Yew Bio-Pharm Group, Inc. - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED September 30, 2014

OR

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)

723 South Casino Center Blvd., Las Vegas, Nevada 89101

(Address of principal executive offices) (Zip Code)

(702) 487-4683

(Registrant’s telephone number, including area code)

294 Powerbilt Avenue, Las Vegas, Nevada 89148

(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  ☒ 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  ☒ No   ☐

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):

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

As of November 14, 2014, 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 NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

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:

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 15 of our Annual Report on Form 10-K for the year ended December 31, 2013.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

See notes to unaudited consolidated financial statements

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

See notes to unaudited consolidated financial statements

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See notes to unaudited consolidated financial statements

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

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, 2013 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, 2013.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2014, and the results of operations and cash flows for the nine-month period ended September 30, 2014 and 2013, have been made.

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

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

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:

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

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

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

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

As of September 30, 2014, the Company agreed to waive all management fees to be payable by HDS and the Company expects to waive such management fees in the near future due to a need of working capital in HDS to expand HDS’s operations.

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

YBP has no direct or indirect legal or equity ownership interest in HDS. However, through the Contractual Arrangements, the stockholders of HDS have assigned all their rights as stockholders, including voting rights and disposition rights of their equity interests in HDS to JSJ, our indirect, wholly-owned subsidiary. YBP is deemed to be the primary beneficiary of HDS and the financial statements of HDS are consolidated in the Company’s consolidated financial statements. At September 30, 2014 and December 31, 2013, the carrying amount and classification of the assets and liabilities in the Company’s balance sheets that relate to the Company’s variable interest in the VIE was as follows:

The assets and liabilities in the table above are held in HDS, the VIE. The creditors of HDS have legal recourse only to the assets of HDS and do not have such recourse to the Company. In addition, HDS’ assets are generally restricted only to pay such liabilities. Thus, the Company’s maximum legal exposure to loss related to the VIE is significantly less than the carrying value of the HDS assets due to outstanding intercompany liabilities. Restricted net assets of the VIE shall mean that amount of our proportionate share of net assets of HDS (after intercompany eliminations) which as of the end of the most recent fiscal year and most recent reporting balance sheet date may not be transferred to the parent company by the VIE in the form of loans, advances or cash dividends without the consent of a third party (e.g. lender, regulatory agency, foreign government).

NOTE 3 – INVENTORIES

Inventories consisted of raw materials, work-in-progress, finished goods-handicrafts, yew seedlings and other trees (consisting of larix, spruce and poplar trees). The Company classifies its inventories based on its historical and anticipated levels of sales; any inventory in excess of its normal operating cycle of one year is classified as long-term on its consolidated balance sheets. As of September 30, 2014 and December 31, 2013, inventories consisted of the following:

NOTE 4 – TAXES

(a) Federal Income Tax and Enterprise Income Taxes

The Company is registered in the State of Nevada and is subject to the United States federal income tax at a tax rate of 34%. No provision for income taxes in the U.S. has been made as the Company had no U.S. taxable income as of September 30, 2014 and December 31, 2013.

The Company’s subsidiary and VIE, JSJ and HDS, respectively, being incorporated in the PRC, are subject to PRC’s Enterprise Income Tax. Pursuant to the PRC Income Tax Laws, Enterprise Income Taxes (“EIT”) is generally imposed at 25%.

The table below summarizes the difference between the U.S. statutory federal tax rate and the Company’s effective tax rate for the three months and nine months ended September 30, 2014 and 2013:

Income before income tax expenses of $892,716 and $592,212 for the three months ended September 30, 2014 and 2013, respectively, and $3,685,428 and $2,857,232 for the nine months ended September 30, 2014 and 2013, respectively, was attributed to subsidiaries with operations in China. HDS and JSJ recorded no income tax expense for the three and nine months ended September 30, 2014 and 2013 due to the fact that HDS has been granted a tax exemption and has loss carry-forwards from previous years to offset income tax liability generated for handicraft sales and JSJ has been incurring net losses.

The combined effects of the income tax expense exemptions and tax reductions available to the Company for the three months and nine months ended September 30, 2014 and 2013 are as follows:

The deferred income tax assets or liabilities calculated pursuant to the EIT is not material due to the fact that the Company has been granted EIT exemption with respect to its yew raw materials and yew tree segments and is only subject to tax under the EIT for its handicrafts segment, which only represents a small portion of net revenues.

The Company has incurred net operating loss for income tax purposes for the three and nine months ended September 30, 2014 and 2013. The net operating loss carry-forwards for U.S. income tax purposes amounted to $3,472,742 and $3,258,426 at September 30, 2014 and December 31, 2013, respectively, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2033. Management believes that the realization of the benefits arising from this loss appear to be uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero at September 30, 2014 and December 31, 2013. The valuation allowance at September 30, 2014 and December 31, 2013 was $1,180,732 and $1,107,865, respectively. The net change in the valuation allowance was an increase of $34,953 and $14,340 during the three months ended September 30, 2014 and 2013, respectively. The net change in the valuation allowance was an increase of $72,867 and $82,595 during the nine months ended September 30, 2014 and 2013, 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 September 30, 2014 and December 31, 2013, are as follows:

For U.S. income tax purposes, the Company has cumulative undistributed earnings of foreign subsidiary and VIE of approximately $23.9 million and $20.1 million as of September 30, 2014 and December 31, 2013, 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.

