’s Key Laboratory of Forest Plant Ecology in Northeast Forestry University have shown that the growing cycle of a cultivated yew is significantly shorter than that of a natural yew and the concentration is taxol is higher.

61



Table of Contents

We have been issued two patents related to our advanced growth technology:

  “Yew Tree Plant Extracts, Methods for Extracting the Plant Extracts and Application”, or the Yew Extract Method, was granted by the State Intellectual Property Office, or SIPO, to HDS on August 16, 2011. This patent had previously been held by Heilongjiang Yew Pharmaceutical Co., Ltd. This patent is valid for 20 years, from June 23, 2004 through June 22, 2024.

  “Northeast Yew Asexual Reproduction Method”, or the Asexual Reproduction Method, was granted by SIPO to HDS on September 21, 2011. This patent is valid for 20 years, from September 30, 2010 through September 29, 2030.

We believe that our patented Asexual Reproduction Method has three unique advantages:

  The Asexual Reproduction Method addresses the low rooting rate problem and accelerates the seedling rate and the maturity period for Northeast yew. It increases the rooting rate to over 80% and the seedling rate to over 85% for Northeast yew. It can bring the Northeast yew to maturity and ready for commercialization for medical use in as little as two-to-three years, compared to more than 50 years for naturally growing yew trees.

  Large colonies can form to out-compete other organisms for nutrients. The active ingredients in the offspring were relatively stable with little difference.

  There is high chance of survival of the offspring with little variation.

Our patented Yew Extract Method is an extraction process to extract anti-cancer active ingredients from yew branches and leaves for use in anti-cancer drugs. It utilizes Northeast yew branches and leaves as new medicinal parts to obtain anti-cancer ingredients. The Yew Extract Method has high yield rate and low costs. According to the Shanghai Institute of Pharmaceutical Industry, the anti-cancer effect of the ingredients obtained through Yew Extract Method is no less than that of taxol. Clinical research studies show the ingredients obtained through the Yew Extract Method has also low side effects. The Yew Extract Method increases the sustainability and enhances the utilization rates for yew trees in medical use from 1/5000 (in obtaining taxol) to 1/200. The Yew Extract Method has not yet been used for commercial purposes. We are currently studying the possibility of commercializing the Yew Extract Method for medical uses.

We do not currently own any trade names, trademarks or service marks the loss of which would be materially adverse to our business.

Research and Development

We entered into a Technology Development Service Agreement dated January 1, 2010, or the Technology Agreement, with Kairun. Under the Technology Agreement, Kairun provides us with testing and technologies regarding utilization of yew trees to extract taxol and develop higher concentration of taxol in the yew trees we grow and cultivate. For these services, we have agreed to pay Kairun a one-time fee in the amount of RMB 200,000 after the technologies developed by Kairun are tested and approved by us. We retain all intellectual property rights in connection with the technologies developed by Kairun. Kairun may not provide similar services to any other party without our prior written consent.

The initial term of the Technology Agreement was two years. Kairun informed us that it is taking longer than originally expected to develop the technologies and conduct the tests under the Technology Agreement. Accordingly, in February 2012, we entered into a supplemental agreement with Kairun, extending the term of the Technology Agreement indefinitely until project results specified in the original Technology Agreement are achieved. Kairun is owned directly and indirectly primarily by Mr. Wang and Madame Qi. See “Certain Relationships and Related Transactions, and Director Independence”.

We incurred $24,404 and $16,048 of research and development expenses in 2010 and 2011, respectively, and we did not incur research and development expenses for the nine months ended September 30, 2012.

62



Table of Contents

Competition

We believe that we face little competition within the PRC for the growth and cultivation of yew trees because of the amount of space needed for proper cultivation of yew trees, the long period to maturity of the yew tree, the difficulties of propagation, the scarcity of yews and the regulation of the yew industry in the PRC. Because of the need for governmental approval to grow, cultivate and commercialize yew trees, we believe that there are high barriers to entry to our industry.

Most of our competitors are smaller companies that do not have cloning technology and therefore have to engage in substantially longer growing cycles to commercialize yew trees. Our main competitors in the growth of yew trees and cultivation of yew cuttings include Zhejiang Changshan Mandiya Yew Science and Technology Limited Company, located in Zhejiang, China; and Luo Yang Madia Yew Science and Technology Development Limited Company, or Luo Yang, located in Henan, China. For example, Luo Yang has only approximately 300 mu (approximately 50 acres) of yew seedlings under cultivation.

There is significant competition for the sale of furniture, handicrafts and potted trees in the PRC. This is a highly fragmented industry in the PRC with innumerable competitors and little, if any, concentration of market share locally, regionally or nationally. Many of our competitors are probably larger than we are and can devote more resources than we can to the manufacture, distribution and sale of furniture, handicrafts and potted trees. Additionally, many of our competitors sell furniture and handicrafts, not made of yew trees, at prices considerably lower than the premium prices at which we sell our products. However, we believe that there is relatively little competition within the Chinese domestic market for our premium-priced yew products, primarily because of the scarcity of yew trees and the regulation of the yew industry in the PRC. We believe that we are the only business in the PRC that has been given permission to produce furniture and handicrafts from yew timber.

While we do not manufacture TCM or any taxol-based product ourselves, we could be seen as indirectly competing with companies that do manufacture taxol-based medicine. We face potential competition from many providers of TCM for many ailments. With respect to TCM specifically for use as a secondary treatment for cancer, we may be seen to compete with companies such as Fujian Leephick Pharmaceutical Limited Company, or Fujian Leephick, located in Wuping, China, and Qi Ao Chinese Medicine Tablet Co., Ltd., or Qi Ao, located in Anguo City, Hebei Province, China. Fujian Leephick is a fairly new company that we believe is only in an early stage of its research and development. Qi Ao can be differentiated from our company in that Qi Ao does not cultivate yew trees and requires third party supply of raw materials to produce TCM, whereas we produce the raw materials and sell them to our affiliate under the Development Agreement for the production of TCM, thereby providing a reliable supply of raw materials combined with the financial assurance of being paid up-front rather than being paid depending upon the timing and amount of sales to purchasers of the TCM.

Ningbo Green-Health Pharmaceutical Company Co., Ltd. is a leading manufacturer of food and drugs with substantially greater financial and other resources than ours. However, taxol-based medicine is only one of Ningbo’s products and they do not produce any other yew-based products other than taxol-based medicine.

Plant and Equipment

The machinery and other equipment that we use in making our products are manufactured, for the most part, in the PRC. We conduct our own maintenance of our machinery and equipment. Replacement parts are relatively easy to obtain without delays as and when required, and are not subject to significant price fluctuations.

Government Regulations

Certain parts of our business are regulated under national, provincial and local laws in the PRC. The following information summarizes certain major regulations that apply to us.

Regulations at the national, provincial and local levels in the PRC are subject to change. To date, compliance with governmental regulations has not had a material impact on our earnings or competitive

63



Table of Contents


position, but, because of the evolving nature of such regulations, we are unable to predict the impact such regulation may have in the foreseeable future.

The growing and cultivation of yew trees and manufacturing products from yew trees, is regulated by Forest Law and its Implementing Regulations, Rules on Permit for Felling of Forest Trees, Regulations on Wild Plants Protection and other PRC laws and regulations. HDS received approval issued by the Department of Forestry of Heilongjiang Province (Document No. 188) on October 25, 2003, allowing it to sell yew trees and manufacture handicrafts using yew timber. There is no cost to the Company to maintain this approval. This approval has no expiration date.

