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EX-32 - CERTIFICATION - Yew Bio-Pharm Group, Inc.f10q0615ex32_yewbiopharm.htm
EX-31.1 - CERTIFICATION - Yew Bio-Pharm Group, Inc.f10q0615ex31i_yewbiopharm.htm
EX-31.2 - CERTIFICATION - Yew Bio-Pharm Group, Inc.f10q0615ex31ii_yewbiopharm.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

   

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2015

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM ______ TO ______

 

COMMISSION FILE NUMBER 000-54701

 

YEW BIO-PHARM GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   26-1579105
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

9460 Telstar Avenue, Suite 6

El Monte, California 91731 

 

 (Address of principal executive offices) (Zip Code)

 

(626) 401-9588

 

(Registrant’s telephone number, including area code)

 

N/A

 

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

 

 

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨  No x

 

As of August 18, 2015, there were 52,125,000 shares, $0.001 par value per share, of the registrant’s common stock outstanding. 

 

 

 

 
 

 

YEW BIO-PHARM GROUP, INC.

 

FORM 10-Q

 

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2015

TABLE OF CONTENTS

 

   

Page

Number

 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS 4
     
  CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2015 (UNAUDITED) AND DECEMBER 31, 2014 4
     
  CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2015 AND JUNE 30, 2014 5
     
  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2015 AND JUNE 30, 2014 6
     
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34
     
ITEM 4. CONTROLS AND PROCEDURES 34
 
PART II. OTHER INFORMATION
     
ITEM 1. LEGAL PROCEEDINGS 35
     
ITEM 1A. RISK FACTORS 35
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 35
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 35
     
ITEM 4. MINE SAFETY DISCLOSURES 35
     
ITEM 5. OTHER INFORMATION 35
     
ITEM 6. EXHIBITS 35

 

2
 

Forward-Looking Statements

 

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements”, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.

 

Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.

 

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. Some of the key factors impacting these risks and uncertainties include, but are not limited to:

 

  risks related to our ability to collect amounts owed to us by some of our largest customers;
  our ability to continue to purchase yew cuttings from our various suppliers at relatively stable prices;
  our dependence on a small number of customers for our yew raw materials, including a related party ;
  our dependence on a small number of customers for our yew trees for reforestation;
  our ability to market successfully yew raw materials used in the manufacture of traditional Chinese medicine (“TCM”);
  industry-wide market factors and regulatory and other developments affecting our operations;
  our ability to sustain revenues should the Chinese economy slow from its current rate of growth;
  continued preferential tax treatment for the sale of yew trees and potted yew trees;
  uncertainties about involvement of the Chinese government in business in the People’s Republic of China (the “PRC” or “China”) generally; and
  any change in the rate of exchange of the Chinese Renminbi (“RMB”) to the U.S. dollar, which could affect currency translations of our results of operations, which are earned in RMB but reported in dollars;
  industry-wide market factors and regulatory and other developments affecting our operations;
  any impairment of any of our assets;
  a slowdown in the Chinese 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 16 of our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the securities & Exchange Commission (“SEC”) on March 31, 2015.

 

3
 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS 

 

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   June 30,
2015
   December 31, 2014 
   (Unaudited)     
ASSETS
CURRENT ASSETS:        
Cash  $610,658   $487,940 
Accounts receivable   2,236,486    922,564 
Accounts receivable - related party   975,562    340,132 
Inventories   3,509,414    1,443,078 
Prepaid expenses - related party   126,731    5,787 
Prepaid expenses and other assets   2,003,906    16,791 
           
Total Current Assets   9,462,757    3,216,292 
           
LONG-TERM ASSETS:          
Long-term inventories, net   11,083,446    10,663,545 
Property and equipment, net   795,544    856,250 
Land use rights and yew forest assets, net   20,574,883    20,305,821 
           
Total Long-term Assets   32,453,873    31,825,616 
           
Total Assets  $41,916,630   $35,041,908 
           
LIABILITIES AND SHAREHOLDERS' EQUITY 
CURRENT LIABILITIES:          
Accounts payable  $427,165   $- 
Accrued expenses and other payables   268,141    84,722 
Advances from customers   67,501    - 
Taxes payable   16,444    10,547 
Due to related parties   697,445    45,040 
Short-term borrowings   1,642,360    - 
           
           
Total Current Liabilities   3,119,056    140,309 
           
Total Liabilities   3,119,056    140,309 
           
SHAREHOLDERS' EQUITY:          
Common stock ($0.001 par value; 140,000,000 shares authorized; 52,125,000 shares issued and outstanding at June 30, 2015 and December 31, 2014)   52,125    52,125 
Additional paid-in capital   9,108,038    8,557,656 
Retained earnings   23,043,440    20,444,667 
Statutory reserves   3,466,039    3,100,766 
Accumulated other comprehensive income - foreign currency translation adjustment   3,127,932    2,746,385 
           
Total Shareholders' Equity   38,797,574    34,901,599 
           
Total Liabilities and Shareholders' Equity  $41,916,630   $35,041,908 

 

See notes to unaudited consolidated financial statements

 

4
 

 

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

   For the Three Months Ended June 30,   For the Six Months Ended
June 30,
 
   2015   2014   2015   2014 
REVENUES:                
    Revenues  $1,904,941   $1,780,535   $3,439,595   $3,394,253 
    Revenues - related party   2,761,981    283,032    3,869,782    737,291 
                     
       Total Revenues   4,666,922    2,063,567    7,309,377    4,131,544 
                     
COST OF REVENUES:                    
    Cost of revenues   1,533,314    354,456    1,907,359    769,072 
    Cost of revenues - related party   753,806    70,479    1,550,730    183,597 
                     
       Total Cost of Revenues   2,287,120    424,935    3,458,089    952,669 
                     
GROSS PROFIT   2,379,802    1,638,632    3,851,288    3,178,875 
                     
OPERATING EXPENSES:                    
    Selling   9,075    661    13,763    2,421 
    General and administrative   475,400    220,361    942,778    385,997 
                     
       Total Operating Expenses   484,475    221,022    956,541    388,418 
                     
INCOME FROM OPERATIONS   1,895,327    1,417,610    2,894,747    2,790,457 
                     
OTHER INCOME (EXPENSES):                    
    Interest income (expense)   (18,546)   55    (18,421)   291 
    Government grant   135,322    -    135,322    - 
    Other income (expense)   (4,457)   (194)   (4,473)   1,964 
                     
       Total Other Income (Expenses)   112,319    (139)   112,428    2,255 
                     
INCOME BEFORE INCOME TAXES   2,007,646    1,417,471    3,007,175    2,792,712 
PROVISION FOR INCOME TAXES   (1,990)   -    (43,129)   - 
NET INCOME  $2,005,656   $1,417,471   $2,964,046   $2,792,712 
                     
COMPREHENSIVE INCOME:                    
    NET INCOME  $2,005,656   $1,417,471   $2,964,046   $2,792,712 
    OTHER COMPREHENSIVE INCOME (LOSS):                    
       Foreign currency translation adjustment   123,694    35,482    381,547    (222,486)
                     
    COMPREHENSIVE INCOME  $2,129,350   $1,452,953   $3,345,593   $2,570,226 
                     
NET INCOME PER COMMON SHARE:                    
    Basic  $0.04   $0.03   $0.06   $0.06 
    Diluted  $0.03   $0.03   $0.05   $0.04 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                    
    Basic   52,125,000    50,000,000    52,125,000    50,000,000 
    Diluted   57,618,689    50,000,000    57,899,669    64,872,148 

 

 See notes to unaudited consolidated financial statements

 

5
 

 

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    For the Six Months Ended
June 30,
 
    2015     2014  
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income   $ 2,964,046     $ 2,792,712  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                
Depreciation     76,099       91,862  
Stock-based compensation     537,660       -  
Stock issued for professional services     12,722       -  
Amortization of land use rights and yew forest assets     256,333       255,678  
Gain on disposal of property and equipment     -       (2,142 )
Changes in operating assets and liabilities:                
Accounts receivable     (1,300,729 )     (911,790 )
Accounts receivable - related party     (629,335 )     237,626  
Prepaid expenses and other current assets     (1,979,257 )     (20,473 )
Prepaid expenses - related party     (120,407     -  
Due from related parties     -       14,034  
Inventories     (2,071,367 )     358,413  
Accounts payable     427,058       42,398  
Accrued expenses and other payables     182,092       (1,100
Advances from customers     67,236       -  
Taxes payable     5,789       (3,865 )
                 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES     (1,572,060 )     2,853,353  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Proceeds from disposal of property and equipment     -       5,000  
Purchase of property and equipment     (7,000 )     -  
Payment for land use rights and yew forest assets     (588,928 )     (3,755,629
                 
NET CASH USED IN INVESTING ACTIVITIES     (595,928 )     (3,750,629 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from short-term borrowings     1,642,360       -  
Proceeds from related party advances     652,363       1,221  
Repayments for related party advances     -       (25,674 )
                 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     2,294,723       (24,453 )
                 
EFFECT OF EXCHANGE RATE ON CASH     (4,017     (7,204 )
                 
NET INCREASE (DECREASE) IN CASH     122,718       (928,933 )
                 
CASH - Beginning of period     487,940       1,159,611  
                 
CASH - End of period   $ 610,658     $ 230,678  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Cash paid for:                
Interest   $ 18,647     $ -  
Income taxes   $ -     $ -  
                 
Non-cash investing and financing activities                
Reclassification of yew forest assets to inventories   $ 279,514     $ 1,658  

 

See notes to unaudited consolidated financial statements

 

6
 

 

 YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

 

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of December 31, 2014 was derived from the audited consolidated financial statements of Yew Bio-Pharm Group, Inc. (individually “YBP” and collectively with its subsidiaries and operating variable interest entity, the “Company”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2014.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of June 30, 2015, and the results of operations and cash flows for the six-month periods ended June 30, 2015 and 2014, have been made.