(b) Value Added Taxes (“VAT”)

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

NOTE 5 – STOCKHOLDERS’ EQUITY

On December 13, 2012, the Company’s shareholders approved the issuance of stock purchase options (“Founders’ Options”) to the Company’s directors/officers (collectively, the “Founders”) and the Company issued the Founders’ Options to the Founders following such approval. The terms of each Founder’s Option are identical to each other except for the name of the optionee and the number of shares of the Company’s common stock subject to each Founder’s Option. The principal terms of the Founders’ Options include the following:

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”). Within the stock option agreement, each of the Optionees 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 and expires on August 1, 2018 from August 1, 2014, vesting commencement date. The options vest over a three-year time period from 8/1/2014, 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.

The number of shares of the Company’s common stock subject to above option plan is as follows:

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 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. The service provider will be providing promotional opportunities related to the Company business and disseminating research material to increase general awareness of the Company and its business to the public.

On July 22, 2014, the Company entered into a Consulting Agreement (the “Agreement”) with a consultant for a period of three years. Pursuant to the Agreement, the Company agreed to issue to the consultant 1,250,000 shares of its Rule 144 restricted common stock for the service period. The consultant will provide financing and certain consultation services to the Company.

A total of $321,387 was recognized for the share-based compensation expense for the nine months ended September 30, 2014.

There were no stock warrants issued, terminated/forfeited and exercised during the nine months ended September 30, 2014.

The following table summarizes the shares of the Company's common stock issuable upon exercise of options outstanding at September 30, 2014:

The aggregate intrinsic value amounted to $0 which is based upon the Company’s closing stock price of $0.11 as of September 30, 2014, which 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 three and nine months ended September 30, 2014 amounted to $5,657.

NOTE 6 – EARNINGS PER SHARE

ASC 260 “Earnings per Share,” requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of common shares issuable upon the confirmation of subscriptions for shares and common stock options (using the treasury stock method).

The following table presents a reconciliation of basic and diluted net income per share for the three and nine months ended September 30, 2014 and 2013:

NOTE 7 –  CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

Customers

For the three and nine months ended September 30, 2014 and 2013, customers accounting for 10% or more of the Company’s revenue were as follows:

The two largest customers accounted for 11% and 53% of the Company’s total outstanding accounts receivable at September 30, 2014 and 2013, respectively, of which Yew Pharmaceutical Co., Ltd., (“Yew Pharmaceutical”), a related party, accounted for 0% and 53% of total outstanding accounts receivable, respectively.

Suppliers

For the three and nine months ended September 30, 2014 and 2013, suppliers accounting for 10% or more of the Company’s purchase were as follows:

The three largest suppliers accounted for 86.2% of the Company’s total purchase for the nine months ended September 30, 2014 and the Company had $0 payable with these suppliers at September 30, 2014. 

For the three months ended September 30, 2013, the Company did not make any significant purchases. For the nine months ended September 30, 2013, two suppliers accounted for 100% of the Company’s purchases and the Company did not have any payable with these suppliers at September 30, 2013.

NOTE 8 – RELATED PARTY TRANSACTIONS

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

Cooperation and Development Agreement and Revenues from Related Party

On January 9, 2010, the Company entered into a Cooperation and Development Agreement (the “Development Agreement”) with Yew Pharmaceutical. Pursuant to the Development Agreement, for a period of ten years expiring on January 9, 2020, the Company shall supply cultivated yew raw materials to Yew Pharmaceutical that will be used by Yew Pharmaceutical to make traditional Chinese medicines and other pharmaceutical products, at price of RMB 1,000,000 (approximately $158,000) per metric ton.

For the three months ended September 30, 2014 and 2013, sales to Yew Pharmaceutical under the Development Agreement amounted to $565,832 and $88,706, respectively. For the nine months ended September 30, 2014 and 2013, sales to Yew Pharmaceutical under the Development Agreement amounted to $1,302,390 and $1,409,141, respectively.

At September 30, 2014 and December 31, 2013, the Company had $0 and $377,821 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 RMB 162,450 (approximately $26,000). The payment for the first five years of the ZTC Lease was due prior to December 31, 2010 and beginning in 2011, the Company is required to make full payment for the land use rights in advance for each subsequent five-year period. For the three months ended September 30, 2014 and 2013, rent expense related to the ZTC Lease amounted to $6,590 and $6,583, respectively. For the nine months ended September 30, 2014 and 2013, rent expense related to the ZTC Lease amounted to $19,810 and $19,583, respectively. At September 30, 2014 and December 31, 2013, prepaid rent to ZTC amounted to $13,194 and $33,212 which was included in prepaid expenses – related parties on the accompanying consolidated balance sheets.