As a foreign-invested enterprise, JSJ is subject to the Foreign-Invested Enterprise Law (1986), as amended, and the Regulations of Implementation of the Foreign Investment Enterprise Law (1990), as amended, both of which provide for incorporation, corporate governance, operation, business and other aspects of a foreign-invested enterprise.

PRC resident shareholders of the Company are required to complete foreign exchange registration with SAFE. In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 75, which became effective as of November 1, 2005, and was further supplemented by two implementation notices issued by the SAFE on November 24, 2005, May 29, 2007 and July1, 2011, respectively. SAFE Circular 75 states that PRC residents, whether natural or legal persons, must register with the relevant local SAFE branch prior to establishing or taking control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them.

In 2006, six PRC regulatory agencies jointly adopted the M&A Rule. The M&A Rule requires that, if an overseas company established or controlled by PRC domestic companies or citizens intends to acquire equity interests or assets of any other PRC domestic company affiliated with the PRC domestic companies or citizens, such acquisition must be submitted to the Ministry of Commerce, rather than local regulators, for approval. In addition, this regulation requires that an overseas company controlled directly or indirectly by PRC companies or citizens and holding equity interests of PRC domestic companies needs to obtain the approval of the CSRC prior to listing its securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying the documents and materials required to be submitted by overseas special purpose companies seeking CSRC’s approval of their overseas listings.

Environmental Issues

Our operations are subject to various pollution control regulations with respect to noise, water and air pollution and the disposal of waste and hazardous materials. We are also subject to periodic inspections by local environmental protection authorities. Our operating facilities have received certifications from the relevant PRC government agencies in charge of environmental protection indicating that the operations are in compliance with the relevant PRC environmental laws and regulations.

We believe that we are in substantial compliance with all environmental laws and regulations applicable to our business. We are not currently subject to any pending actions alleging any violations of applicable PRC environmental laws.

Corporate Structure and Recapitalization

First Restructure

HDS was incorporated under the laws of the PRC on August 22, 1996. On April 17, 2003, HDS was privatized when the original shareholder of HDS, the State Forest Fire Control Research and Development Fund Heilongjiang Management Team, transferred its shares in HDS to a company controlled by Zhiguo Wang and his wife, Guifang Qi.

On November 28, 2003, the registered capital of HDS was increased from RMB 500,000 to RMB 30,000,000 and the number of shareholders of HDS increased to 35, including 34 individual shareholders and

64



Table of Contents


one entity shareholder. On June 28, 2008, 29 individual shareholders of HDS transferred their shares in HDS to Mr. Wang and one individual shareholder transferred its shares in HDS to Xingming Han, and there was an increase of the registered capital of HDS from RMB 30,000,000 to RMB 45,000,000, the balance of which was paid by Mr. Wang in the amount of RMB 10,500,000 and HEFS in the amount of RMB 4,500,000.

Until February 23, 2010, HDS was owned by Zhiguo Wang (62.81%), his wife Guifang Qi (18.53%), Xingming Han (4.82%), a PRC individual named Yingjun Jiang (3.22%) and HEFS (10.62%). Mr. Wang, Madame Qi, Mr. Han, Mr. Jiang and HEFS are collectively referred to as the Original Shareholders. Mr. Wang is the President and a director of the Company. Madame Qi is the wife of Mr. Wang and an officer and director of the Company. Mr. Han is an officer and director of the Company. HEFS is owned primarily by Mr. Wang and Madame Qi.

YBP was incorporated under the laws of Nevada on November 13, 2007. On October 29, 2009, YBP established a wholly-owned subsidiary, JSJ, incorporated in the PRC, as part of a reorganization of the Company, or the First Restructure.

Also on October 29, 2009, the Harbin Economic Cooperation and Promotion Bureau, or HECPB, approved JSJ to become a wholly-owned foreign enterprise, or WOFE, of YBP. HECPB is a governmental department of the City of Harbin with responsibility for business and economic cooperation and development in the city. According to the website of HECPB, it was established by the People’s Government of Harbin in 2004 and is in charge of issuing approvals and related documents to foreign companies with investments in Harbin. HECPB may be regarded as a municipal counterpart to and acting under grant of authority from MOFCOM, which has the ultimate authority with respect to matters pertaining to businesses operating in the PRC, including foreign ownership of businesses and WOFEs.

Pursuant to the First Restructure, on February 23, 2010, the Company, through JSJ, entered into an Equity Transfer Agreement, referred to collectively as the First Transfer Agreements, with each of the Original Shareholders. Pursuant to the First Transfer Agreements, the terms of which are substantially identical to each other, the Original Shareholders transferred all of their respective ownership in HDS to JSJ for an aggregate RMB 45,000,000, which amount represents the amount of the then registered capital of HDS. As a result of this transaction, HDS became a wholly-owned subsidiary of JSJ.

JSJ and the Original Shareholders also entered into a Supplemental Agreement dated February 26, 2010, or the First Supplemental Agreement, pursuant to which JSJ had the right to put the shares of HDS back to the Original Shareholders for the original purchase price of an aggregate RMB 45,000,000, in the event that the transaction did not close or PRC governmental approval was not received, within six months following the execution of the First Transfer Agreements.

As a result of the First Restructure, as described above, the organization of the Company looked as follows:

 

65



Table of Contents

On May 10, 2010, JSJ, Mr. Wang, Mr. Jiang and HEFS entered into a Debtor’s and Creditors’ Rights Agreement, or the Creditors’ Agreement, pursuant to which Mr. Jiang and HEFS assigned their rights, including the right to be paid for the HDS shares transferred by them to JSJ, under their respective First Transfer Agreements, to Mr. Wang, and Mr. Wang assumed the obligations of Mr. Jiang and HEFS under their respective First Transfer Agreements.

Before, during and after the First Restructure, Mr. Wang, Madame Qi and Mr. Han served as the sole directors and principal executive officers of the Company, other than the position of CFO.

Second Restructure

In October 2010, the Company determined, in consultation with its professional advisors, that the First Restructure did not meet certain technical PRC legal requirements and that the Company would need to be further reorganized, or the Second Restructure. Accordingly, on October 28, 2010, JSJ and each of the HDS Shareholders entered into new Equity Transfer Agreement, referred to collectively as the Second Transfer Agreements, the terms of which are substantially identical to each other, pursuant to which 100% of the common stock of HDS was transferred by JSJ back to the HDS Shareholders for aggregate consideration of RMB 45,000,000. Since the consideration of RMB 45,000,000 due to the HDS Shareholders in the First Restructure had not yet been paid, pursuant to a Supplemental Agreement to the Second Equity Transfer Agreements dated February 16, 2011, the aggregate RMB 45,000,000 amount payable by the HDS Shareholders to JSJ for the return of their HDS common stock in respect of the Second Restructure, was offset against JSJ’s liability to the HDS Shareholders in the same aggregate amount in respect of the First Transfer Agreements, which amount had not yet been paid by JSJ.