 

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company continually evaluates its estimates, including those related to bad debts, inventories, income taxes, and the valuation of equity transactions. The Company bases its estimates on historical experience and on various other assumptions that it believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

 

Details of the Company’s subsidiaries, variable interest entity (“VIE”) and VIE’s subsidiary are as follows:

 

Name  Domicile and Date of Incorporation  Registered
Capital
  Effective
Ownership
  Principal Activities
Heilongjiang Jinshangjing Bio-Technology Development Co., Limited (“JSJ”)  PRC  
October 29, 2009
  US$100,000  100%  Holding company
             
Yew Bio-Pharm Holdings Limited (“Yew Bio-Pharm (HK)”)  Hong Kong  
November 29, 2010
  HK$10,000  100%  Holding company of JSJ
             
Harbin Yew Science and Technology Development Co., Ltd. (“HDS”)  PRC  
August 22, 1996
  RMB45,000,000  Contractual arrangements  Sales of yew tree components for use in pharmaceutical industry; sales of yew tree seedlings and potted yew trees; manufacture of yew tree wood handicrafts; and sales of wood ear mushroom
             
Harbin Yew Food Co., Ltd ("HYF")  PRC 
November 4, 2014
  RMB100,000(1)  100%  Sales of wood ear mushroom

 

(1) Harbin Yew Food Co. Ltd is wholly owned by HDS and did not pay the registered capital as of June 30, 2015.

 

7
 

  

NOTE 2 – PRINCIPLES OF CONSOLIDATION

  

The consolidated financial statements include the financial statements of YBP, its subsidiaries and operating VIE, in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated on consolidation.

   

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

 

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

 

Exclusive Option Agreement. Under an Exclusive Option Agreement among JSJ, HDS and each HDS Shareholder (individually, an “Option Agreement”), the terms of which are substantively identical to each other, each HDS Shareholder has granted JSJ or its designee the irrevocable and exclusive right to purchase, to the extent permitted under PRC law, all or any part of the HDS Shareholder’s equity interests in HDS (the “Equity Interest Purchase Option”) for RMB10. 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 RMB500,000, sell or purchase any assets or rights, incur of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. The term of each Option Agreement is ten years commencing on November 5, 2020 and may be extended at the sole election of JSJ.

  

8
 

 

Equity Interest Pledge Agreement. In order to guarantee HDS’ performance of its obligations under the Business Cooperation Agreement, each HDS Shareholder, JSJ and HDS entered into an Equity Interest Pledge Agreement (individually, a “Pledge Agreement”), the terms of which are substantially similar to each other. Pursuant to the Pledge Agreement, each HDS Shareholder pledged all of his or her equity interest in HDS to JSJ. If HDS or the HDS Shareholders breach their respective contractual obligations and such breach is not remedied to the satisfaction of JSJ within 20 days after the giving of notice of breach, JSJ, as pledgee, will be entitled to exercise certain rights, including the right to foreclose upon and sell the pledged equity interests. During the term of the Pledge Agreement, the HDS Shareholder shall not transfer his or her equity interest in HDS or place or otherwise permit any other security interest of other encumbrance to be placed on such equity interest. Upon the full payment of the Service Fee under the Business Cooperation Agreement and upon the termination of HDS’ obligations thereunder, the Pledge Agreement shall be terminated.

 

Power of Attorney. Under the Power of Attorney executed by each HDS Shareholder (each, a “Power of Attorney”), the terms of which are substantially similar to each other, JSJ has been granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the HDS Shareholders, to act on behalf of the HDS Shareholder as his or her exclusive agent and attorney with respect to all matters concerning the HDS Shareholder’s equity interests in HDS, including without limitation, the right to: 1) attend shareholders’ meetings of HDS; 2) exercise all the HDS Shareholders’ rights, including voting rights under PRC laws and HDS’ Articles of Association, including but not limited to the sale or transfer or pledge or disposition of the HDS Shareholder’s equity interests in HDS in whole or in part; and 3) designate and appoint on behalf of the HDS Shareholders the legal representative, executive director, supervisor, manager and other senior management of HDS.

  

To the extent that the Contractual Arrangements are enforceable under PRC law, as from time to time interpreted by relevant state agencies, they constitute the valid and binding obligations of each of the parties to each such agreement.

  

The Company believes that HDS is considered a VIE under ASC 810 “Consolidation”, because the equity investors in HDS no longer have the characteristics of a controlling financial interest, and the Company, through JSJ, is the primary beneficiary of HDS and controls HDS’ operations. Accordingly, HDS has been consolidated as a deemed subsidiary into YBP as a reporting company under ASC 810.

  

As required by ASC 810-10, the Company performs a qualitative assessment to determine whether the Company is the primary beneficiary of HDS which is identified as a VIE of the Company. A quality assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and the parties involved in the design of the entity. The Company’s assessment on the involvement with HDS reveals that the Company has the absolute power to direct the most significant activities that impact the economic performance of HDS. JSJ is obligated to absorb a majority of the risk of loss from HDS activities and entitles JSJ to receive a majority of HDS’ expected residual returns. In addition, HDS’ shareholders have pledged their equity interest in HDS to JSJ, irrevocably granted JSJ an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the equity interests in HDS and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by JSJ. Under the accounting guidance, the Company is deemed to be the primary beneficiary of HDS and the results of HDS are consolidated in the Company’s consolidated financial statements for financial reporting purposes. Accordingly, as a VIE, HDS’ sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s and the Company’s net income includes all of HDS’ net income. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income attributable to the Company. Because of the Contractual Arrangements, YBP has a pecuniary interest in HDS that requires consolidation of HDS’ financial statements with those of the Company.

 

9
 

 

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

 

As of June 30, 2015, the Company agreed to waive all management fees to be payable by HDS and the Company expects to waive such management fees in the near future due to a need of working capital in HDS to expand HDS’ operations.

 

On November 4, 2014, HDS established a new subsidiary, Harbin Yew Food Co., Ltd. (HYF), to develop and cultivate wood ear mushroom. The Company plans to operate three production lines, including wood ear mushroom polysaccharide, powder, tea and other packaged wood ear mushroom, products. The move marks the Company’s entrance into the organic food and functional beverage market. HYF did not have any operation for the period ended June 30, 2015.

 

The Company is principally engaged in (1) processing and selling yew raw materials or yew extracts used in the manufacture of traditional Chinese medicine (“TCM”); (2) growing and selling yew tree seedlings and mature trees, including potted miniature yew trees; (3) manufacturing and selling furniture and handicrafts made of yew tree timber; and (4) selling wood ear mushroom as finished goods. The Company is located in Harbin, Heilongjiang Province, China.

  

YBP has no direct or indirect legal or equity ownership interest in HDS. However, through the Contractual Arrangements, the stockholders of HDS have assigned all their rights as stockholders, including voting rights and disposition rights of their equity interests in HDS to JSJ, our indirect, wholly-owned subsidiary. YBP is deemed to be the primary beneficiary of HDS and the financial statements of HDS are consolidated in the Company’s consolidated financial statements. At June 30, 2015 and December 31, 2014, the carrying amount and classification of the assets and liabilities in the Company’s balance sheets that relate to the Company’s VIE and VIE’s subsidiary are as follows:

 

   June 30,
2015
   December 31,
2014
 
Assets        
Cash  $597,808   $446,554 
Accounts receivable   1,795,576    922,564 
Accounts receivable – related party   975,562    340,132 
Inventories (current and long-term), net   13,944,205    12,106,623 
Prepaid expenses and other assets   1,992,847    5,363 
Prepaid expenses - related party   126,731    6,600 
Property and equipment, net   756,136    814,676 
Land use rights and yew forest assets, net   20,574,883    20,305,822 
Total assets of VIE  $40,763,748   $34,948,334 
Liabilities          
Accounts payable  $27,165   $- 
Accrued expenses and other payables   244,978    54,265 
Advances from customers   67,501    - 
Taxes payable   13,665    8,104 
Due to VIE holding companies   1,275,974    1,417,851 
Short-term borrowings   1,642,360    - 
Due to related parties   4,221    2,958 
Total liabilities of VIE  $3,275,864   $1,483,178 

  

10
 

 

NOTE 3 – INVENTORIES

 

Inventories consisted of raw materials, work-in-progress, finished goods, yew seedlings and other trees, which consist of larix, spruce and poplar trees. The Company classifies its inventories based on its historical and anticipated levels of sales; any inventory in excess of its normal operating cycle of one year is classified as long-term on its consolidated balance sheets. As of June 30, 2015 and December 31, 2014, inventories consisted of the following:

 

   June 30, 2015   December 31, 2014 
   Current
portion
   Long-term
portion
   Total   Current
portion
   Long-term
portion
   Total 
Raw materials  $154,526   $2,828,226   $2,982,752   $120,478   $2,798,489   $2,918,967 
Work-in-process   -    -    -    -    256,227    256,227 
Finished goods   939,105    755,830    1,694,935    -    805,438    805,438 
Yew seedlings and other trees   2,415,783    7,584,898    10,000,681    1,322,600    6,889,573    8,212,173 
Total   3,509,414    11,168,954    14,678,368    1,443,078    10,749,727    12,192,805 
Reserve for impairment - handicrafts   -    (85,508)   (85,508)   -    (86,182)   (86,182)
Inventories, net  $3,509,414   $11,083,446   $14,592,860   $1,443,078   $10,663,545   $12,106,623 

 

NOTE 4 – TAXES

 

(a) Federal Income Tax and Enterprise Income Taxes

 

The Company is registered in the State of Nevada and is subject to the United States federal income tax at a tax rate of 34%. No provision for income taxes in the U.S. has been made as the Company had no U.S. taxable income as of June 30, 2015 and December 31, 2014.

 

The Company’s subsidiary, VIE and its subsidiary, JSJ, HDS, and HYF, respectively, incorporated in the PRC, are subject to PRC’s Enterprise Income Tax. Pursuant to the PRC Income Tax Laws, Enterprise Income Taxes (“EIT”) is generally imposed at 25%. However, HDS has been named as a leading enterprise in the agricultural industry and awarded with a tax exemption through December 31, 2058 with an exception of handicrafts and wood ear mushroom sold. JSJ is a holding company and subject to regular corporate income tax rate of 25%, and has no operation profit for tax liabilities. HYF did not have any operation for the six months ended June 30, 2015.