On December 3, 2008, the Company entered into a lease for retail space in Harbin with Madame Qi (the “Store Lease”). Pursuant to the Store Lease, no payment was due for the first year and an annual payment of RMB12,000 (approximately $2,000) is due for each of the second and third years thereof. The term of the Store Lease is three years and expired on December 3, 2011. On November 15, 2011, the Company renewed the Store Lease. Pursuant to the renewed Store Lease, the annual rent is RMB15,600 (approximately $2,500) and the annual payment is due by May 30 of each year. The term of the renewed Store Lease is 3 years and expires on December 1, 2014. On December 31, 2013, the Company terminated the Store Lease. For the three months ended September 30, 2014 and 2013, rent expense related to the Store Lease amounted to $nil and $633, respectively.  For the nine months ended September 30, 2014 and 2013, rent expense related to the Store Lease amounted to $nil and $1,881, respectively. Since December 2012, the premises subject to the Store Lease have been used as warehouse space rather than retail space.

On January 1, 2010, the Company entered into a lease for office space with Mr. Wang (the “Office Lease”). Pursuant to the Office Lease, annual payments of 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 September 30, 2014 and 2013, rent expense related to the Office Lease amounted to $609 and $608, respectively. For the nine months ended September 30, 2014 and 2013, rent expense related to the Office Lease amounted to $1,829 and $1,808, 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. For the three months ended September 30, 2014 and 2013, rent expense related to the JSJ Lease amounted to $406 and $405, respectively. For the nine months ended September 30, 2014 and 2013, rent expense related to the JSJ Lease amounted to $1,219 and $1,205, respectively. At September 30, 2014 and December 31, 2013, prepaid rent to Mr. Wang amounted to $nil and $819, respectively, which was included in prepaid expenses - related parties on the accompanying consolidated balance sheets.

The principal executive offices of YBP are located at 294 Powerbilt Avenue, Las Vegas, Nevada, a property owned by the Company’s President, Zhiguo Wang, which he provides rent-free to the Company. However, the Company pays utilities, property insurance, real estate tax, association dues and certain other expenses on the property to third parties, which, in the three months ended September 30, 2014 and 2013, aggregated approximately $1,686 and $3, 762, respectively, and in the nine months ended September 30, 2014 and 2013, aggregated approximately $8,513 and $11,112, respectively. The space provided by Mr. Wang to use as principal executive offices is less than 500 square feet and a significant portion of the property is used by Mr. Wang for his personal use. The Company estimates that the market value of a gross and full service lease for an equivalent executive office rent in the same geographic area is approximately $800 to $1,000 per month. The landlord of a gross and full service lease typically would be responsible for paying utilities, property tax and insurance and other expenses associated with maintaining the property. However, the Company pays these expenses, as well as association dues, on behalf of Mr. Wang to third parties in lieu of making rent payments. The Company believes that the difference between the annual market rent for the space used by the Company and the amount the Company paid to third parties for expenses related to the property is not material.

At September 30, 2014 and December 31, 2013, the total prepaid rent for the above operating leases with related parties amounted to $12,788 and $34,031, respectively, which amount was included in prepaid expenses-related party on the accompanying consolidated balance sheets.

Loan Made to a Related Party

On January 15, 2014, the Company entered into a loan agreement with Yew Pharmaceutical pursuant to which, the Company agreed to lend Yew Pharmaceutical in the amount of RMB360,000 ($58,400). The proceeds of the loan would be utilized to purchase an inspection machinery and equipment. The acquired fixed asset would improve quality assurance of yew products and ensure the consistency of sales. Under the agreement, Yew Pharmaceutical, upon its final inspection of machinery and equipment, has four months to pay off the entire loan to the Company. The duration of the loan agreement starts from January 15, 2014 through May 15, 2014. As of September 30, 2014, the outstanding balance is $nil.

Due to Related Parties

The Company’s officers, directors and related parties, from time to time, provided advances to the Company for working capital purpose. These advances are short-term in nature, non-interest bearing, unsecured and payable on demand. The due to related parties amount at September 30, 2014 and December 31, 2013 was as follows:

Amount due to ZTC incurred in connection with acquisition of yew tree forests and land use right of underlying land.

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 September 30, 2014, Kairun has not yet completed the services provided for in the Technology Agreement and, therefore, no payment was made to Kairun.

Land Use Right Agreement

On November 15, 2013, Harbin Yew Science and Technology Development Co., Ltd. (“HDS”), the operating entity and wholly-owned subsidiary of Yew Bio-Pharm Group, Inc. (the “Company”), entered into a Forest and Land Use Right Acquisition Contract of Wuchang Erhexiang Pingfangdian Forestry Centre 15th Compartments (the “Contract”) with Heilongjiang Zishan Keji Gufen Limited Company (“ZKG”). Pursuant to the Contract, HDS acquired 2,565 mu of yew tree forests and land use right of the underlying land located at Wuchang Pingfangdian Forestry Centre in Helongjiang Province, PRC. The term of the contract is 38 years, through November 7, 2051. During the term of the Contract, HDS plans to harvest cut and replant the trees, sell the harvest cutting logs, promote the growth of the young trees accordingly, as well as plant yew trees of five years old or above based on the condition of the harvest cutting. Payments under the Contract total $7.8 million and $2.9 million was paid as of December 31, 2013. During the three months and nine months ended September 30, 2014, the Company paid $0.7 million and $4.5 million, leaving approximately $0.4 million unpaid.