As discussed above, Mr. Jiang and HEFS had assigned to Mr. Wang their respective rights and obligations vis-a-vis JSJ resulting from the First Restructure, pursuant to the First Supplemental Agreement and the Creditors’ Agreement, since as of such time Mr. Jiang and HEFS had not yet been paid for the transfer of their interests in HDS to JSJ in the First Restructure in the amount of 3.22% and 10.62% of HDS’s equity interest, respectively. Therefore, in the Second Restructure, pursuant to the Second Transfer Agreements, JSJ transferred to Mr. Wang not only his previous shareholdings in HDS before the First Restructure (representing 62.81% of HDS’s total equity), but also an additional 13.84% of the equity in HDS as a result of Mr. Wang’s being assigned Mr. Jiang’s 3.22% equity interest in HDS and HEFS’s 10.62% equity interest in HDS.

After the foregoing transactions were completed, the HDS Shareholders then owned 100% of the shares of HDS in the following percentages:

Mr. Wang
                 76.65 %  
Madame Qi
                 18.53 %  
Mr. Han
                 4.82 %  
 

On November 5, 2010, JSJ entered into a series of contractual arrangements, or the Contractual Arrangements, with HDS and/or the HDS Shareholders, as described below:

  Exclusive Business Cooperation Agreement. Pursuant to the Exclusive Business Cooperation Agreement between JSJ and HDS, or 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, or collectively referred to as 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, or 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

66



Table of Contents


  such month, or the Monthly Net Income, and (b) pay 80% of such Monthly Net Income to JSJ, each such payment referred to as 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 referred to as 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, or the Equity Interest Purchase Option, for RMB 10. If an appraisal is required by PRC laws at the time when and if JSJ exercises the Equity Interest Purchase Option, the parties shall negotiate in good faith and, based upon the appraisal, make a necessary adjustment to the purchase price so that it complies with any and all then applicable PRC laws. Without the consent of JSJ, the HDS Shareholders shall not sell, transfer, mortgage or dispose of their respective shares of HDS stock. Additionally, without the prior consent of JSJ, the HDS Shareholders shall not in any manner supplement, change or amend the articles of association and bylaws of HDS, increase or decrease its registered capital, change the structure of its registered capital in any other manner, or engage in any transactions that could materially affect HDS’ assets, liabilities, rights or operations, including, without limitation, the incurrence or assumption of any indebtedness except incurred in the ordinary course of business, execute any major contract over RMB 500,000, sell or purchase any assets or rights, incur of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. The term of each Option Agreement is ten years commencing on November 5, 2020 and may be extended at the sole election of JSJ.

  Equity Interest Pledge Agreement. In order to guarantee HDS’s performance of its obligations under the Business Cooperation Agreement, each HDS Shareholder, JSJ and HDS entered into an Equity Interest Pledge Agreement, individually referred to as 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 a Power of Attorney executed by each HDS Shareholder, individually referred to as a Power of Attorney, the terms of which are substantially similar to each other, JSJ has

67



Table of Contents


  been granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the HDS Shareholder, 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 Shareholder’s 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 Shareholder the legal representative, executive director, supervisor, manager and other senior management of HDS.

On November 29, 2010, YBP established a wholly-owned subsidiary, Yew HK, a limited liability company incorporated under the laws of Hong Kong. On January 26, 2011, YBP transferred its ownership in JSJ to Yew HK. As a result of the Second Restructure, HDS is considered a VIE, and YBP, as the sole shareholder of Yew HK and the ultimate parent company, is the controlling entity of HDS.

On April 15, 2011, Mr. Wang, Madame Qi and Mr. Han completed an updated registration with the State Administration of Foreign Exchange, or SAFE, pursuant to the requirements under SAFE Circular 75.

As a result of the Second Restructure, as described above, the organization of the Company now looks as follows:

 

As of November 30, 2012, the HDS Shareholders collectively owned 22,805,512 shares, or approximately 45.61%, of YBP’s common stock, or the HDS Shareholders’ Stock. Before, during and after the Second Restructure, the HDS Shareholders served as the sole directors and principal executive officers of the Company, other than the position of CFO.

While we have not discovered any precedent under Nevada law for a transaction like the Second Restructure, it is possible that the Second Restructure should have been approved by YBP’s shareholders because it may be viewed as having involved the sale of all or substantially all of YBP’s assets in that the stock of HDS was transferred from a wholly-owned subsidiary, JSJ, to the HDS Shareholders. However, because the Company was not yet subject to the reporting obligations of the Exchange Act, YBP was unable to issue a proxy statement that complied with SEC proxy rules to its shareholders in connection with such approval. Once the Company became subject to the reporting obligations of the Exchange Act, it sought and obtained shareholder ratification of the Second Restructure and all of the transactions contemplated and effected in connection therewith at the Special Meeting on December 13, 2012. While we believe that it is unclear if the Second Restructure required shareholder approval under Nevada law, we also believe that since the Second Restructure has been ratified by our shareholders, any possible concerns about the manner by which the Second Restructure was approved under Nevada law has been alleviated, since we believe that the

68



Table of Contents


Nevada Corporations Law allows for shareholder ratification after-the-fact of transactions requiring shareholder approval. See “Certain Relationships and Related Transactions, and Director Independence”.

Recapitalization

Generally, the founders of a corporation in the United States receive shares of stock in consideration of the tangible and intangible assets contributed by them to the enterprise. Since the consideration for those shares is the transfer of assets, including intellectual property, and business know-how, sometimes referred to as “sweat equity”, no cash payment for such shares occurs.

However, unfamiliar with the usual way that founders acquire equity interests in corporations in the United States, the HDS Shareholders both contributed assets to the Company and actually purchased their HDS Shareholders’ Stock between March 2008 and September 2009, for cash, in a series of four different offerings of YBP common stock during that period, at prices ranging between $0.02 and $0.10 per share, for an aggregate purchase price of $966,501.

As a result of the Contractual Arrangements of the Second Restructure, in which all of the profits of HDS will be paid under the terms of the Business Cooperation Agreement to JSJ, which is an indirect wholly-owned subsidiary of YBP, combined with the actual purchase by the HDS Shareholders of the HDS Shareholders’ Stock for cash, it could be viewed that Mr. Wang, Madame Qi and Mr. Han have, in effect, paid for their HDS Shareholders’ Stock twice.

Accordingly, the Company rectified this situation by obtaining shareholder approval at the Special Meeting on December 13, 2012 to issue a stock purchase option, each referred to as a Founder’s Option and collectively referred to as the Founders’ Options, to each of Mr. Wang, Madame Qi and Mr. Han in an amount equal to the number of shares of YBP common stock that each of them then currently owned. The terms of the Founders’ Options are identical to each other except for the name of the optionee and the number of shares of YBP common stock subject to each such Founder’s Option. Those terms include:

  The issuance of the Founders’ Options was subject to pre-issuance approval by our shareholders, which approval was obtained at the Special Meeting;

  Each Founder’s Option was fully vested upon issuance;

  Each Founder’s Option is exercisable for a period of five years;

  Each Founder’s Option has a per share exercise price equal to the fair market value of a shares of YBP common stock on the date of grant, or $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 YBP common stock subject to each Founder’s Option is as follows:

Number of Optionee
        Number of Shares
Subject to Founder’s
Option
Zhioguo Wang
                 20,103,475   
Guifang Qi
                 2,488,737   
Xingming Han
                 213,300   
 

69



Table of Contents

The terms of the Founders’ Options have not been determined as a result of arm’s-length negotiations. The Board of Directors of YBP, which consists of the same persons who are the HDS Shareholders and the grantees of the Founders’ Options, obtained shareholder approval of the issuance of the Founders’ Options at the Special Meeting on December 13, 2012.