  

Income before income tax expenses of $2,007,646 and $1,417,471 for the three months ended June 30, 2015 and 2014, respectively, and $3,007,175 and $2,792,712 for the six months ended June 30, 2015 and 2014, respectively, were attributed to subsidiaries and VIE with operations in China. JSJ and HYF recorded no income tax expense for the three and six months ended June 30, 2015 and 2014 due to the fact that JSJ has been incurring net losses and HYF did not have any operation since its establishment. HDS recorded income tax expense of $1,990 and $43,129 for the three and six months ended June 30, 2015, respectively. HDS recorded no income tax expense for the three and six months ended June 30, 2014 due to the fact that HDS was granted a tax exemption and had loss carry-forwards from previous periods to offset income tax liability generated for handicrafts.

  

11
 

 

The combined effects of the income tax expense exemptions and tax reductions available to the Company for the three months and six months ended June 30, 2015 and 2014 are as follows:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2015   2014   2015   2014 
Tax exemption effect  $575,359   $374,005   $867,690   $725,132 
Tax reduction due to loss carry-forward   8    (849)   2,363    2,172 
Loss not subject to income tax   (366)   (827)   (744)   (1,659)
Basic net income per share effect  $(0.01)  $(0.01)  $(0.02)  $(0.01)
Diluted net income per share effect  $(0.01)  $(0.01)  $(0.02)  $(0.01)

 

The table below summarizes the difference between the U.S. statutory federal tax rate and the Company’s effective tax rate for the three months and six months ended June 30, 2015 and 2014:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2015   2014   2015   2014 
U.S. federal income tax rate   34%   34%   34%   34%
Foreign income not recognized in the U.S.   (34%)   (34%)   (34%)   (34%)
PRC EIT rate   25%   25%   25%   25%
PRC tax exemption and reduction   (25%)   (25%)   (24%)   (25%)
Total provision for income taxes   -    -    1%   - 

 

The deferred income tax assets or liabilities calculated pursuant to the EIT are not material due to the fact that the Company has been granted EIT exemption with respect to its yew raw materials and yew tree segments.

 

The Company incurred net operating losses for U.S. income tax purposes for the three and six months ended June 30, 2015 and 2014. The net operating loss carry-forwards for U.S. income tax purposes amounted to $3,406,475 and $4,000,246 at June 30, 2015 and December 31, 2014, respectively, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2035. Management believes that the realization of the benefits arising from this loss appear to be uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero at June 30, 2015 and December 31, 2014. The valuation allowance at June 30, 2015 and December 31, 2014 was $1,158,202 and $1,360,084, respectively. The net change in the valuation allowance was a decrease of $80,018 and an increase of $11,795 during the three months ended June 30, 2015 and 2014, respectively. The net change in the valuation allowance was a decrease of $201,882 and an increase of $37,914 during the six months ended June 30, 2015 and 2014, respectively. Management reviews this valuation allowance periodically and makes adjustments as necessary.

 

Deferred tax assets and liabilities are provided for significant income and expense items recognized in different years for income tax and financial reporting purposes. Temporary differences, which give rise to a net deferred tax asset for the Company as of June 30, 2015 and December 31, 2014, are as follows:

 

   June 30,
2015
   December 31,
2014
 
U.S. tax benefit of net operating loss carry forward  $1,158,202   $1,360,084 
Valuation allowance   (1,158,202)   (1,360,084)
Net deferred tax assets  $-   $- 

 

For U.S. income tax purposes, the Company has cumulative undistributed earnings of foreign subsidiary and VIE of approximately $27.9 million and $24.7 million as of June 30, 2015 and December 31, 2014, respectively, which are included in consolidated retained earnings and will continue to be indefinitely reinvested in overseas operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted to the U.S. in the future.

  

12
 

 

(b) Value Added Taxes (“VAT”)

 

The applicable VAT tax rate is 13% for agricultural products and 17% for handicrafts sold in the PRC. In accordance with VAT regulations in the PRC, the Company is exempt from paying VAT on its yew raw materials and yew trees sales as an agricultural corps cultivating company up to December 31, 2016. VAT payable in the PRC is charged on an aggregated basis at the applicable rate on the full price collected for the goods sold or taxable services provided and less any deductible VAT already paid by the taxpayer on purchases of goods in the same fiscal year. 

 

NOTE 5 – SHORT-TERM BORROWINGS

 

On April 23, 2015, HDS entered into a loan agreement with Harbin Rongtong Branch of Bank of Communications (“BOCOM”) in the amount of RMB10,000,000 (approximately $1,630,000), payable on April 22, 2016. The loan carries an interest rate of 6.955% per annum and is payable quarterly on the 20th of the last month of each quarter. Heilongjiang Zishan Technology Co., Ltd (“ZTC”), a related party controlled by Mr. Wang and his wife Madame Qi, collateralized its buildings and land use rights with BOCOM to secure the loan.

 

NOTE 6 – STOCKHOLDERS’ EQUITY

 

(a) Common Stock

 

On July 22, 2014, the Company entered into a Service Provider Agreement (the “SPA”) with a service provider to commence service on July 22, 2014 for a period of three years. Pursuant to the SPA, the Company agreed to issue to the service provider 1,250,000 shares of its Rule 144 restricted common stock for the service period. The shares are payable in 875,000 shares of its restricted common stock on or before July 22, 2014 for the first year of service under the SPA and 375,000 shares of its restricted common stock to be issued on or before July 22, 2015, for the second and third year of service under the SPA. For the six months ended June 30, 2015, a total of $12,722 was expensed under the SPA. 

 

(b) Stock Options

  

On July 18, 2014, the Company’s board of directors in lieu of an established compensation committee granted options pursuant to the Corporation’s 2012 Equity Incentive Plan to two directors and one of its employees (the “Optionees I”). Within the stock option agreement, each of the Optionees I was issued 200,000 shares of common stock of the Company at an exercise price of $0.20 per share. The option has a term of four years starting from August 1, 2014, the vesting commencement date, and expires on August 1, 2018. The options vest over a three-year time period from August 1, 2014, and 30%, 35%, and 35% of the total shares granted shall vest and become exercisable 12, 24, and 36 months after the initial vesting commencement date.

 

On November 18, 2014, the Company’s board of directors in lieu of an established compensation committee granted options pursuant to the Corporation’s 2012 Equity Incentive Plan to the Company’s employees (the “Optionees II”). Within the stock option agreement, each of the Optionees II was issued shares of common stock of the Company at an exercise price of $0.23 per share. There are three types of term for the subject stock options granted. (1) The option has a term of four years starting from November 18, 2014, the vesting commencement date, and expires on November 18, 2018. The options vest over a three-year time period from November 18, 2014, and 30%, 35%, and 35% of the total shares granted shall vest and become exercisable 12, 24, and 36 months after the initial vesting commencement date. (2) The option has a term of two years starting from November 18, 2014, the vesting commencement date, and expires on November 18, 2016. The options vest over a one-year time period from November 18, 2014, and 100% of the total shares granted shall vest and become exercisable 12 months after the initial vesting commencement date. (3) The option has a term of three years starting from November 18, 2014, the vesting commencement date, and expires on November 18, 2017. The options vest over a two-year time period, and 50% and the remaining 50% of the total shares shall vest and become exercisable 12 and 24 months respectively after the initial vesting commencement date.

  

13
 

 

Stock option activities for the six months ended June 30, 2015 and 2014 are summarized in the following table.

 

   Six Months ended
June 30, 2015
   Six Months ended
June 30, 2014
 
   Number of Stock Options   Weighted Average Exercise Price   Number of Stock Options   Weighted Average Exercise Price 
Balance at beginning of period   27,205,512    0.30    22,805,512    0.22 
Exercised   -    -    -    - 
Forfeited   400,000    0.23    -    - 
Balance at end of period   26,805,512    0.22    22,805,512    0.22 
Option exercisable at end of period   22,805,512    0.22    22,805,512    0.22 

  

The following table summarizes the shares of the Company's common stock issuable upon exercise of options outstanding at June 30, 2015:

 

Stock Options Outstanding  Stock Options Exercisable 
Range of 
 Exercise Price
   Number 
Outstanding at 
 June 30, 
2015    
   Weighted Average 
Remaining 
 Contractual Life 
 (Years)    
   Weighted 
Average 
 Exercise Price
   Number 
Exercisable at 
June 30, 
2015
   Weighted 
 Average 
 Exercise Price
 
$ 0.20-0.23   26,805,512    2.51   $0.22    22,805,512   $0.22 

 

The aggregate intrinsic value amounted to $790,165 and $684,165 for outstanding stock options and exercisable stock options as of June 30, 2015, respectively, based upon the Company’s closing stock price of $0.25 as of June 30, 2015, which amount would have been received by the option holders had all option holders exercised their option awards as of that date.  Stock option expense recognized during the six months ended June 30, 2015 amounted to $537,660.

 

NOTE 7 – EARNINGS PER SHARE 

 

The following table presents a reconciliation of basic and diluted net income per share for the three and six months ended June 30, 2015 and 2014:

 

   Three Months Ended 
June 30,
   Six Months Ended 
June 30,
 
   2015   2014   2015   2014 
Net income available to common stockholders for basic and diluted net income per share of common stock  $2,005,656   $1,417,471   $2,964,046   $2,792,712 
Weighted average common stock outstanding – basic   52,125,000    50,000,000    52,125,000    50,000,000 
Effect of dilutive securities:                    
Non-vested restricted common stock   85,376    -    89,129    - 
Stock options issued to directors/officers/employees   5,408,313    -    5,685,540    14,872,148 
Weighted average common stock outstanding – diluted   57,618,689    50,000,000    57,899,669    64,872,148 
Net income per common share – basic  $0.04   $0.03   $0.06   $0.06 
Net income per common share – diluted  $0.03   $0.03   $0.05   $0.04 

 

NOTE 8 – CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

 

Customers

 

For the three and six months ended June 30, 2015 and 2014, customers accounting for 10% or more of the Company’s revenue were as follows:

 

   Three Months Ended 
June 30,
   Six Months Ended 
June 30,
 
Customer  2015     2014   2015    2014 
A (Yew Pharmaceutical, a related party)   59%   14%   53%   18%
C   *%   16%    *%   25%
B    *%   15%    *%     *%
D   33%    *%   21%     *%

  

* Less than 10%

 

14
 

 

The largest customers accounted for 44% and 24% of the Company’s total outstanding accounts receivable at June 30, 2015 and 2014, respectively, of which Yew Pharmaceutical Co., Ltd., (“Yew Pharmaceutical”), a related party, accounted for 30% and 9.4% of total outstanding accounts receivable, respectively.