NOTE 9 – STATUTORY RESERVES

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

The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. For the three months ended September 30, 2014 and 2013, the Company appropriated to the statutory surplus reserve in the amount of $128,732 and $63,772, respectively. For the nine months ended September 30, 2014 and 2013, the Company appropriated to the statutory surplus reserve in the amount of $419,818 and $311,256, respectively. The accumulated balance of the statutory reserve of the Company as of September 30, 2014 and December 31, 2013 was $3,016,936 and $2,597,118, respectively.

NOTE 10 – SEGMENT INFORMATION

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

During the three and nine months ended September 30, 2014 and 2013, the Company operated in three reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees, including potted miniature yew trees; and (3) the handicrafts segment, consisting of the manufacture and sale of handicrafts and furniture made of yew timber. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of the Company’s operations are conducted in the PRC.

Information with respect to these reportable business segments for the three and nine months ended September 30, 2014 and 2013 was as follows:

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

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

NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from contracts with Customers (Topic 606)”. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets”. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanged for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period”. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. The amendment in the ASU provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Earlier adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.

NOTE 12 – SUBSEQUENT EVENTS

On October 29, 2014, the Company organized under the laws of China a new subsidiary, Harbin Yew Food Co. LTD. (“HYF”), to develop and cultivate black fungus. HYF plans to operate three production lines to include black fungus polysaccharide, powder, tea and other packaged black fungus products. The move marks the Company's entrance into the organic food and functional beverage market. HYF will utilize an area of 10,000 square meters for black fungus production workshops, which includes 1,500 square meters of warehouses, a 500 square meter factory building and 600 square meters of laboratories and offices.

The following discussion of our consolidated results of operations for the three and nine months ended September 30, 2014 and 2013, and cash flows for the nine months ended September 30, 2014 and 2013, and consolidated financial conditions as of September 30, 2014 and December 31, 2013 should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this document.

Overview

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

For the three and nine months ended September 30, 2014 and 2013, we operated in three reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees, including potted miniature yew trees; and (3) the handicrafts segment, consisting of the manufacture and sale of furniture and handicrafts made of yew timber. Our reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of our operations are conducted in the PRC. We are located in Harbin, Heilongjiang Province, China.

For the three months ended September 30, 2014, revenues from the sale of TCM raw materials represented approximately 68.3% of consolidated revenue (including 33% of consolidated revenues from a related party); sale of yew trees represented approximately 30.2% of consolidated revenue; and the sale of handicrafts represented approximately 1.5% of consolidated revenue. For the three months ended September 30, 2013, revenues from the sale of TCM raw materials represented approximately 65.1% of consolidated revenue (including 5.7% of consolidated revenues from a related party); sale of yew trees represented approximately 29.1% of consolidated revenue; and the sale of handicrafts represented approximately 5.8% of consolidated revenue.

For the nine months ended September 30, 2014, revenues from the sale of TCM raw materials represented approximately 57.6% of consolidated revenue (including 22% of consolidated revenues from a related party); sale of yew trees represented approximately 40.3% of consolidated revenue; and the sale of handicrafts represented approximately 2.1% of consolidated revenue. For the nine months ended September 30, 2013, revenues from the sale of TCM raw materials represented approximately 58.2% of consolidated revenue (including 25.9% of consolidated revenues from a related party); sale of yew trees represented approximately 38.6% of consolidated revenue; and the sale of handicrafts represented approximately 3.2% of consolidated revenue.

All of YPB revenues were generated by HDS and in the PRC. YBP has no significant business operations in the U.S. as of the current reporting period. The expenses (approximately $216,458 and $243,000 for the nine months ended September 30, 2014 and 2013, respectively) incurred in the U.S. were primarily related to satisfy the reporting requirements of public listed company. At September 30, 2014, YBP has approximately $13,320 in cash and holds the 100% equity interests in its subsidiaries Yew HK and JSJ. Yew HK itself has no business operations or assets other than holding of equity interests in JSJ. JSJ has no business operations and assets with a book value of approximately $3,135, including approximately $3,135 in cash at September 30, 2014. JSJ also holds the VIE interests in HDS through the contractual arrangements (the “Contractual Arrangements”) described in Notes to Consolidated Financial Statements. In the event that we are unable to enforce the Contractual Agreements, we may not be able to exert effective control over HDS, and our ability to conduct our business may be materially and adversely affected. If the applicable PRC authorities invalidate our Contractual Agreements for any violation of PRC laws, rules and regulations, we would lose control of the VIE resulting in its deconsolidation in financial reporting and severe loss in our market valuation.

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, 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 the HDS pursuant to which we shall receive 100% of HDS’s net income. In accordance with these agreements, HDS shall pay consulting fees equal to 100% of its net income to our wholly-owned subsidiary, JSJ and JSJ shall supply the technology and administrative services needed to service the HDS.