To the extent that the Founders’ Options are exercised, the number of shares of YBP common stock then held by each HDS Shareholder could as much as double, which would be highly dilutive to the other existing YBP shareholders. The following chart shows the maximum effect of this dilution assuming full exercise of each Founder’s Option for cash:

Shareholder
        Number
Shares
Presently
Held
    Percentage
of Issued
Shares
Presently
Held
    Number
Shares Held
Assuming
Exercise of
All
Founders’
Options
    Percentage of
Issued Shares
Following
Exercise of All
Founders’
Options
Zhiguo Wang
                 20,103,475             40.21 %            40,206,950             55.23 %  
Guifang Qi
                 2,488,737             4.98 %            4,977,474             6.84 %  
Xingming Han
                 213,300             0.43 %            426,600             0.59 %  
All HDS Shareholders as a group (3 persons)
                 22,805,512             45.61 %            45,611,024             62.65 %  
All other existing shareholders
                 27,194,488             54.39 %            27,194,488             37.35 %  
Total
                 50,000,000             100.00 %            72,805,512             100.00 %  
 

See “Certain Relationships and Related Transactions, and Director Independence”.

Employees

As of September 30, 2012, we had approximately 80 employees, of whom approximately 41 were full-time employees and approximately 39 were part-time employees. Of these employees, all full-time employees and all but two part-time employees were employed in the PRC. Our employees belong to a trade union. We believe that we maintain good labor relations with our employees.

We believe that we are current in making required social insurance payments for our employees. However, we have not paid into a housing fund for our employees, as required under relevant PRC laws and regulations. The unpaid amount is approximately RMB 40,000 at December 31, 2011 and RMB 60,000at September 30, 2012 and there is an additional penalty of up to RMB 50,000 that we are required to pay for our failure to make this contribution in a timely manner.

About Harbin

Harbin is the capital of Heilongjiang Province in Northeast China, an area sometimes referred to in the West as Manchuria. The city lies in southern Heilongjiang Province, on the southeastern edge of the Songnen Plain and the southern bank of the Songhua River. Harbin is the tenth largest city in the PRC, with a population of approximately 9.9 million people. It serves as a key political, economic, scientific, cultural, communications and transportation hub in Northeastern China. Harbin is one of the largest railway hubs in Northeast China, with five major railways (Jingha, Binsui, Binzhou, Binbei and Labin) meeting here.

Harbin enjoys a diversified economy, including light industry, textile, medicine, foodstuff, automobile, metallurgy, electronics, building materials and chemicals. The Harbin International Economic and Trade Fair has been held annually since 1990 and is one of the largest foreign trade fairs authorized by the Chinese government. The fair attracts exhibitors and visitors from throughout Asia, including Japan and Korea, and other important regional countries, including Russia.

Harbin has a continental climate with hot, humid summers and extremely cold, dry and sunny winters. Both spring and fall are short transition seasons. Average annual precipitation is low, at 20.6 inches, and is heavily concentrated from May to September. Harbin’s climate is favorable for growing yew trees.

The modern city of Harbin originated in 1898 from a small village, with the start of the construction of the Chinese Eastern Railway by Russia, an extension of the Trans-Siberian Railway, shortcutting substantially

70



Table of Contents


the distance to Vladivostok and creating a link to the Chinese port city of Dalian and the Russian Naval Base at Port Arthur.

With the establishment of the Japanese puppet state of Manchukuo, Japanese troops occupied Harbin on February 4, 1932. The Soviet Army took the city on August 20, 1945 and transferred the city’s administration to the Chinese People’s Liberation Army in April 1946.

Properties

Office and Retail Space

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, we pay utilities, property insurance, real estate tax, association dues and certain other expenses on the property to third parties, which, in 2011, aggregated approximately $9,830. See “Certain Relationships and Related Transactions, and Director Independence”. None of YBP, Yew HK or JSJ owns or rents any properties.

HDS leases office space in the Xiangfang District of Harbin from the Company’s President, Zhiguo Wang, under a 15-year lease commencing January 1, 2010 and expiring December 31, 2025. We pay rent in the amount of RMB 15,000 per year. We believe that the rent is at or below market for the space we are occupying. See “Certain Relationships and Related Transactions, and Director Independence”.

HDS leases approximately 40 square meters of usable retail space in the Nangang District of Harbin from Guifang Qi, a director of the Company and the wife of Zhiguo Wang. Pursuant to a Lease Contract dated December 3, 2008, the premises were provided rent-free for the first year of the three-year lease. Beginning December 3, 2009, we paid rent in the amount of RMB 12,000 per year for the second and third years of the lease term. We entered into the current lease on these premises on November 15, 2011. The term of the new three-year lease is from December 1, 2011 through December 1, 2014. We pay rent in the amount of RMB 1,300 per month (RMB 15,600 per year), payable annually on or before May 30 of each year of the term. We believe that the rent is at or below market for the space we are occupying. We closed the store in December 2012, although we continue to lease the facility to exhibit and warehouse our finished products. See “Certain Relationships and Related Transactions, and Director Independence”.

HDS leases approximately 3,886 square meters of office space in Beichuan Village from Heilongjiang Pingshan Yew Comprehensive Development Co., Ltd., or Pingshan, under a 23-year lease commencing March 20, 2002 and expiring March 19, 2025. We pay rate an annual rate of RMB 25,000 for each year of the terms as follows: RMB 250,000 on or before December 31, 2012 for the first ten years of the term; RMB 125,000 on or before December 31, 2017 for the next five years of the term; and a final payment of RMB 175,000 on or before the end of the term for the remaining seven years of the term. We made the first payment covering the first ten years of rent in the amount of RMB 250,000 in February 2012.

71



Table of Contents

Land Use and Similar Agreements

There is no private ownership of land in the PRC. Land is owned by the government and the government grants land use rights for specified terms. Therefore, we have entered into several long-term agreements to use land and/or cultivate yew trees on such land, as summarized in the following table:

Date of Agreement
        Transferor
(Lessor)
    Location
    Land Use Area
    Term
March 21, 2004
           
Wuchang City
Forestry Bureau
   
Wuchang City
   
1,000,000 mu
   
30 years
 
March 22, 2004
           
Changshan Niu
   
Beichuan Village,
Pingshan Town
   
125 mu
   
50 years
 
April 4, 2004
           
Pingshan Town
Government
(Beichuan Village
Committee)
   
Beichuan Village,
Pingshan Town
   
400 mu(1)
   
50 years
 
March 25, 2005
           
ZTC
   
Lalin Town,
Wuchang City
   
361 mu
   
30 years
 
January 18, 2008
           
Shukun Jiang and
Shubao Jiang
   
Pinshan Dalazi
Mountain
   
290 mu
   
50 years
 
March 4, 2010
           
Heilongjiang
Pingshan Yew
Comprehensive
Development Co., Ltd.
   
Pingfangdian
   
15,865 mu
   
45 years
 
July 18, 2012
           
Huazhong Liu
   
Beizhao Village,
Hongxing Town,
A’cheng District
   
117.5 mu
   
16 years
 


(1)
  This agreement provides for 400 mu, which is the total usable area subject to the agreement. A survey completed after the agreement was entered into concluded that a total of 955 mu is covered by the agreement, to which the parties have agreed.