 

Suppliers

 

For the three and six months ended June 30, 2015 and 2014, suppliers accounting for 10% or more of the Company’s purchase were as follows:

 

   Three Months Ended 
June 30,
   Six Months Ended 
June 30,
 
Supplier  2015   2014   2015   2014 
A      47%    *%   35%    *%
B      49%    *%   22%    *%
C       *%   100%   11%   100%

 

For the three and six months ended June 30, 2015, three individual suppliers accounted for 96% and 68% of the Company’s purchases, respectively, and did not have any payable balance with these suppliers at June 30, 2015. 

 

For the three and six months ended June 30, 2014, three individual suppliers, aggregated as supplier C in the table above, accounted for 100% of the Company’s purchases and the Company had $42,304 payable with these suppliers at June 30, 2014.

   

NOTE 9 – RELATED PARTY TRANSACTIONS

 

In addition to several of the Company’s officers and directors, the Company conducted transactions with the following related parties:

 

Company   Ownership
Heilongjiang Zishan Technology Stock Co., Ltd. (“ZTC”)   18% owned by Heilongjiang Hongdoushan Ecology Forest Stock Co., Ltd., 39% owned by Zhiguo Wang, Chairman and Chief Executive Officer, 31% owned by Guifang Qi, the wife of Mr. Wang and director of the Company, and 12% owned by third parties.
Heilongjiang Yew Pharmaceutical Co., Ltd. (“Yew Pharmaceutical”)   95% owned by Heilongjiang Hongdoushan Ecology Forest Stock Co., Ltd., and 5% owned by Madame Qi.
Shanghai Kairun Bio-Pharmaceutical Co., Ltd. (“Kairun”)   60% owned by Heilongjiang Zishan Technology Co., Ltd., 20% owned by Heilongjiang Hongdoushan Ecology Forest Stock Co., Ltd., and 20% owned by Mr. Wang.
Heilongjiang Hongdoushan Ecology Forest Stock Co., Ltd. (“HEFS”)   63% owned by Mr. Wang, 34% owned by Madame Qi, and 3% owned by third parties.

 

15
 

 

Cooperation and Development Agreement and Revenues from Related Party

 

On January 9, 2010, the Company entered into a Cooperation and Development Agreement (the “Development Agreement”) with Yew Pharmaceutical. Pursuant to the Development Agreement, for a period of ten years expiring on January 9, 2020, the Company shall supply cultivated yew raw materials to Yew Pharmaceutical that will be used by Yew Pharmaceutical to make traditional Chinese medicines and other pharmaceutical products, at price of RMB1,000,000 (approximately $158,000) per metric ton. In addition, the Company entered into a series of wood ear mushroom selling agreements with Pharmaceuticals, pursuant to which the Company sells wood ear mushroom collected from local peasants to Yew Pharmaceuticals for manufacturing of wood ear mushroom products.

 

For the three months ended June 30, 2015 and 2014, sales to Yew Pharmaceutical under the above agreements amounted to $2,761,981 and $283,032, respectively. For the six months ended June 30, 2015 and 2014, sales to Yew Pharmaceutical under the above agreements amounted to $3,869,782 and $737,291, respectively.

 

On June 30, 2015 and December 31, 2014, the Company had $975,562 and $340,132 accounts receivable from Yew Pharmaceutical, respectively.

 

Operating Leases

 

On March 25, 2005, the Company entered into an Agreement for the Lease of Seedling Land with ZTC (the “ZTC Lease”). Pursuant to the ZTC Lease, the Company leased 361 mu of land from ZTC for a period of 30 years, expiring on March 24, 2035. Annual payments under the ZTC Lease are RMB162,450 (approximately $26,000). The payment for the first five years of the ZTC Lease was due prior to December 31, 2010 and beginning in 2011, the Company was required to make full payment for the land use rights in advance for each subsequent five-year period. For the three months ended June 30, 2015 and 2014, rent expense related to the ZTC Lease amounted to $6,669 and $6,584, respectively. For the six months ended June 30, 2015 and 2014, rent expense related to the ZTC Lease amounted to $13,288 and $13,220, respectively. At June 30, 2015 and December 31, 2014, prepaid rent to ZTC amounted to $126,731 and $6,600 which was included in prepaid expenses – related parties on the accompanying consolidated balance sheets.

 

On January 1, 2010, the Company entered into a lease for office space with Mr. Wang (the “Office Lease”). Pursuant to the Office Lease, annual payments of RMB15,000 (approximately $2,000) are due for each of the term. The term of the Office Lease is 15 years and expires on December 31, 2025. For the three months ended June 30, 2015 and 2014, rent expense related to the Office Lease amounted to $616 and $608, respectively. For the six months ended June 30, 2015 and 2014, rent expense related to the Office Lease amounted to $1,227 and $1,221, respectively. 

 

On July 1, 2012, the Company entered into a lease for office space with Mr. Wang (the “JSJ Lease”). Pursuant to the JSJ Lease, JSJ leases approximately 30 square meter of office space from Mr. Wang in Harbin. Rent under the JSJ Lease is RMB10,000 (approximately $1,600) annually. The term of the JSJ Lease is three years and expires on June 30, 2015. On July 1, 2015, the Company and Mr. Wang renewed the JSJ Lease. The renewed lease expires on June 30, 2018. For the three months ended June 30, 2015 and 2014, rent expense related to the JSJ Lease amounted to $411 and $405, respectively. For the six months ended June 30, 2015 and 2014, rent expense related to the JSJ Lease amounted to $818 and $814, respectively.

 

On June 30, 2015 and December 31, 2014, the total prepaid rent for the above operating leases with related parties amounted to $126,731 and $5,787, respectively, which amount was included in prepaid expenses-related party on the accompanying consolidated balance sheets.

 

Due to Related Parties

 

The Company’s officers, directors and other related parties, from time to time, provided advances to the Company for working capital purpose. These advances are usually short-term in nature, non-interest bearing, unsecured and payable on demand. Due to Zhiguo Wang and other shareholders, excluding the borrowings from Madame Qi as disclosed below, amounted to $49,445 and $45,040 at June 30, 2015 and December 31, 2014, respectively.  

 

On May 15, 2015, the Company borrowed $648,000 from Madame Qi through the issuance of a subordinated promissory note. The note bears 2% interest per annum and shall be payable on or before November 15, 2015 (“Due Date”). Interest payment shall be made with principal on Due Date. As of June 30, 2015, the total borrowings including the interest were $649,633.

 

16
 

 

Research and Development Agreement

 

The Company entered into a Technology Development Service Agreement dated January 1, 2010 (the “Technology Agreement”) with Kairun. The term of the Technology Agreement was two years. Under the Technology Agreement, Kairun provides the Company with testing and technologies regarding utilization of yew trees to extract taxol and develop higher concentration of taxol in the yew trees the Company grow and cultivate. For these services, the Company agreed to pay Kairun RMB200,000 (approximately $32,000) after the technologies developed by Kairun are tested and approved by the Company. The Company will retain all intellectual property rights in connection with the technologies developed by Kairun. Kairun may not provide similar services to any other party without the Company’s prior written consent. In February 2012, we entered into a supplemental agreement with Kairun, extending the term of the Technology Agreement indefinitely until project results specified in the original Technology Agreement have been achieved. Kairun is owned directly and indirectly primarily by Mr. Wang and Madame Qi. As of June 30, 2015, Kairun has not yet completed the services provided for in the Technology Agreement and, therefore, no payment was made to Kairun.  

 

NOTE 10 – GOVERNEMNT GRANT

 

On March 18, 2015, the Company filed an application to Finance Bureau of Wuchang city for government grant used to support general planting and cultivation of yew trees. The grant of RMB827,200, or $135,322, was issued and received by the Company in April 2015.

  

NOTE 11 – STATUTORY RESERVES

 

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriation to the statutory surplus reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the board of directors.

  

The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. For the three months ended June 30, 2015 and 2014, the Company appropriated to the statutory surplus reserve in the amount of $230,943 and $149,760, respectively. For the six months ended June 30, 2015 and 2014, the Company appropriated to the statutory surplus reserve in the amount of $365,273 and $291,086, respectively. The accumulated balance of the statutory reserve of the Company as of June 30, 2015 and December 31, 2014 was $3,466,039 and $3,100,766, respectively.

  

NOTE 12 – SEGMENT INFORMATION

 

ASC 280 requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

 

For the three and six months ended June 30, 2015, the Company operated in four reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials or yew tree extracts 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; (3) the handicrafts segment, consisting of the manufacture and sale of handicrafts and furniture made of yew timber; and (4) the wood ear mushroom segment, consisting of the sale of wood ear mushroom. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of the Company’s operations except the sales of yew tree extracts are conducted in the PRC.

 

17
 

 

The Company operated in the TCM segment, yew tree segment, and handicrafts segment for the three and six months ended June 30, 2014, as the wood ear mushroom segment was not established until the fourth quarter of 2014.

 

Information with respect to these reportable business segments for the three and six months ended June 30, 2015 and 2014 was as follows:

 

   Three Months Ended,
June 30,
   Six Months Ended, 
June 30,
 
   2015   2014   2015   2014 
Revenues:                
TCM raw materials  $3,909,314   $1,150,805   $4,866,320   $2,194,785 
Yew trees   344,919    872,437    1,043,671    1,836,743 
Handicrafts   7,206    40,325    94,714    100,016 
Wood ear mushroom   405,483    -    1,304,672    - 
   $4,666,922   $2,063,567   $7,309,377   $4,131,544 
Cost of revenues:                    
TCM raw materials   1,847,197    208,658    1,995,521    440,998 
Yew trees   63,687    180,040    308,536    429,371 
Handicrafts   1,225    36,237    15,118    82,300 
Wood ear mushroom   375,011    -    1,138,914    - 
   $2,287,120   $424,935   $3,458,089   $952,669 
Depreciation and amortization:                    
TCM raw materials   131,535    116,151    268,366    241,887 
Yew trees   7,973    19,548    9,590    33,248 
Handicrafts   7,118    7,104    14,183    14,923 
Wood ear mushroom   -    -    -    - 
Other   11,854    29,783    32,011    57,482 
   $158,480   $172,586   $324,150   $347,540 
Net income (loss):                    
TCM raw materials   2,062,117    956,664    2,870,799    1,752,891 
Yew trees   281,232    712,286    735,135    1,406,622 
Handicrafts   5,981    4,679    79,596    19,361 
Wood ear mushroom   30,472    -    165,758    - 
Other   (374,146)   (256,158)   (887,242)   (386,162)
   $2,005,656   $1,417,471   $2,964,046   $2,792,712 

  

   June 30, 2015 
   TCM raw materials   Yew
trees
   Handicrafts   Wood ear
mushroom
   Other   Total 
Identifiable long-lived assets, net  $20,244,956   $897,695   $47,158   $-   $180,618   $21,370,427 

  

   December 31, 2014 
   TCM raw materials   Yew
trees
   Handicrafts   Wood ear
mushroom
   Other   Total 
Identifiable long-lived assets, net  $19,973,775   $915,551   $63,319   $-   $209,246   $21,162,071 

  

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The Company does not allocate any selling, general and administrative expenses, other income/expenses to its reportable segments because these activities are managed at a corporate level. In addition, the specified amounts for interest expense and income tax expense are not included in the measure of segment profit or loss reviewed by the chief operating decision maker and these specified amounts are not regularly provided to the chief operating decision maker. Therefore, the Company has not disclosed interest expense and income tax expense for each reportable segment.