The accounts of HDS are consolidated in the accompanying financial statements. As VIEs, HDS’ sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of HDS’ net income, and their assets and liabilities are included in our consolidated balance sheets. The VIEs do not have any non-controlling interest and, accordingly, we did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in HDS that 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 own subsidiary, is obligated to absorb a majority of the risk of loss from HDS activities and is entitled to receive a majority of HDS’s expected residual returns. In addition, HDS’s shareholders have pledged their equity interest in HDS to JSJ, irrevocably granted JSJ an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the equity interests in HDS and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by JSJ. Under the accounting guidance, we are deemed to be the primary beneficiary of HDS and the results of HDS’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 individual receivable balances, we consider many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. We recognize the probability of the collection for each customer and believe the amount of the balance as of September 30, 2014 could be collected and accordingly, based on a review of our outstanding balances, we did not record any allowance for doubtful accounts.

Inventories

Inventories consisted of raw materials, work-in-progress, finished goods-handicrafts, yew seedlings and other trees (consisting of larix, spruce and poplar trees). 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-handicraft and yew seedlings include direct materials, direct labor and an appropriate proportion of overhead.

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

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

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

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

Based on factors above, at September 30, 2014, we did not provide any inventory allowance and reserve.

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

Property and equipment

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

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 will be used to supply raw materials such as branches, leaves and fruit to us that will be used to manufacture our products. We amortize these land and yew forest use rights over the term of the respective land and yew forest use right, which ranges from 45 to 50 years. The lease agreements do not have any renewal option and we have no further obligations to the lessor. We record the amortization of these land and forest use rights as part of our cost of revenues.

Due from related parties

On January 15, 2014, the Company entered into a loan agreement with Yew Pharmaceutical pursuant to which, the Company agreed to lend Yew Pharmaceutical in amount of RMB 360,000 ($58,400). The proceeds of the loan would be utilized to purchase an inspection machinery and equipment. The acquired fixed asset would improve quality assurance of yew products and ensure the consistency of sales. Under the agreement, Yew Pharmaceutical, upon its final inspection of machinery and equipment, has four months to pay off the entire loan to the Company. The duration of the loan agreement starts from January 15, 2014 through May 15, 2014. As of September 30, 2014, the outstanding balance is $0.

Revenue recognition

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

Income taxes

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

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

Stock-based compensation

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

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

Recent accounting pronouncements

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

In August 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

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

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2013-02 is not expected to have a material impact on our consolidated financial statements.

In March 2013, the FASB issued ASU 2013-05 “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.”ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. These amendments provide that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on our 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 VIEs is the RMB. All of our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect our reported levels of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.

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

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

Recently enacted JOBS Act

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

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

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

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

Results of Operations

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

Three and Nine Months Ended September 30, 2014 Compared to Three and Nine Months Ended September 30, 2013

Revenues

Our revenues principally derived from sales of TCM raw materials used for remanufacturing and yew trees which consisted of sale of yew tree seedling and mature trees. For the three months ended September 30, 2014, we had total revenues of $1,700,924, as compared to $1,544,327 for the three months ended September 30, 2013, an increase of $156,597 or 10.10%. The increase in total revenue for the three months ended September 30, 2014 as compared to September 30, 2013 was attributable to increase in both TCM raw materials and the increase in Yew trees.

For the nine months ended September 30, 2014, we had total revenues of $5,832,468, as compared to $5,449,633 for the nine months ended September 30, 2013, an increase of $382,835 or 7%. The increase in total revenue for the nine months ended September 30, 2014 as compared to September 30, 2013 was attributable to increase in both TCM raw materials and the increase in Yew trees.

Total revenue is summarized as follows:

For the three month ended September 30, 2014 compared to September 30, 2013, the increase in revenue of TCM raw material was mainly attributable to the increase in unit selling price effective August 1, 2014. The increase in revenue of yew tree was mainly attributable to the growth of new market demand as we entered into additional distribution agreements with our regional distributors located in Shenzhen, China. In addition, we sold more yew trees cultivated from 2004 to 2008 with higher unit selling price due to steady yearly increase for the three months ended September 30, 2014 as compared to 2013, along with normal sales fluctuation. The decrease in revenue of handicrafts was due to the normal sales fluctuation and we expect the sales of handicrafts will increase in the fourth quarter of 2014.

For the nine months ended September 30, 2014 compared to September 30, 2013, the increase in revenue of TCM raw material was mainly attributable to the revenue increase during third quarter of 2014 as compared to 2013. The increase in revenue of yew tree was mainly attributable to the growth of new market demand as we entered into additional distribution agreements with our regional distributors located in Shenzhen, China. In addition, we sold more yew trees cultivated from 2004 to 2008 with higher unit selling price due to steady yearly increase for the nine months ended September 30, 2014 as compared to 2013, along with normal sales fluctuation. The decrease in revenue of handicrafts was due to sales decrease during third quarter of 2014 and we expect the sales of handicrafts to increase in the fourth quarter of 2014.  

Cost of Revenues

Our cost of revenues is mainly influenced by the costs of TCM raw materials and yew tree segments. For the three months ended September 30, 2014, cost of revenues amounted to $293,797 as compared to $638,228 for the three months ended September 30, 2013, a decrease of $344,431 or 54.0%. For the three months ended September 30, 2014, cost of revenues accounted for 17.3% of total revenues compared to 41.3% of total revenues for the three months ended September 30, 2013.

For the nine months ended September 30, 2014, cost of revenues amounted to $1,246,466 as compared to $1,722,419 for the nine months ended September 30, 2013, a decrease of $475,953 or 27.6%. For the nine months ended September 30, 2014, cost of revenues accounted for 21.4% of total revenues compared to 31.61% of total revenues for the nine months ended September 30, 2013.