On March 21, 2004, we entered into the Joint Venture Agreement with the Wuchang Forestry Bureau, pursuant to which the Wuchang Forestry Bureau has given us access to 1,000,000 mu (approximately 166,667 acres) of forest land located in Wuchang City to develop yew tree forests and produce yew seedlings. The Wuchang Forestry Bureau has also granted us land to use for two nurseries, of 400 mu (approximately 67 acres) and 1400 mu (approximately 233 acres), respectively, to cultivate yew tree seedlings. Pursuant to the Joint Venture Agreement, we have permission to plant yew trees on this land from 2004 to 2034. Any profits from the planting of yew trees and other agriculture shall be distributed 80% to the Company and 20% to the Wuchang Forestry Bureau. We have not yet cultivated this land or generated any revenue under the Joint Venture Agreement.

Under an agreement dated March 22, 2004, we lease from one individual 125 mu (approximately 21 acres) of land in Beichuan Village, Pingshan Town, A’cheng City, Heilongjiang Province. We made a one-time payment to the lessor in the amount RMB 552,500 under this lease, which has a term of 50 years.

Under an agreement dated April 4, 2004, we lease from Pingshan Town Government (Beichuan Village Committee) 400 mu (approximately 67 acres) of barren hill and uncultivated land in Beichuan Village, Heilongjiang Province, for a term of 50 years. We made a one-time payment of RMB 1,003,000 under this agreement. Based on surveying undertaken jointly between HDS and the Beichuan Village Committee, we have agreed that the land subject to this agreement actually comprises 955 mu (approximately 159 acres), although only 400 mu is usable land. At the end of the 50-year term of this agreement, we will retain the right to use the land without making further payments.

72



Table of Contents

Under an agreement dated March 25, 2005 with ZTC, we lease 361 mu (approximately 60 acres) of land in Lalin Town, Wuchang City, Heilongjiang Province, for nursery land used to cultivate yew stock. This agreement is for a term of 30 years expiring on March 24, 2035, after which term the right of land use shall be transferred to us. Under this agreement, we pay RMB 162,450 per year, with a lump sum payment of RMB 812,250 representing the first five years of the lease on or before December 31, 2010. We made a payment in the amount of RMB 1,000,000 in March 2012. Thereafter, we are required to pay each next five years’ rent in advance. Mr. Wang and Madame Qi are the principal owners of ZTC. See “Certain Relationships and Related Transactions, and Director Independence”.

Under an agreement dated January 18, 2008, we lease from two individuals approximately 290 mu (approximately 48 acres) and the building thereon, on the north side of Dabeilazi Mountain located in Pingshan Town, Heilongjiang Province. We paid RMB 2,370,000 for the use of the land, the yew trees thereon and the buildings thereon. We own the trees and buildings and lease the land. The lease has a term of 50 years. At the end of the 50-year term of this agreement, we will retain the right to use the land without making further payments.

Under an agreement dated March 4, 2010, we lease from Pingshan 15,865 mu (approximately 2,644 acres) of land in Beichuan Village, Pingshan Town, A’Cheng District, for a term of 45 years expiring on March 4, 2055, and purchased all the yews situated thereon. We are required to make total payments of RMB 80,152,900 to Pingshan. The total payment has been divided into three installments, each installment representing a parcel of land. In 2010, we made payments in two installments aggregating RMB 42,434,000 (approximately $6,300,000), for a parcel of 10,720 mu and all the yew trees and seedlings situated thereon and had a balance due of RMB 37,718,900 as of December 31, 2010, of which amount RMB 26,314,300 (approximately $4,100,000) related to the final parcel of 5,145 mu. Subsequent to December 31, 2010, we acquired the remaining 5,145 mu and made payments aggregating RMB 31,579,600 (approximately $4,700,000), leaving a balance of RMB 6,139,300 (approximately $1,000,000).

On July 18, 2012, we entered into the Fuye Field Agreement with an individual in the PRC. Pursuant to the Fuye Field Agreement, HDS will lease 117.5 mu (approximately 19.6 acres) located at Fuye Field, Beizhao Village, Hongxing Town, A’cheng District in Helongjiang Province, PRC. The term of the agreement is 16 years, through March 2028. During the term of the Fuye Field Agreement, HDS has the right to develop the property for the production of yew trees. In addition, HDS has acquired a building and more than 80,000 trees — which are not yew trees — located on the property. These trees consist of approximately 20,000 larix, 56,700 spruce and 3,700 poplar trees.

Payments to be made by the Company under the Fuye Field Agreement total RMB 15,002,300, payable as follows:

  RMB 6,300,000 upon receipt by HDS of all related supporting documents and materials on the ownership and land use right of the property

  RMB 3,700,000 on December 25, 2012

  RMB 5,002,300 on or before December 25, 2013.

The Company prepaid the first installment of RMB 6,300,000 on or about June 20, 2012 and presently expects to be able to make the additional payments required by the Fuye Field Agreement from cash-on-hand and net cash flow from operations.

Litigation

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

73



Table of Contents

MANAGEMENT

Our directors and executive officers and additional information concerning them are as follows:

Name
        Age
    Position
Zhiguo Wang
           
50
   
Chief Executive Officer, President, Secretary and Chairman of the Board
Adam Wasserman
           
48
   
Chief Financial Officer
Guifang Qi
           
50
   
Treasurer-YBP and Director
Xingming Han
           
47
   
General Manager-HDS and Director
 

Zhiguo Wang has been the President and a director of YBP since the company was incorporated in November 2007, and has been the Secretary of YBP since January 2010. Mr. Wang founded our company in 1996 and has served as Chairman of the Board and General Manager of HDS since its inception. Since August 2007, Mr. Wang has served as executive director of the China National Forest Industry Association. In January 2007, he was elected to the first board of directors by the Heilongjiang Province Pharmaceutical Professional Association. In August 2007, he was elected Executive Director of the China National Forest Industry Association. In December 2010, Mr. Wang was elected vice chairman of the Heilongjiang Province Forestry Industry Association. Mr. Wang is also involved in the management of other businesses, including Yew Pharmaceutical, Kairun and ZTC. He currently devotes approximately 71% of his time, or 120 hours per month, on average, to the Company’s business. Mr. Wang graduated from Northeast Forestry University, located in Harbin, for both his undergraduate and graduate degrees. Mr. Wang is the husband of Guifang Qi.

Adam Wasserman has been our chief financial officer since September 2011. He is chief executive officer for CFO Oncall, Inc. and CFO Oncall Asia, Inc., collectively referred to as CFO Oncall, in which he owns 80% and 60% of such businesses, respectively. CFO Oncall provides chief financial officer services to various companies. Currently, Mr. Wasserman also serves as the Chief Financial Officer of Oriental Dragon Corp since June 2010, and Apps Genius Corp since January 2011 and other U.S listed public companies. Mr. Wasserman also served as Chief Financial Officer for Gold Horse International, Inc. from July 2007 to September 2011, Cleantech Solutions International, Inc. in 2007 and 2008, Transax International Limited from May 2005 to December 2011, and other companies all under the terms of consulting agreements with CFO Oncall. Mr. Wasserman holds a Bachelor of Science from the State University of New York at Albany. He is a member of The American Institute of Certified Public Accountants, is a director, treasurer and an executive board member of Gold Coast Venture Capital Association and is a director of CD International Enterprises, Inc. since January 2010.