 

Asset information by reportable segment is not reported to or reviewed by the chief operating decision maker and, therefore, the Company has not disclosed asset information for each reportable segment. The Company’s operations are located in the PRC. All revenues are derived from customers in the PRC. All of the Company’s operating assets are located in the PRC.

 

NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1. Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities. 2. Eliminate the presumption that a general partner should consolidate a limited partnership. 3. Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. 4. Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The ASU will be effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In July 2015, The FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s consolidated financial statements.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our consolidated results of operations for the three and six months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014, and consolidated financial conditions as of June 30, 2015 and December 31, 2014 should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this document.

 

Overview

 

We are a major grower and seller of yew trees and manufacturer of products made from yew trees, including potted yew trees for display in homes and offices, and handicrafts. We also sell branches and leaves of yew trees for the manufacture of TCM containing taxol, which TCM has been approved in the PRC for use as a secondary treatment of certain cancers, meaning it must be administered in combination with other pharmaceutical drugs. The yew industry is highly regulated in the PRC because the Northeast yew tree is considered an endangered species. In the fourth quarter of 2014, we started to sell wood ear mushroom product.

 

For the three and six months ended June 30, 2015 as compared to three and six months ended June 30, 2014, we operated in four reportable business segments: (1) the TCM raw materials segment, consisting of the production and sales of yew raw materials or yew tree extracts used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sales of yew tree seedlings and mature trees, including potted miniature yew trees; (3) the handicrafts segment, consisting of the manufacture and sales of furniture and handicrafts made of yew timber; and (4) the wood ear mushroom segment, consisting of the sales of wood ear mushroom. Our reportable segments are strategic business units that offer different products. Compared with the three and six months ended June 30, 2015, there were no wood ear mushroom sales for the three and six months ended June 30, 2014. The four business segments are managed separately based on the fundamental differences in their operations. All of our operations except the sales of yew tree extracts are conducted in the PRC. We are located in Harbin, Heilongjiang Province, China.

 

For the six months ended June 30, 2015, revenues from the sales of TCM raw materials represented approximately 66.6% of consolidated revenue (including 35% of consolidated revenues from a related party); sales of yew trees represented approximately 14.3% of consolidated revenue; sales of wood ear mushroom represented approximately 17.8% of consolidated revenue; and the sales of handicrafts represented approximately 1.3% of consolidated revenue. For the six months ended June 30, 2014, revenues from the sales of TCM raw materials represented approximately 53.1% of consolidated revenue (including 17.8% of consolidated revenues from a related party); sales of yew trees represented approximately 44.5% of consolidated revenue; and the sales of handicrafts represented approximately 2.4% of consolidated revenue.

 

For the three months ended June 30, 2015, revenues from the sales of TCM raw materials represented approximately 83.8% of consolidated revenue (including 50.5% of consolidated revenues from a related party); sales of yew trees represented approximately 7.4% of consolidated revenue; sales of wood ear mushroom represented approximately 8.7% of consolidated revenue; and the sales of handicrafts represented approximately 0.2% of consolidated revenue. For the three months ended June 30, 2014, revenues from the sales of TCM raw materials represented approximately 55.7% of consolidated revenue (including 13.7% of consolidated revenues from a related party); sales of yew trees represented approximately 42.3% of consolidated revenue; and the sales of handicrafts represented approximately 2.0% of consolidated revenue.

 

YBP’s revenues were mostly generated by HDS and in the PRC. YBP has no significant business operations in the U.S. for the current reporting period except for a one-time sales contract to sell yew tree extracts to a third party in Hong Kong, China. The expenses (approximately $723,709 and $113,653 for the six months ended June 30, 2015 and 2014, respectively) incurred in the U.S. were primarily related to fulfilling the reporting requirements of public listed company, stock-based compensation, and other costs related to issuance of common stock for professional service. As of June 30, 2015, YBP had approximately $9,626 in cash and held 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 $3,224, including approximately $3,224 in cash at June 30, 2015. JSJ also holds the VIE interests in HDS through the contractual arrangements (the “Contractual Arrangements”) described in Notes to Consolidated Financial Statements. On November 4, 2014, HDS established a new subsidiary, Harbin Yew Food Co. LTD. (“HYF”), to develop and cultivate wood ear mushroom. As of June 30, 2015, Harbin Yew Food Co. Ltd., had no business operation yet. In the event that we are unable to enforce the Contractual Agreements, we may not be able to exert effective control over HDS and HYF, and our ability to conduct our business may be materially and adversely affected. If the applicable PRC authorities invalidate our Contractual Agreements for any violation of PRC laws, rules and regulations, we would lose control of the VIE and its subsidiary resulting in its deconsolidation in financial reporting and severe loss in our market valuation.

 

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Critical accounting policies and estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, allowance for obsolete inventory, the classification of short and long-term inventory, the useful life of property and equipment and intangible assets, recovery of long-lived assets, income taxes, write-down in value of inventory, 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 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 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. 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 a VIE, 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 VIE does 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 requires 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 us. 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 owned subsidiary, is obligated to absorb a majority of the risk of loss from HDS’ activities and is entitled to receive a majority of HDS’ expected residual returns. In addition, HDS’ shareholders have pledged their equity interest in HDS to JSJ, irrevocably granted JSJ an exclusive option to purchase, to the extent permitted under the PRC Law, all or part of the equity interests in HDS and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by JSJ. Under the accounting guidance, we are deemed to be the primary beneficiary of HDS and the results of HDS’ operation are consolidated in our consolidated financial statements for financial reporting purposes.

 

Accordingly, as a VIE, HDS’ 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’ 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 our 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’ 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. We maintain allowances for doubtful accounts for estimated losses. We review the accounts receivable balance on a periodic basis and make general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of an individual receivable balance, we consider many factors, including the age of the balance, a customer’s historical payment data, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. We recognize the probability of the collection for each customer and believe the amount of the balance as of June 30, 2015 could be collected and accordingly, based on a review of our outstanding balances, we did not record any allowance for doubtful accounts.

 

21
 

 

Inventories

 

Inventories consisted of raw materials, work-in-progress, finished goods, yew seedlings and other trees (consisting of larix, spruce and poplar trees). We classify our inventories based on our historical and anticipated levels of sales; any inventory in excess of its normal operating cycle of one year is classified as long-term on our 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 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 identify inventories that cannot be sold at all or can only be sold at deeply discounted prices. An allowance will be established if management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record reserves for the difference between the carrying cost and the estimated market value.

 

Our handicraft and yew furniture products are hand-made by traditional Chinese artisans.

 

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 use rights and yew forest assets

 

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 use rights and yew forest assets. This type of arrangement is common for the use of land in the PRC. Yew trees on land containing yew tree forests are 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 our cost of revenues.

 

Revenue recognition

 

We generate our revenue from sales of yew seedling products, sales of yew raw materials for medical application, sales of wood ear mushroom, 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.

 

22
 

 

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 February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1. Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities. 2. Eliminate the presumption that a general partner should consolidate a limited partnership. 3. Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. 4. Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The ASU will be effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

 

Currency exchange rates

 

Our functional currency is the U.S. dollar, and the functional currency of our operating subsidiaries and VIE 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.

 

23
 

 

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.

 

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:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2015   2014   2015   2014 
Revenues - third parties  $1,904,941   $1,780,535   $3,439,595   $3,394,253 
Revenues - related party   2,761,981    283,032    3,869,782    737,291 
Total revenues   4,666,922    2,063,567    7,309,377    4,131,544 
Cost of revenues - third parties   1,533,314    354,456    1,907,359    769,072 
Cost of revenues - related party   753,806    70,479    1,550,730    183,597 
Total cost of revenues   2,287,120    424,935    3,458,089    952,669 
Gross profit   2,379,802    1,638,632    3,851,288    3,178,875 
Operating expenses   484,475    221,022    956,541    388,418 
Income from operations   1,895,327    1,417,610    2,894,747    2,790,457 
Other income (expenses)   112,319    (139)   112,428    2,255 
Net income before income taxes   2,007,646    1,417,471    3,007,175    2,792,712 
Income taxes   (1,990)   -    (43,129)   - 
Net income   2,005,656    1,417,471    2,964,046    2,792,712 
Other comprehensive income:                    
Foreign currency translation adjustment   123,694    35,482    381,547    (222,486)
Comprehensive income  $2,129,350   $1,452,953   $3,345,593   $2,570,226 

 

Three and Six Months Ended June 30, 2015 Compared to Three and Six Months Ended June 30, 2014

 

Revenues

 

For the three months ended June 30, 2015, we had total revenues of $4,666,922, as compared to $2,063,567 for the three months ended June 30, 2014, an increase of $2,603,355 or 126.2%. The increase in total revenue was attributable to the increase in revenues from TCM raw materials and wood ear mushroom segment.