Cost of revenues by product categories is as follows:

For the three months ended September 30, 2014, the decrease in our cost of revenues as compared to three month ended September 30, 2013 is primarily due to the decrease in cost of revenue of all product categories.

The decrease in cost of revenue of TCM raw materials segment is mainly attributable to higher unit cost TCM raw materials, remanufactured from yew trees in Qingshan plant during April, 2013, that were eventually depleted by the year ended 2013. In addition, the decrease in overall sales of TCM raw materials had reduced the overall cost of revenue for the three months ended September 30, 2014 as compared to 2013.

The decrease in cost of revenue of yew tree is attributable to the decrease in sales of yew trees. We sold more yew trees cultivated from 2004 to 2008 with higher unit selling price due to steady yearly increase, leading to the decrease of the cost of revenue while the sales revenue increases for the three months ended September 30, 2014 as compared to 2013

The decrease in cost of revenue in handicraft segment for the three months ended September 30, 2014 as compared to 2013 is primarily attributable to the decrease of the sales revenue as deemed to be normal sales fluctuation.

For the nine months ended September 30, 2014, the decrease in our cost of revenues as compared to nine months ended September 30, 2013 is primarily due to the decrease in cost of revenue of all product categories.

The decrease in cost of revenue of TCM raw materials segment is mainly attributable to higher unit cost TCM raw materials, remanufactured from yew trees in Qingshan plant during April, 2013, that were eventually depleted by the year ended 2013. In addition, the decrease in overall sales of TCM raw materials has also reduced the overall cost of revenue for the nine months ended September 30, 2014 as compared to 2013.

The decrease in cost of revenue of yew tree is mainly attributable to the decrease in sales of yew trees during third quarter of 2014. We sold more yew trees cultivated from 2004 to 2008 with higher unit selling price due to steady yearly increase, leading to the decrease of the cost revenue while the sales revenue increases for the nine months ended September 30, 2014 as compared to 2013

The decrease in cost of revenue in handicraft segment for the nine months ended September 30, 2014 as compared to 2013 is primarily attributable to the decrease of the sales revenue during third quarter of 2014 which deemed to be normal sales fluctuation.

Gross Profit

For the three months ended September 30, 2014, gross profit was $1,407,127 as compared to $906,099 for the three months ended September 30, 2013, representing gross margins of 82.7% and 58.7%, respectively. For the nine months ended September 30, 2014, gross profit was $4,586,002 as compared to $3,727,214 for the nine months ended September 30, 2013, representing gross margins of 78.6% and 68.4%, respectively. Gross profit margins by categories were as follows:

For the three months ended September 30, 2014, our overall gross profit margin had increased as compared to overall gross profit margin for the three month ended September 30, 2013 primarily attributable to increase in profit margin of all product categories.

Our gross margin percentage of TCM raw materials had increased for the three months ended September 30, 2014 is primarily attributable to increase in revenue along with decrease in cost of revenue which resulted from depletion of remanufactured yew trees in Qingshan plant towards the end of 2013, along with the sales volume decrease during third quarter of 2014. In addition, we had a general increase in unit selling price of TCM raw materials effective August 1, 2014.

Our gross margin percentage of yew trees had increased primarily attributable to changes in sales product mix. We sold more yew trees cultivated from 2004 to 2008 that yielded lower unit cost with higher unit selling price for the three months ended September 30, 2014 as compared to 2013.

Our gross margin percentage of handicrafts had increased primarily attributable to the changes in sales product mix. We sold higher gross margin handicrafts for the three months ended September 30, 2014.

For the nine months ended September 30, 2014, our overall gross profit margin had increased as compared to overall gross profit margin for the nine month ended September 30, 2013 primarily attributable to increase in profit margin of all product categories.

Our gross margin percentage of TCM raw materials had increased for the nine months ended September 30, 2014 is primarily attributable to increase in revenue along with decrease in cost of revenue which resulted from depletion of remanufactured yew trees in Qingshan plant towards the end of 2013, along with the sales volume decrease for the nine months ended September 30, 2014. In addition, we had a general increase in unit selling price of TCM raw materials effective August 1, 2014.

Our gross margin percentage of yew trees had increased primarily attributable to the increase in third quarter of 2014. We sold more yew trees cultivated from 2004 to 2008 that yielded lower unit cost with higher unit selling price in third quarter which results the overall increase of gross margin for the nine months ended September 30, 2014 as compared to 2013.

Our gross margin percentage of handicrafts had increased primarily attributable to the changes in sales product mix. We sold handicrafts that yielded higher gross margin during the third quarter of 2014, leading to higher gross margin for the nine months ended September 30, 2014.

Selling Expenses

Selling expenses consisted of the following:

For the three months ended September 30, 2014, total selling expense was $6,973 as compared to $7,356 for the three months ended September 30, 2013, a decrease of $383 or 5.2%. The changes remained consistent as compared to prior period.

For the nine months ended September 30, 2014, selling expenses were $9,394 as compared to $19,049 for the nine months ended September 30, 2013, a decrease of $9,655, or 50.7%. The decrease in our selling expenses for the nine months ended September 30, 2014 was primarily attributable to decrease in salary and related benefit which we expect to increase in the fourth quarter.