Guifang Qi has been the Treasurer of YBP since May 2010 and a director of YBP since December 2010. Since 1997, she has also served as Vice General Manager of HDS in charge of purchasing and suppliers. Madame Qi graduated from Mudanjiang Forestry School, located in Mudanjiang, Heilongjiang Province, where she majored in forestry. Madame Qi is the wife of Zhiguo Wang.

Xingming Han has been a director of YBP since May 2010. From 2000 to 2009, he has also served as Vice General Manager of HDS, and since 2009 as the General Manager of HDS, in charge of manufacturing. He also served as the General Manager of Yew Pharmaceutical from 2008 to 2010. Mr. Han graduated from Harbin Architectural Engineering College in Harbin. In December 2006, he received the qualification of China Senior Business Manager.

During the past ten years, there have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any director, executive officer, promoter or control person of the Company, including any allegations (not subsequently reversed, suspended or vacated), permanent or temporary injunction, or any other order of any federal or state authority or self-regulatory organization, relating to activities in any phase of the securities, commodities, banking, savings and loan, or insurance businesses in connection with the purchase or sale of any security or commodity, or involving mail or wire fraud in any business. None of our directors presently serves as a director of any other public companies.

Each of our director’s primary qualification to serve as such involves his or her extensive experience with different aspects of yew tree technology, cultivation, engineering and/or project management.

74



Table of Contents

Mr. Wang is the founder of the Company, and formally educated and trained as an Engineer in Forestry and a Senior Engineer of Pharmaceutical Engineering. His specific experience, qualifications, attributes and skills that led to the conclusion that he should serve as a director of the Company include the following. From 1984 to 1995, Mr. Wang developed and created the first artificial yew forest in the world, for which he received the Second Scientific and Technological Progress Award for Heilongjiang Province in 1995. In 2002, Mr. Wang took part in, and took charge of, the research and development of Dakesu, which was a project in the scientific and technological development program of Ministry of Science and Technology under the PRC’s Tenth Five-Year Plan. In 2005, Mr. Wang took part in, and took charge of, the pre-clinical research of the new anti-cerebral ischemia marine vaccine “Maitong” which was a project of the 863 Program under the PRC’s Tenth Five-Year Plan. On January 18, 2006, this project passed the check and acceptance of the Ministry of Science and Technology. In 2006, Mr. Wang took part in, and took charge of, clinical research of the sea cucumber polysaccharide vaccine, which was also an 863 Program under the PRC’s Eleventh Five-Year Plan”. In 2006, the extract from plants of taxus species and the extracting method and the application of the extract (taxus injection solution) researched and developed by Mr. Wang received a patent issued by SIPO.

Mr. Wang has received numerous awards for his work in yew tree development, cultivation and cloning, and related fields. Among them, in 2002, he received the gold award of Century Cup in Academic Exchange Conference about China’s Entry Into WTO, High and New Pharmaceutical Technology and Chinese Traditional Medicine Development. On December 28, 2007, he was granted “Contribution Award of Guangcai Program and Land Forestation” by Ministry of Forestry, All-China Federation of Industry and Commerce and China Society for Promotion of Guangcai Program.

The specific experience, qualifications, attributes and skills that led to the conclusion that Madame Qi should serve as a director of the Company include her background as a technician in the Weihe Forestry Administration, located in Heilongjiang Province, the province where the Company’s operations are located. Additionally, Madame Qi was an integral part of an asexual cultivation and cloning technology of the yew trees project from 1984 to 1995. She was in charge of project organization and implementation, and as well as documenting the auditing and result analysis of the project, giving her specific experience in the Company’s patent technologies, in-depth knowledge of yew tree production technology and yew tree production costs controls.

The specific experience, qualifications, attributes and skills that led to the conclusion that Mr. Han should serve as a director of the Company include his education in civil engineering and prior experience at Harbin Shangzhi Yimiaonpo Construction Company, or Yimiaonpo, where his responsibilities included engineer, vice general manager and project manager. During his tenure at Yimiaonpo, Mr. Han was in charge of overall construction project progress, project safety, and quality and cost controls. Mr. Han was responsible for establishing the national revitalizing Northeast old industrial base for breeding and industrializing yew forest for medical use project in 2005 and he successfully led the project to pass national inspections. Mr. Han has developed, organized and implemented a number of yew tree related projects at Harbin city and Heilongjiang provincial levels, which projects have passed governmental inspections.

Involvement in Certain Legal Proceedings

None of our directors and officers has not been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, nor has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. There have been no events under any bankruptcy act, no criminal proceedings, no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any of our directors, executive officers, promoters or control persons during the past ten years.

75



Table of Contents

EXECUTIVE COMPENSATION

The Summary Compensation Table shows certain compensation information for services rendered in all capacities for the fiscal years ended December 31, 2011, 2010 and 2009. Other than as set forth herein, no executive officer’s salary and bonus exceeded $100,000 in any of the applicable years. The following information includes the dollar value of base salaries, bonus awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred.

Summary Compensation Table

Name and Principal Position
        Year
    Salary
($)
    Bonus
($)
    Stock
Awards
($)
    Option
Awards
($)
    Non-equity
incentive
plan
compensation
($)
    Non-qualified
deferred
compensation
earnings ($)
    All other
compensation
($)
    Total
($)
Zhiguo Wang President,
                 2011              15,757                                                                                           15,757   
Chief Executive Officer
                 2010              11,507                                                                                           11,507   
 
                 2009              9,648                                                                                           9,648   
 
Adam Wasserman (1)
                 2011              40,000                                                                                           40,000   
Chief Financial Officer
                 2010                                                                                                            
 
                 2009                                                                                                            
 
Guifang Qi
                 2011              11,586                                                                                           11,586   
Treasurer, YBP and Vice
                 2010              9,146                                                                                           9,146   
General Manager, HDS
                 2009              7,894                                                                                           7,894   
 
Xingming Han
                 2011              15,757                                                                                           15,757   
General Manager, HDS
                 2010              11,212                                                                                           11,212   
 
                 2009              6,856                                                                                           6,856   
 
Li Zhao (2)
                 2011              901                                                                                            901    
Chief Financial Officer
                 2010              4,426                                                                                           4,426   
 
                 2009              4,385                                                                                           4,385   
 
Shiyi Li (3)
                 2011              2,188                                                                                           2,188   
Chief Financial Officer
                 2010              N/A                                                                                            N/A    
 
                 2009              N/A                                                                                            N/A    
 


(1)
  Mr. Wasserman has served as CFO since September 1, 2011.

(2)
  Ms. Zhao served as CFO from January 1, 2009 to March 10, 2011.

(3)
  Shiyi Li served as CFO from March 10, 2011 to September 1, 2011.

Employment Agreements

We have entered into employment agreements with our Chinese executive officers in the form and with the provisions specified by the Harbin Labor and Social Security Bureau. The provisions of these agreements are not negotiable and do not vary other than providing the term, title and salary of the individual employee.