 

For the six months ended June 30, 2015, we had total revenues of $7,309,377, as compared to $4,131,544 for the six months ended June 30, 2014, an increase of $3,177,833 or 76.9%. The increase in total revenue for the six month ended June 30, 2015 as compared to June 30, 2014 was attributable to the increase in revenues from TCM raw materials and wood ear mushroom segment. Total revenue is summarized as follows:

 

   Three Months Ended 
June 30,
   Increase   Percentage 
   2015   2014   (Decrease)   Change 
TCM raw materials  $3,909,313   $1,150,855   $2,758,508    240%
Yew trees   344,919    872,437    (527,518)   (60)%
Wood ear mushroom   405,484    -    405,484    100%
Handicrafts   7,206    40,325    (33,119)   (82)%
Total  $4,666,922   $2,063,527   $2,603,355    126%

 

24
 

 

   Six Months Ended
June 30,
   Increase   Percentage 
   2015   2014   (Decrease)   Change 
TCM raw materials  $4,866,320   $2,194,785   $2,671,535    122%
Yew trees   1,043,671    1,836,743    (793,072)   (43)%
Wood ear mushroom   1,304,672    -    1,304,672    100%
Handicrafts   94,714    100,016    (5,302)   (5)%
Total  $7,309,377   $4,131,544   $3,177,833    77%

 

For the three months ended June 30, 2015 compared to June 30, 2014, the increase in revenue of TCM raw material was mainly attributable to the increase in demand from our related party, Yew Pharmaceutical, and a one-time sales of yew tree extracts. The decrease in revenue of yew tree was mainly attributable to the Company’s strategy adjustment to reserve more yew trees for future TCM raw materials sales and normal sales fluctuation. The decrease in revenue of handicrafts was mainly due to the decreased market demands with sales fluctuation. The Company started to sell wood ear mushroom in the last quarter of 2014 and therefore there is no comparable sales amount for the three months ended June 30, 2014.

 

For the six months ended June 30, 2015 compared to June 30, 2014, the increase in revenue of TCM raw material was mainly attributable to the increase in demand from our related party, Yew Pharmaceutical, and a one-time sales of yew tree extracts. The decrease in revenue of yew tree was mainly attributable to the Company’s strategy adjustment to reserve more yew trees for future TCM raw materials sales and normal sales fluctuation. The revenues of handicrafts were comparable for the six months ended June 30, 2015 and 2014. The Company started to sell wood ear mushroom in the last quarter of 2014 and therefore there is no comparable sales amount for the six months ended June 30, 2014.

 

Cost of Revenues

 

For the three months ended June 30, 2015, cost of revenues amounted to $2,287,120 as compared to $424,935 for the three months ended June 30, 2014, an increase of $1,862,185 or 438.2%. For the three months ended June 30, 2015, cost of revenues accounted for 49% of total revenues compared to 20.6% of total revenues for the three months ended June 30, 2014.

 

For the six months ended June 30, 2015, cost of revenues amounted to $3,458,089 as compared to $952,669 for the six months ended June 30, 2014, an increase of $2,505,420 or 263%. For the six months ended June 30, 2015, cost of revenues accounted for 47.3% of total revenues compared to 23.1% of total revenues for the six months ended June 30, 2014.

 

Cost of revenues by product categories is as follows:

 

   Three Months Ended
June 30,
   Increase   Percentage 
   2015   2014   (Decrease)   Change 
TCM raw materials  $1,847,197   $208,658   $1,638,539    785%
Yew trees   63,687    180,040    (116,353)   (65)%
Wood ear mushrooms   375,011    -    375,011    100%
Handicrafts   1,225    36,237    (35,012)   (97)%
Total  $2,287,120   $424,935   $1,862,185    438%

 

   Six Months Ended
June 30,
   Increase   Percentage 
   2015   2014   (Decrease)   Change 
TCM raw materials  $1,995,521   $440,998   $1,554,523    353%
Yew trees   308,536    429,371    (120,835)   (28)%
Wood ear mushrooms   1,138,914    -    1,138,914    100%
Handicrafts   15,118    82,300    (67,182)   (82)%
Total  $3,458,089   $952,669   $2,505,420    263%

 

The increase in our cost of revenues for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014 was primarily a result of the increase in costs of revenue in TCM raw materials and wood ear mushroom segment and offset by decrease in costs of revenue of yew tree and handicrafts segments.

 

The increase in cost of revenue in TCM raw material segment is attributable to the one-time sales of yew tree extracts and the increase in sales to our related party, Yew Pharmaceutical.

 

25
 

 

The decrease in cost of revenue in yew trees segment as compared to the three months ended June 30, 2014 was due to the decreased sales of yew trees.

 

We started to sell wood ear mushroom product in the fourth quarter of 2014, and therefore there were no comparative costs for the three months end June 30, 2015 and 2014.

 

The decrease in cost of revenue of handicrafts was attributable to the decrease of sales quantity in handicraft.

 

The increase in our cost of revenues for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014 was primarily a result of the increase in costs of revenue in TCM raw materials and wood ear mushroom segment and offset by decrease in costs of revenue of yew tree and handicrafts segments.

 

The increase in cost of revenue in TCM raw material segment is attributable to the one-time sales of yew tree extracts and the increase in sales volume to our related party, Yew Pharmaceutical.

 

The decrease in cost of revenue in yew trees segment as compared to the six months ended June 30, 2014 was due to the decreased sales of yew trees.

 

We started to sell wood ear mushroom product in the fourth quarter of 2014, and therefore there were no comparative costs for the three months end June 30, 2015 and 2014.

 

The decrease in cost of revenue of handicrafts was attributable to the decrease of sales quantity in handicraft, and the changes of sales product mix as we sold more handicrafts with higher unit selling price in the first quarter of 2015.

  

Gross Profit

 

For the three months ended June 30, 2015, gross profit was $2,379,802 as compared to $1,638,632 for the three months ended June 30, 2014, representing gross margins of 51.0% and 79.4%, respectively. For the six months ended June 30, 2015, gross profit was $3,851,288 as compared to $3,178,875 for the six months ended June 30, 2014, representing gross margins of 52.7% and 76.9%, respectively. Gross profit margins by categories were as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2014   (Decrease) Increase   2015   2014   (Decrease) Increase 
TCM raw materials   52.7%   81.9%   (29.2)%   59.0%   79.9%   (20.9)%
Yew trees   81.5%   79.4%   2.1%   70.4%   76.6%   (6.2)%
Wood ear mushrooms   7.5%   -%   7.5%   12.7%   -%   12.7%
Handicrafts   83.0%   10.1%   72.9%   84.0%   17.7%   66.3%
Total   51.0%   79.4%   (28.4)%   52.7%   76.9%   (24.2)%

 

The decrease in our overall gross profit margin for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014 was primarily attributable to the lower gross margin yield of wood ear mushroom segment, and the one-time yew tree extracts sales occurred in June, 2015.

 

The decrease in our gross margin percentage related to the sale of TCM raw materials for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014 was primarily attributable to the lower gross profit margin of the one-time sales of yew tree extracts.

 

The gross margin percentage related to the sale of yew trees and seedlings for the three months ended June 30, 2015 remains consistent as compared to the three months ended June 30, 2014.

 

The gross margin percentage related to the sale of wood ear mushroom for the three months ended June 30, 2015 was 7.7%. We started to sell wood ear mushroom product in the fourth quarter of 2014, and therefore there were no comparative gross profits for the three months ended June 30, 2014.

 

The increase in our gross margin percentage related to the sale of handicrafts for the three months ended June 30, 2015 was primarily attributable to the changes of sales product mix in handicrafts.

 

The decrease in our overall gross profit margin for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014 was primarily attributable to the lower gross margin yield of wood ear mushroom segment, , and the one-time yew tree extracts sales occurred in June, 2015.

 

26
 

 

The decrease in our gross margin percentage related to the sale of TCM raw materials for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014 was primarily attributable to the lower gross profit margin of the one-time sales of yew tree extracts.

 

The gross margin percentage related to the sale of yew trees and seedlings for the six months ended June 30, 2015 remains consistent as compared to the six months ended June 30, 2014.

 

The gross margin percentage related to the sale of wood ear mushroom for the six months ended June 30, 2015 was 12.8%. We started to sell wood ear mushroom product in the fourth quarter of 2014, and therefore there were no comparative gross profits for the six months ended June 30, 2014.

 

The increase in our gross margin percentage related to the sale of handicrafts for the six months ended June 30, 2015 was primarily attributable to the changes of sales product mix in handicrafts.

 

Selling Expenses

 

Selling expenses consisted of the following:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2015   2014   2015   2014 
Salary and related benefit  $4,480   $-   $8,343   $- 
Shipping and handling   -    338    -    1,471 
Other   4,595    323    5,420    950 
Total  $9,075   $661   $13,763   $2,421 

 

For the three months ended June 30, 2015, selling expenses were $9,075 as compared to $661 for the three months ended June 30, 2014, an increase of $8,414, or 1,272.9%. The increase in our selling expenses for the three months ended June 30, 2015 was primarily attributable to increase in salary and related benefit expenses and other miscellaneous expenses, partially offset by decrease in shipping and handling expenses.

 

For the six months ended June 30, 2015, selling expenses were $13,763 as compared to $2,421 for the six months ended June 30, 2014, an increase of $11,342, or 468.5%. The increase in our selling expenses for the six months ended June 30, 2015 was primarily attributable to increase in salary and related benefit expenses and other miscellaneous expenses, partially offset by decrease in shipping and handling expenses.

 

General and Administrative Expenses

 

For the three months ended June 30, 2015, general and administrative expenses amounted to $475,399, as compared to $220,361 for the three months ended June 30, 2014, an increase of $255,038, or 115.7%.

 

For the six months ended June 30, 2015, general and administrative expenses amounted to $942,777, as compared to $385,997 for the six months ended June 30, 2014, an increase of $556,780, or 144.2%.

 

General and administrative expenses consisted of the following:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2015   2014   2015   2014 
Compensation and related benefits  $200,490   $39,069   $537,660   $72,853 
Depreciation   27,208    34,400    54,330    69,606 
Travel and entertainment   14,508    22,850    32,318    27,000 
Professional fees   99,715    72,748    121,711    135,092 
Research and development   13,906    -    13,906    - 
Other   119,573    51,294    182,853    81,446 
Total  $475,400   $220,361   $942,778   $385,997 

 

27
 

 

The changes in general and administrative expenses for the three and six months ended June 30, 2015, as compared to the three and six months ended June 30, 2014, consisted of the following:

 

  For the three months ended June 30, 2015, compensation and related benefits increased by $161,421, or 413.2%, as compared to the three months ended June 30, 2014. For the six months ended June 30, 2015, compensation and related benefits increased by $464,807, or 638%, as compared to the six months ended June 30, 2014. The increase in compensation and related benefits is mainly attributable to increase in stock-based compensation associated with related cost of issuance.
   