General and Administrative Expenses

For the three months ended September 30, 2014, general and administrative expenses amounted to $506,566, as compared to $308,611 for the three months ended September 30, 2013, an increase of $197,955, or 64.1%.

For the nine months ended September 30, 2014, general and administrative expenses amounted to $892,563, as compared to $852,480 for the nine months ended September 30, 2013, an increase of $40,083, or 4.7%.

General and administrative expenses consisted of the following:

The increase in our general and administrative expenses for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, is primarily attributable to increase in compensation and related benefits.

The increase in our general and administrative expenses for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013 is primarily attributable to increase in compensation and related benefits.

The changes in general and administrative expenses for the three and nine months ended September 30, 2014, as compared to the three and nine months ended September 30, 2013, consisted of the following:

Income from Operations

For the three months ended September 30, 2014, income from operations was $893,588, as compared to income from operations of $590,132 for the three months ended September 30, 2013, an increase of $303,456, or 51.4%. The increase was primarily attributable to increase in overall revenues along with decrease in cost of revenues.

For the nine months ended September 30, 2014, income from operations was $3,684,045, as compared to income from operations of $2,855,685 for the nine months ended September 30, 2013, an increase of $828,360, or 29%. The increase was primarily attributable to increase in overall revenues along with decrease in cost of revenues.

Other Income (Expenses)

For the three months ended September 30, 2014, total other expense was $872 as compared to total other income of $2,080 for the three months ended September 30, 2013. For the nine months ended September 30, 2013, total other income was $1,383 as compared to total other income of $1,547 for the nine months ended September 30, 2013.

Net Income

As a result of the factors described above, our net income was $892,716 or $0.02 per share (basic and diluted), for the three months ended September 30, 2014, as compared to net income of $592,212 or $0.01 per share (basic and diluted), for the three months ended September 30, 2013. Our net income was $3,685,428, or $0.07 per basic and $0.06 per diluted share, for the nine months ended September 30, 2014, as compared to net income of $2,857,232, or $0.06 per share (basic and diluted), for the nine months ended September 30, 2013.

Foreign Currency Translation Adjustment

For the three months ended September 30, 2014, we reported an unrealized gain on foreign currency translation of $10,560, as compared to $180,344 for the three months ended September 30, 2013. For the nine months ended September 30, 2014, we reported an unrealized loss on foreign currency translation of $211,926, as compared to unrealized gain of $777,867 for the nine months ended September 30, 2013. 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 September 30, 2014, comprehensive income of $903,276 was derived from the sum of our net income of $892,716 plus a foreign currency translation gain of $10,560. For the three months ended September 30, 2013, comprehensive income of $772,556 was derived from the sum of our net income of $592,212 plus a foreign currency translation gain of $180,344.

For the nine months ended September 30, 2014, comprehensive income of $3,473,502 was derived from the sum of our net income of $3,685,428 offset with foreign currency translation loss of $211,926. For the nine months ended September 30, 2013, comprehensive income of $3,635,099 was derived from the sum of our net income of $2,857,232 plus a foreign currency translation gain of $777,867.

Segment Information

For the three and nine months ended September 30, 2014 and 2013, we operated in three reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees, including potted miniature yew trees; and (3) the handicrafts segment, consisting of the manufacture and sale of furniture and handicrafts made of yew timber. Our reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of our operations are conducted in the PRC.

Information with respect to these reportable business segments for the three months ended September 30, 2014 and 2013 was as follows:

Information with respect to these reportable business segments for the nine months ended September 30, 2014 and 2013 was as follows:

TCM raw materials

During the three months ended September 30, 2014, we sold 5,115 kg of TCM raw materials as compared to 5,681 kg of TCM raw materials during the three months ended September 30, 2013, an approximate decrease of 10% in sales volume primarily attributable to decrease in sales volume to our third party and partially offset by the increase in sales volume to our related party, Yew Pharmaceutical. Although the overall sales volume had decreased, we had a general increase of the unit selling price effective August 1, 2014 which had increased the total sales revenue for the three months ended September 30, 2014.

During the nine months ended September 30, 2014, we sold 17,795 kg of TCM raw materials as compared to 18,888 kg of TCM raw materials during the nine months ended September 30, 2013, a 5.8% decrease in sales volume primarily attributable to decrease in sales volume to our related party, and partially offset by the increase in sales volume to third party, Yew Pharmaceutical. Although the overall sales volume had decreased, we had a general increase of the unit selling price effective August 1, 2014 which had increased the total sales revenue for the nine months ended September 30, 2014.

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.

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

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.

For the three months ended September 30, 2014 and 2013, we had revenue of $565,099 and $88,706, respectively, from the sale of TCM raw materials to Yew Pharmaceutical, an increase of $476,393 or 537%. For the nine months ended September 30, 2014 and 2013, we had revenue of $1,302,390 and $1,409,141, respectively, from the sale of TCM raw materials to Yew Pharmaceutical, a decrease of $106,751 or 7.6%.