We had an employment agreement with Mr. Wang, pursuant to which he is employed in the capacity of Chief Executive Officer, for a term of three years, commencing May 9, 2009 and terminating on May 8, 2012. His contractually-provided compensation was RMB 7,000 per month for the entire term, although management increased his salary to RMB 10,000 per month from July 2011 through May 8, 2012. We entered into a new employment agreement with Mr. Wang for a three-year term, commencing May 10, 2012 and terminating on May 9, 2015. Mr. Wang’s compensation under the new agreement is RMB 10,000 per month.

We had an employment agreement with Mr. Han, pursuant to which he is employed in the capacity of General Manager, for a term of three years, commencing April 9, 2009 and terminating on April 8, 2012. His

76



Table of Contents


contractually-provided compensation was RMB 7,000 per month for the entire term, although management increased his salary to RMB 10,000 per month from July 2011 through April 8, 2012. We entered into a new employment agreement with Mr. Han for a three-year term, commencing April 10, 2012 and terminating on April 9, 2015. Mr. Han’s compensation under the new agreement is RMB 10,000 per month.

We had an employment agreement with Madame Qi, pursuant to which she is employed in the capacity of Vice General Manager, for a term of three years, commencing April 9, 2009 and terminating on April 8, 2012. Her contractually-provided compensation was RMB 4,500 per month for the entire term, although management increased her salary to RMB 7,000 per month from July 2011 through April 8, 2012. We entered into a new employment agreement with Madame Qi for a three-year term, commencing April 10, 2012 and terminating on April 9, 2015. Madame Qi’s compensation under the new agreement is RMB 5,000 per month.

Effective September 1, 2011, Mr. Wasserman, through CFO Oncall Asia, Inc. entered into an agreement, or the Wasserman Agreement, with us providing for his appointment as our Chief Financial Officer of the Company for a period of one year. Pursuant to the Wasserman Agreement, Mr. Wasserman will receive a salary of $96,000 per year, payable in equal monthly installments. Mr. Wasserman’s compensation is paid to CFO Oncall Asia, Inc., of which he serves as Chief Executive Officer and in which he is the majority shareholder.

Outstanding Equity Awards at Fiscal Year-End

As of December 31, 2012, the following equity awards were outstanding, in the form of the Founders’ Options, to our named executive officers:

Number of Optionee
        Number of Shares
Subject to Founder’s
Option
Zhioguo Wang
                 20,103,475   
Guifang Qi
                 2,488,737   
Xingming Han
                 213,300   
 

We are authorized to issue up to 15,000,000 shares of common stock for grants under the 2012 Plan, which was adopted by our Board of Directors on September 25, 2012 and approved by our shareholders at the Special Meeting on December 13, 2012. No grants have been made under the 2012 Plan to date.

Bonuses and Deferred Compensation

We do not have any bonus, deferred compensation or retirement plan. All decisions regarding compensation are determined by our board of directors.

Payment of Post-Termination Compensation

We do not have change-in-control agreements with any of our directors or executive officers, and we are not obligated to pay severance or other enhanced benefits to executive officers upon termination of their employment.

Board of Directors and Director Compensation

All directors hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the board of directors. We do not currently have any independent directors. Our directors do not receive compensation for serving in such capacity.

Corporate Governance

We do not have standing audit, compensation and corporate governance committees, or committees performing similar functions. We have not adopted a code of ethics. We anticipate that as we become more familiar with the obligations of U.S. public companies, we will implement appropriate corporate governance structures to comply with SEC and/or stock exchange requirements. We intend to comply with all corporate governance requirements applicable to us at this time.

77



Table of Contents

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Under the Development Agreement, we sell yew branches and leaves to Yew Pharmaceutical and Yew Pharmaceutical manufactures taxol-based TCM in accordance with the requirements of the HFDA. Yew Pharmaceutical produces the TCM at its own facilities in Harbin and is responsible for producing the finished product medicine in accordance with the requirements of good manufacturing practices, filing all applications and obtaining all approvals from the HFDA. Yew Pharmaceutical is also the exclusive distributor of this TCM, Zi Shan. Under the Development Agreement, Yew Pharmaceutical pays us RMB 1,000,000 per ton of raw material. This amount is below the current market rate of approximately RMB 1,100,000 per ton of raw material. Given the 10-year term of the Development Agreement and our belief that the fair market value for yew raw material will continue to rise, the difference between fair market value and the contractually-set price at which we sell yew raw material to Yew Pharmaceutical is expected to increase, especially in later years of the term of the Development Agreement. As the purchaser of raw material for the production of TCM, Yew Pharmaceutical is also the primary customer in our TCM raw materials segment and a major customer of the Company as a whole. Yew Pharmaceutical is owned directly and indirectly primarily by Mr. Wang and Madame Qi. Under the Technology Agreement we entered into with Kairun, Kairun provides us with testing and technologies regarding utilization of yew trees to extract taxol and develop higher concentration of taxol in the yew trees we grow and cultivate. For these services, we have agreed to pay Kairun RMB 200,000 after the technologies developed by Kairun are tested and approved by us. We retain all intellectual property rights in connection with the technologies developed by Kairun. Kairun may not provide similar services to any other party without our prior written consent.

The initial term of the Technology Agreement was two years. Kairun informed us that it is taking longer than originally expected to develop the technologies and conduct the tests under the Technology Agreement. Accordingly, in February 2012, we entered into a supplemental agreement with Kairun, extending the term of the Technology Agreement indefinitely until project results specified in the original Technology Agreement are achieved. Kairun is owned directly and indirectly primarily by Mr. Wang and Madame Qi.

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, we pay utilities, property insurance, real estate tax, association dues and certain other expenses on the property to third parties, which, in 2011, aggregated approximately $9,830, which we believe approximates the fair market value of rent that we would have paid for similar office space.

HDS leases office space in Xiangfang District, Harbin from the Company’s President, Zhiguo Wang, under a 15-year lease commencing January 1, 2010 and expiring December 31, 2025. We pay rent in the amount of RMB 15,000 per year. We believe that the rent is at or below market for the space we are occupying.

HDS occupies approximately 40 square meters of usable retail space in the Nangang District of Harbin from Guifang Qi, a director of the Company and the wife of Zhiguo Wang. Pursuant to a Lease Contract dated December 3, 2008, the premises were provided rent-free for the first year of the three-year lease. Beginning December 3, 2009, we paid rent in the amount of RMB 12,000 per year for the second and third years of the lease term. We entered into the current lease on this property on November 15, 2011. The term of the new three-year lease is from December 1, 2011 through December 1, 2014. We pay rent in the amount of RMB 1,300 per month (RMB 15,600 per year), payable annually on or before May 30 of each year of the term. We believe that the rent is at or below market for the space we are occupying. We closed the store in December 2012, although we continue to lease the facility to exhibit and warehouse our finished products.

Under an agreement dated March 25, 2005 with ZTC, we lease 361 mu (approximately 60 acres) of land in Lalin Town, Wuchang City, Heilongjiang Province, for nursery land used to cultivate yew stock. This agreement is for a term of 30 years expiring on March 24, 2035. Under this agreement, we pay RMB 162,450 per year, with a lump sum payment of RMB 812,250 representing the first five years of the lease on or before December 31, 2010. We made a payment in the amount of RMB 1,000,000 in March 2012. Thereafter, we are required to pay each next five years’ rent in advance. Mr. Wang and Madame Qi own approximately 39.4% and 30.7%, respectively, of ZTC.