For the three months ended June 30, 2015, depreciation decreased by $7,192, or 20.9%, as compared to the three months ended June 30, 2014. For the six months ended June 30, 2015, depreciation decreased by $15,276, or 21.9%, as compared to the six months ended June 30, 2014. The decrease was primarily attributable to decrease in depreciable assets with one of the automobiles fully depreciated on July, 2014. In addition, we disposed of partial of our fix assets in the fourth quarter of 2014.
   
For the three months ended June 30, 2015, travel and entertainment decreased by $8,342, or 36.5% as compared to the three months ended June 30, 2014. The decrease was due to the decreased needs for travelling. For the six months ended June 30, 2015, travel and entertainment increased by $5,318, or 19.7% as compared to the six months ended June 30, 2014. The increase was primarily attributable to increase in travels relating to business coordination in the first quarter of 2015.
   
Professional fees consisted primarily of legal, accounting, investor relations and other fees associated with being a public company in the United States. For the three months ended June 30, 2015, professional fees increased by $26,967, or 37.1%, as compared to the three months ended June 30, 2014. This increase was primarily attributable to the company engaged the service providers to improve the visibility of the company’s publicly traded stocks. For the six months ended June 30, 2015, professional fees decreased by $13,381, or 9.9%, as compared to the six months ended June 30, 2014. This decrease was primarily attributable to decrease in fees paid to professionals for filing and reporting requirements as we saw our business operation stabilized.
   
For the three months ended June 30, 2015, other miscellaneous general and administrative expenses increased by $68,279, or 133.1%, as compared to the three months ended June 30, 2014. For the six months ended June 30, 2015, other miscellaneous general and administrative expenses increased by $101,407, or 124.5%, as compared to the six months ended June 30, 2014. The increase was primarily attributable to associated cost of the Company’s new U.S. principal executive office that was established in California during the first quarter of 2015.

 

Income from Operations

 

For the three months ended June 30, 2015, income from operations was $1,895,327 as compared to income from operations of $1,417,610 for the three months ended June 30, 2014, an increase of $477,717, or 33.7%. The increase was primarily attributable to the increase in revenues from TCM raw materials and wood ear mushroom segments.

 

For the six months ended June 30, 2015, income from operations was $2,894,747 as compared to income from operations of $2,790,457 for the six months ended June 30, 2014, an increase of $104,290, or 3.7%. The increase was primarily attributable to the increase in revenues from TCM raw materials and wood ear mushroom segments.

 

Other Income

 

For the three months ended June 30, 2015, total other income amounted to $112,319 as compared to total other expense of $139 for the three months ended June 30, 2014. The increase was mainly attributable to the receipt of PRC government allowance for planting TCM raw materials.

 

For the six months ended June 30, 2015, total other income amounted to $112,428 as compared to total other income of $2,255 for the six months ended June 30, 2014. The increase is mainly attributable to the receipt of PRC government allowance for planting TCM raw materials.

 

Provision for Income Taxes

 

For the three months ended June 30, 2015, provision for income taxes amounted to $1,990 as compared to $0 for the three months ended June 30, 2014.

 

For the six months ended June 30, 2015, provision for income taxes amounted to $43,129 as compared to $0 for the six months ended June 30, 2014.

 

28
 

 

Net Income

 

As a result of the factors described above, our net income was $2,005,656 or $0.04 and $0.03 per share (basic and diluted, respectively), for the three months ended June 30, 2015, as compared to net income of $1,417,471 or $0.03 per share (basic and diluted), for the three months ended June 30, 2014. As a result of the factors described above, our net income was $2,964,046 or $0.06 and $0.05 per share (basic and diluted, respectively), for the six months ended June 30, 2015, as compared to net income of $2,792,712 or $0.06 and $0.04 per share (basic and diluted, respectively), for the six months ended June 30, 2014.

 

Foreign Currency Translation Adjustment

 

For the three months ended June 30, 2015, we reported an unrealized gain on foreign currency translation of $123,694, as compared to gain of $35,482 for the three months ended June 30, 2014. For the six months ended June 30, 2015, we reported an unrealized gain on foreign currency translation of $381,547, as compared to a loss of $222,486 for the six months ended June 30, 2014. The change reflects the effect of the value of the U.S. dollar in relation to the RMB. These gains 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 June 30, 2015, comprehensive income of $2,129,350 was derived from the sum of our net income of $2,005,656 and a foreign currency translation gain of $123,694. For the three months ended June 30, 2014, comprehensive income of $1,452,953 was derived from the sum of our net income of $1,417,471 and a foreign currency translation gain of $35,482.

 

For the six months ended June 30, 2015, comprehensive income of $3,345,593 was derived from the sum of our net income of $2,964,046 and a foreign currency translation gain of $381,547. For the six months ended June 30, 2014, comprehensive income of $2,570,226 was derived from the sum of our net income of $2,792,712 and a foreign currency translation loss of $222,486.

 

Segment Operations

 

For the three and six months ended June 30, 2015 as compared to the three and six months ended June 30, 2014, we operated in four reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials and yew tree extracts 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; (3) the handicrafts segment, consisting of the manufacture and sale of furniture and handicrafts made of yew timber; and (4) the wood ear mushroom segment, consisting of the sale of wood ear mushroom. Our reportable segments are strategic business units that offer different products. Compared with the three and six months ended June 30, 2015, there was no wood ear mushroom segment for the three and six month ended June 30, 2014. The four business segments are managed separately based on the fundamental differences in their operations. All of our operations except sales of yew tree extracts are conducted in the PRC.

 

Information with respect to these reportable business segments for the three months ended June 30, 2015 and 2014 was as follows:

 

   For the three months ended
June 30, 2015
   For the three months ended
June 30, 2014
 
   Revenues-
third party
   Revenues –
related party
   Total   Revenues-
third party
   Revenues –
related party
   Total 
Revenues                        
TCM raw materials  $1,552,816   $2,356,498   $3,909,314   $867,773   $283,032   $1,150,805 
Yew trees   344,919    -    344,919    872,437    -    872,437 
Handicrafts   7,206    -    7,206    40,325    -    40,325 
Wood ear mushroom   -    405,483    405,483    -    -    - 
Total revenues  $1,904,941   $2,761,981   $4,666,922   $1,780,535   $283,032   $2,063,537 
                               
Cost of Revenues                              
TCM raw materials  $1,468,402   $378,795   $1,847,197   $138,179   $70,479   $208,658 
Yew trees   63,687    -    63,687    180,040    -    180,040 
Handicrafts   1,225    -    1,225    36,237    -    36,237 
Wood ear mushroom   -    375,011    375,011    -    -    - 
Total cost of revenues  $1,533,314   $753,806   $2,287,120   $354,456   $70,479   $424,935 

 

29
 

 

Information with respect to these reportable business segments for the six months ended June 30, 2015 and 2014 was as follows:

 

   For the six months ended
June 30, 2015
   For the six months ended
June 30, 2014
 
   Revenues-
third party
   Revenues –
related party
   Total   Revenues-
third party
   Revenues –
related party
   Total 
Revenues:                        
TCM raw materials  $2,301,210   $2,565,110   $4,866,320   $1,457,493   $737,291   $2,194,784 
Yew trees   1,043,671    -    1,043,671    1,836,743    -    1,836,743 
Handicrafts   94,714    -    94,714    100,017    -    100,017 
Wood ear mushroom   -    1,304,672    1,304,672    -    -    - 
Total revenues  $3,439,595   $3,869,782   $7,309,377   $3,394,253   $737,291   $4,131,544 
                               
Cost of sales:                              
TCM raw materials  $1,583,705   $411,816   $1,995,521   $257,401   $183,597   $440,998 
Yew trees   308,536    -    308,536    429,371    -    429,371 
Handicrafts   15,118    -    15,118    82,300    -    82,300 
Wood ear mushroom   -    1,138,914    1,138,914    -    -    - 
Total cost of revenues  $1,907,359   $1,550,730   $3,458,089   $769,072   $183,597   $952,669 

 

TCM raw materials

 

During the three months ended June 30, 2015, we sold 9,000 kg of TCM raw materials as compared to 6,610 kg of TCM raw materials during the three months ended June 30, 2014, a 36.2% increase in sales volume primarily attributable to increase in sales volume to our related party, Yew Pharmaceutical.

 

During the six months ended June 30, 2015, we sold 12,880 kg of TCM raw materials as compared to 12,680 kg of TCM raw materials during the six months ended June 30, 2014, a 1.6% increase in sales volume primarily attributable to increase in sales volume to our related party, Yew Pharmaceutical, offset by decrease in sales volume to third-party customers.

 

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 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 the Heilongjiang Food and Drug Administration (the “HFDA”). Yew Pharmaceutical is also responsible for producing the finished product in accordance with 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.

 

For the three months ended June 30, 2015 and 2014, we had revenue of $2,356,498 and $283,032, respectively, from the sale of TCM raw materials to Yew Pharmaceutical. For the three months ended June 30, 2015 and 2014, revenue from the sale of TCM raw materials to third parties amounted to $1,552,816 and $867,773, respectively.

 

For the six months ended June 30, 2015 and 2014, we had revenue of $2,565,110 and $737,291, respectively, from the sale of TCM raw materials to Yew Pharmaceutical. For the six months ended June 30, 2015 and 2014, revenue from the sale of TCM raw materials to third parties amounted to $2,301,210 and $1,457,493, respectively.

  

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 primarily owned directly and indirectly by Mr. Wang and Madame Qi, respectively.

 

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.

 

Sales volume was summarized as follows:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2015   2014   2015   2014 
Sales volume - third parties (kg)   2,280    4,860    3,080    8,150 
Sales volume - related party (kg)   6,720    1,750    9,800    4,530 
Total sales volume   9,000    6,610    12,880    12,680 

 

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 we can sell 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.

 

30
 

 

Yew trees

 

During the three months ended June 30, 2015, we sold approximately 18,000 pieces of yew seedlings and trees as compared to approximately 51,000 pieces of yew seedlings and trees for the three months ended June 30, 2014, a decrease in volume of 64.7%.

 

During the six months ended June 30, 2015, we sold approximately 54,000 pieces of yew seedlings and trees, as compared to approximately 120,000 pieces of yew seedlings and trees for the six months ended June 30, 2014, a decrease in volume of 55.0%.

 

The decrease in revenue of yew tree for the three and six months ended June 30, 2015 was mainly attributable to the company’s strategy adjustment to reserve more yew trees for future TCM raw materials sales and normal sales fluctuation as compared to the three and six months ended June 30, 2014.

 

In connection with our entering into a land use agreement in July 2012 (the “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 began selling larix trees to customers during 2013. Spruce and poplar trees are used primarily as building materials. Since March 31, 2014, we began to sell spruce trees to customers and anticipate selling poplar trees in the next few years once these trees reach their maturities.

 

Wood ear mushrooms

 

During the three months ended June 30, 2015, we sold approximately 27,500 kg of wood ear mushroom in amount of $405,483 to our related party, Yew Pharmaceutical. During the six months ended June 30, 2015, we sold approximately 85,000 kg of wood ear mushroom in amount of $1,304,672 to our related party, Yew Pharmaceutical. As this is a newly introduced product category commenced during the fourth quarter of 2014, we expect to develop more customer resources and expand our wood ear sales in 2015.

 

Handicrafts

 

During the three months ended June 30, 2015 and 2014, revenue from the sale of handicrafts made from yew timber amounted to $7,206 and $40,325, respectively, decrease of $33,119, or 82.1%. The decrease in revenues of handicrafts was mainly due to the decreased market demands with sales. During the six months ended June 30, 2015 and 2014, revenue from the sale of handicrafts made from yew timber amounted to $94,714 and $100,017, respectively, decrease of $5,303, or 5.3%.

 

Starting in January 2013, we also began selling some of our more moderately-priced handicrafts on a television shopping program that is broadcast in Heilongjiang Province, of which Harbin is the capital.

 

We continued to evaluate the effectiveness and design of our selling efforts in the handicrafts segment which had included establishing the appropriate sales volume goals with our distributors to reach our desired sales volume of handicrafts.

 

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 June 30, 2015 and December 31, 2014, we had cash balances of $610,658 and $487,940, 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 use rights and yew forest assets. Additionally, we use cash for employee compensation and working capital.

  

The following table sets forth information as to the principal changes in the components of our working capital from December 31, 2014 to June 30, 2015:

 

       December 31, 2014 to 
June 30, 2015
 
Category  June 30,
2015
   December 31,
2014
   Change   Percentage change 
Current assets:                
Cash  $610,658   $487,940   $122,718    25.2%
Accounts receivable   2,236,486    922,564    1,313,922    142.4%
Accounts receivable – related party   975,562    340,132    635,430   186.8%
Inventories   3,509,414    1,443,078    2,066,336    143.2%
Prepaid expenses and other assets   2,003,906    16,791    1,987,115    11,834.4%
Prepaid expenses –  related party   126,731    5,787    120,944    2,089.9%
Current liabilities:                    
Accounts payable   427,165    -    427,165    100.0%
Accrued expenses and other payables   268,141    84,722    183,419    216.5%
Advances from customers   67,501    -    67,501    100.0%
Taxes payable   16,444    10,547    5,897    55.9%
Due to related parties   697,445    45,040    652,405    1,448.5%
Short-term borrowing   1,642,360    -    1,642,360    100.0%
Working capital:                    
Total current assets   9,462,757    3,216,292    6,246,465    194.2%
Total current liabilities   3,119,056    140,309    2,978,747    2,123.0%
Working capital  $6,343,701   $3,075,983   $3,267,718    106.2%

 

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Our working capital increased by $3,267,718 to $6,343,701 at June 30, 2015, from working capital of $3,075,983 at December 31, 2014. This increase in working capital is primarily attributable to:

 

an increase in accounts receivable of approximately $1,313,000
   
an increase in accounts inventories of approximately $2,066,000
   
an increase in prepaid expenses and other assets of approximately $1,987,000

 

partially offset by:

 

a decrease in accounts receivable – related party of approximately $635,000
   
an increase in due to related parties of approximately $652,000
   
an increase in short-term borrowing of approximately $1,642,000

 

For the six months ended June 30, 2015, net cash flow used in operating activities was $1,572,060, as compared to net cash flow provided by operating activities of $2,853,353 for the six months ended June 30, 2014, a decrease of $4,425,413. 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 are not necessarily identical with the comparable changes reflected on the balance sheets.

 

For the six months ended June 30, 2015, net cash flow used in operating activities of $1,572,060 was primarily attributable to:

 

net income of approximately $2,964,000 adjusted for the add-back of non-cash items, such as depreciation of approximately $76,000 and amortization of land use rights and yew forest assets of approximately $256,000, stock-based compensation of approximately $538,000, and issuance of common stock for professional service of approximately $13,000; and
   
the receipt of cash from operations from changes in operating assets and liabilities, such as an increase in accounts payable of approximately $427,000;

 

partially offset by:

 

the use of cash from changes in operating assets and liabilities, such as an increase in accounts receivable of approximately $1,301,000, an increase in prepaid and other current assets of approximately $1,979,000, and an increase in inventories of approximately $2,071,000.

  

For the six months ended June 30, 2014, net cash flow provided by operating activities of $2,853,353 was primarily attributable to:

 

net income of approximately $2,793,000 adjusted for the add-back of non-cash items, such as depreciation of approximately $92,000 and amortization of land use rights and yew forest assets of approximately $256,000, and
   
the receipt of cash from operations from changes in operating assets and liabilities, such as: a decrease in inventories of approximately $358,000, a decrease in accounts receivable – related parties of approximately $238,000.

 

partially offset by:

 

the use of cash from changes in operating assets and liabilities, such as an increase in accounts receivable of approximately $912,000.

 

Net cash flow used in investing activities was approximately $596,000 for the six months ended June 30, 2015. During the six months ended June 30, 2015, we have made payment in approximately $589,000 for land use right and yew forest assets. Net cash flow used in investing activities was approximately $3,751,000 for the six months ended June 30, 2014. During the six months ended June 30, 2014, we sold one of our property and equipment and received proceeds in approximately $5,000. We have also made payment in approximately $3,756,000 for land use right and yew forest assets.

 

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Net cash flow provided by financing activities was approximately $2,295,000 for the six months ended June 30, 2015 and consisted of proceeds of approximately $1,642,000 from bank loan and approximately $652,000 from our related parties. Net cash flow used in financing activities was approximately $24,000 for the six months ended June 30, 2014 and consisted of repayments for advance from our related parties.

 

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 sales 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., Zhiguo Wang, our President and CEO, advanced funds to us in the U.S. and we repaid the amounts 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 China’s State Administration of Foreign Exchange (“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. As of June 30, 2015 and December 31, 2014, approximately $37.3 million and $33.3 million, respectively, of our net assets are located in the PRC. If the foreign exchange control system in the PRC prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to transfer funds deposited within the PRC to fund working capital requirements in the U.S. or pay any dividends 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 June 30, 2015, 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  $583,484   $43,781   $94,039   $137,785   $307,879 
Total  $583,484   $43,781   $94,039   $137,785   $307,879 

 

Off-Balance Sheet Arrangements

 

We have not entered into any 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.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Currency Exchange Rates Risk

 

Substantially all of our operating revenues and expenses are denominated in RMB. We operate using RMB and the effects of foreign currency fluctuations are largely mitigated because local expenses in the PRC are also denominated in the same currency. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. Because we generally receive cash flows denominated in RMB, our exposure to foreign exchange risks should be limited.

 

Our assets and liabilities, of which the functional currency is the RMB, are translated into USD using the exchange rates in effect at the balance sheet date, resulting in translation adjustments that are reflected as cumulative translation adjustment in the shareholders’ equity section on our consolidated balance sheets. A portion of our net assets are impacted by changes in foreign currencies translation rates in relation to the U.S. dollar. We recorded a foreign currency translation gain of $381,547 and loss of $222,486 for the six months ended June 30, 2015 and 2014, respectively, to reflect the impact of the fluctuation of the RMB against the U.S. dollar.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of the RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China.

 

To the extent that we decide to convert RMB denominated cash amounts into U.S. dollars for the purpose of making any dividend payments, which we have not declared but may declare in the future, or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Conversely, if we need to convert U.S. dollars into RMB for operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount it received from the conversion. We have not used, and do not currently expect to use in the future, any forward contracts or currency borrowings to hedge exposure to foreign currency exchange risk. 

 

Interest Rate Risk

 

We have not been, nor do we currently anticipate being, exposed to material risks due to changes in interest rates because we do not have any consolidated debt.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures.

 

The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this report.

 

(b) Changes in Internal Control over Financial Reporting.

 

There have not been any changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on us or our business.

 

ITEM 1A. RISK FACTORS

 

No material change.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

The following exhibits are attached hereto and filed herewith:

 

31.1*  Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
    
31.2*  Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
    
32*  Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
101.INS**  XBRL Instance Document
    
101.SCH**  XBRL Taxonomy Extension Schema Document
    
101.CAL**  XBRL Taxonomy Extension Calculation Linkbase Document
    
101.DEF**  XBRL Taxonomy Extension Definition Linkbase Document
    
101.LAB**  XBRL Taxonomy Extension Label Linkbase Document
    
101.PRE**  XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

** Furnished herewith. XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

35
 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  YEW BIO-PHARM GROUP, INC.
   
Date: August 18, 2015 By: /s/ ZHIGUO WANG
    Zhiguo Wang
    Chief Financial Officer

 

36
 

 

EXHIBIT INDEX

 

Exhibit

Number

  Description of Exhibit
31.1*  Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
    
31.2*  Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
    
32*  Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
101.INS**  XBRL Instance Document
    
101.SCH**  XBRL Taxonomy Extension Schema Document
    
101.CAL**  XBRL Taxonomy Extension Calculation Linkbase Document
    
101.DEF**  XBRL Taxonomy Extension Definition Linkbase Document
    
101.LAB**  XBRL Taxonomy Extension Label Linkbase Document
    
101.PRE**  XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

** Furnished herewith. XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

37