78



Table of Contents

Prior to January 1, 2011, ZTC was also the major supplier of yew seedlings that we purchased for cultivation in our business. We do not plan on making significant purchases from ZTC in the future.

We have received advanced from, and in the past we have provided advances to, certain of our directors, officers and/or related parties, as follows:

        Due to related parties
   
Name of related party
        September 30,
2012
    December 31,
2011
Zhiguo Wang
              $ 54,409          $ 31,357   
Yew Pharmaceutical
                              62,847   
Madame Qi
                 1,689                
ZTC
                              172,284   
Total
              $ 56,098          $ 266,488   
 

These advances are unsecured and payable on demand.

The First Restructure and the Second Restructure involved transactions between the Company and the HDS Shareholders, who are also all of our directors and three of our executive officers. These transactions were not negotiated at arm’s length. While we have not discovered any precedent under Nevada law for a transaction like the Second Restructure, it is possible that the Second Restructure should have been approved by YBP’s shareholders because it may be viewed as having involved the sale of all or substantially all of YBP’s assets in that the stock of HDS was transferred from a wholly-owned subsidiary, JSJ, to the HDS Shareholders. However, because the Company was not yet subject to the reporting obligations of the Exchange Act, YBP was unable to issue a proxy statement to its shareholders in connection with such approval. The Company sought and obtained shareholder ratification of the Second Restructure and all of the transactions contemplated and effected in connection therewith at the Special Meeting on December 13, 2012.

The terms of the Founders’ Options have not been determined as a result of arm’s-length negotiations. The Board of Directors of YBP, which consists of the same persons who are the HDS Shareholders and the grantees of the Founders’ Options, sought and obtained shareholder approval of the issuance of the Founders’ Options at the Special Meeting on December 13, 2012.

None of our directors is independent at this time.

79



Table of Contents

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of January 15, 2013, the number of shares of our common stock owned of record and beneficially by all directors, executive officers and persons who beneficially own more than 5% of the outstanding shares of our common stock:

Name and Address
        Amount and
Nature of
Beneficial
Ownership
    Percentage
of Class(1)
Directors and Executive Officers:
                                       
Zhiguo Wang (2)(3)
No.234, Gexin Street
Nangang District, Harbin City
People’s Republic of China
                 47,150,561             64.76 %   
 
Guifang Qi (2)(4)
No.234, Gexin Street
Nangang District, Harbin City
People’s Republic of China
                 47,150,561             64.76 %   
 
Xingming Han(5)
Door 3, Floor 7, Unit 2, vice No.23 Tongzhan Street
Xiangfang District, Harbin City
People’s Republic of China
                 426,600             *    
 
Adam Wasserman
1643 Royal Grove Way
Weston, FL 33327
                 0              0 %  
 
All Directors and Executive Officers as a group
(4 persons)
                 47,577,161             65.35 %   
 


*
  less than 1%

(1)
  Percentage ownership is based on 72,805,512 shares of YBP common stock deemed outstanding on January 15, 2013, assuming exercise of all outstanding Founders’ Options, all of which are exercisable within 60 days. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for determining the number of shares beneficially owned and for computing the percentage ownership of the person holding such options, but are not deemed outstanding for computing the percentage ownership of any other person. Except as indicated by footnote, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

(2)
  Zhiguo Wang and Guifang Qi are husband and wife.

(3)
  Consists of (i) 20,103,475 shares held by Mr. Wang; (ii) 2,488,737 shares held by Madame Qi; (iii) 1,966,137 shares held by an immediate family member living in Mr. Wang’s and Madame Qi’s residence and as to which Mr. Wang disclaims beneficial ownership; (iv) 20,103,475 shares which are issuable upon exercise of the Founder’s Option issued to Mr. Wang, which option is exercisable within 60 days; and (v) 2,488,737 shares which are issuable upon exercise of the Founder’s Option issued to Madame Qi, which option is exercisable within 60 days.

(4)
  Consists of (i) 2,488,737 shares held by Madame Qi; (ii) 20,103,475 shares held by Mr. Wang; (iii) 1,966,137 shares held by an immediate family member living in Mr. Wang’s and Madame Qi’s residence and as to which Madame Qi disclaims beneficial ownership; (iv) 2,488,737 shares which are issuable upon exercise of the Founder’s Option issued to Madame Qi, which option is exercisable within 60 days; and (v) 20,103,475 shares which are issuable upon exercise of the Founder’s Option issued to Mr. Wang, which option is exercisable within 60 days.

(5)
  Consists of (i) 213,300 shares held by Mr. Han; and (ii) 213,300 shares which are issuable upon exercise of the Founder’s Option issued to Mr. Han, which option is exercisable within 60 days.

80



Table of Contents

DESCRIPTION OF SECURITIES TO BE REGISTERED

This description of our securities is a summary only of certain provisions contained in our Articles of Incorporation and is qualified in its entirety by reference to the complete terms contained therein.

YBP’s Articles of Incorporation, as amended, authorize the Company to issue 140,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of January 15, 2013, 50,000,000 shares of our common stock were issued and outstanding.

Common Stock

All outstanding shares of common stock are of the same class and have equal rights and attributes. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders of the Company. All stockholders are entitled to share equally in dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of liquidation, the holders of common stock are entitled to share ratably in all assets remaining after payment of all liabilities. Holders of common stock do not have cumulative or preemptive rights.

Preferred Stock

As of the date of this registration statement, we are not authorized to issue any shares of preferred stock, we have not issued any such shares and we are not registering any such securities herein.

Debt Securities

As of the date of this registration statement, we have not issued any debt securities and we are not registering any such securities herein.

Warrants

As of the date of this registration statement, we have not issued any warrants, options or other securities which are convertible into or exercisable for shares of our common stock or preferred stock and we are not registering any such securities herein, except that on December 13, 2012, we issued the Founders’ Options. We are not registering any of the shares of common stock for which the Founders’ Options may be exercised. For more information, regarding the terms of the Founders’ Options, see “Our Business — Recapitalization”.

81



Table of Contents

SELLING SHAREHOLDERS

We are registering a total of 16,500,000 shares of common stock, consisting of shares of our common stock issued in one or more of the private placement transactions in which we engaged between March 2008 and September 2009, which amount includes 3,868,540 shares held by our management.

The following table sets forth the names of the selling security holders, the number of shares of common stock beneficially owned by each of the selling stockholders as of November 30, 2012 and the number of shares of common stock being offered by the selling stockholders. The shares being offered hereby are being registered to permit public secondary trading, and the selling stockholders may offer all or part of the shares for resale from time to time. However, the selling stockholders are under no obligation to sell all or any portion of such shares nor are the selling stockholders obligated to sell any shares immediately upon effectiveness of this prospectus. All information with respect to share ownership has been furnished by the selling stockholders.

        Shares Beneficially
Owned Prior to the
Offering (1)
    Shares
Being Offered
    Shares Beneficially
Owned After the
Offering (1)
   
Name of Beneficial Owner
        Number
    Percentage (2)
        Number
    Percentage (2)
Tie Zhi Cheng
                        474                   *                     474                       0                    *    
Guangqing Yang
                 498              *              498              0              *    
Qingsheng Liu
                 498              *              498              0              *    
Yong An Zhao
                 498              *              498              0              *    
Yong Qiang Han
                 498              *              498              0              *    
Zhen Da Zhou
                 498              *              498              0       &n