Revenue generated from related party, Yew Pharmaceutical, had increased for the three months ended September 30, 2014 due to increase of sales volume derived from normal sales fluctuation along with increase in unit selling price. For the nine months ended September 30, 2014, revenue generated from related party, Yew Pharmaceutical, had decrease due to decrease in overall sales volume.

For the three months ended September 30, 2014 and 2013, revenue from the sale of TCM raw materials to third parties amounted to $596,739 and $916,617, respectively, a decrease in $319,878 or 34.9%. For the nine months ended September 30, 2014 and 2013, revenue from the sale of TCM raw materials to third parties amounted to $2,054,232 and $1,762,673, respectively, an increase of $291,559 or 16.5%.

Revenue generated from sales of TCM raw materials to third party customers decreased during the three months ended September 30, 2014 as compared to 2013 is primarily attributable to the decrease of sales volume, which is normal sales fluctuation.

Revenue generated from sales of TCM raw materials to third party customers increased during the nine months ended September 30, 2014 as compared to 2013 is primarily attributable to the increase of sales volume which is normal sales fluctuation, along with the general increase of unit selling price.

Sales volume was summarized as follows:

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.

Yew trees

During the three months ended September 30, 2014, we sold approximately 32,000 pieces of yew seedlings and trees as compared to approximately 144,000 pieces of yew seedlings and trees for the three months ended September 30, 2013, a decrease in volume of 77.8%.

During the nine months ended September 30, 2014, we sold approximately 152,000 pieces of yew seedlings and trees, as compared to approximately 362,000 pieces of yew seedlings and trees for the nine months ended September 30, 2013, a decrease in volume of 58.0%.

The decrease in cost of revenue of yew tree is attributable to decrease of sales volume for the three and nine months ended September 30, 2014 which derived from normal changes of sales product mix. We sold more yew trees cultivated from 2004 to 2008 that yielded lower unit cost with higher unit selling price.

In connection with us entering into a land use agreement in July 2012 (the “Fuye Field Agreement”), we acquired more than 80,000 tree – which were not yew trees – located on the property. These trees consisted of approximately 20,000 larix, 56,700 spruce and 3,700 poplar trees. Latrix trees are used primarily in landscaping and we expect to start selling larix trees in the next few years. Spruce and poplar trees are used primarily as building materials. Since March 31, 2014, we had begun to sell spruce trees to customers and anticipate selling poplar trees in the next few years once these trees reach their maturities.

Handicrafts

For the three months ended September 30, 2014, revenue from sale of handicrafts manufactured from yew timber amounted to $24,956 as compared to $90,194 for the three months ended September 30, 2013, a decrease of $65,238 or 72.3%. For the nine months ended September 30, 2014, revenue from sale of handicrafts manufactured from yew timber amounted to $124,972 as compared to $175,402 for the nine months ended September 30, 2013, a decrease of $50,430 or 28.8%. The decrease in revenue of handicrafts was due to decrease in sales and we expect the sales of handicrafts will increase in the fourth quarter of 2014.

We continued to actively market our handicraft products during the nine months ended September 30, 2014 and engage qualified and reputed first and second tier distributors to increase our handicraft sales.

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 September 30, 2014 and December 31, 2013, we had cash balances of $120,118 and $1,159,611, 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, 2013 to September 30, 2014:

Our working capital increased by $4,981,377 to $3,065,917 at September 30, 2014, from working capital of $(1,915,460) at December 31, 2013. This increase in working capital is primarily attributable to:

Partially offset by:

For the nine months ended September 30, 2014, net cash flow provided by operating activities was $3,495,168, as compared to net cash flow provided by operating activities of $1,435,536 for the nine months ended September 30, 2013, an increase of $2,059,632. 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 nine months ended September 30, 2014, net cash flow provided by operating activities of $3,459,168 is primarily attributable to:

Partially offset by:

For the nine months ended September 30, 2013, net cash flow provided by operating activities of $1,435,536 is primarily attributable to:

Partially offset by:

Net cash flow used in investing activities was approximately $4,501,000 for the nine months ended September 30, 2014. During the nine months ended September 30, 2014, we sold one of our property and equipment and received proceeds in approximately $5,000. We had also made payment in approximately $4,503,000 for land use right and yew forest assets. Net cash flow used in investing activities was approximately $731,000 for the nine months ended September 30, 2013. During the nine months ended September 30, 2013, we spent approximately $218,000 on purchase of property and equipment and made payments for yew forest assets of approximately $514,000.

Net cash flow used in financing activities was approximately $25,000 for the nine months ended September 30, 2014 and consisted of repayments for advance from our related parties in approximate amount of $600 and primarily offset by repayment for advances for related parties in approximate amount of $26,000. During the nine months ended September 30, 2013, we did not have any financing activity.

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 a series of offerings and sales of our common stock. Except for the portion used to pay for professional and other expenses in the United States, 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 United States, Zhiguo Wang, our President and CEO, advanced funds to us in the United States 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 September 30, 2014 and December 31, 2013, approximately $32.8 million and $25.7 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 September 30, 2014, and the effect these obligations are expected to have on our liquidity and cash flows in future periods:

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.

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 loss of $211,926 and gain of $777,867 for the nine months ended September 30, 2014 and 2013, 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.

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. 

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 September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

As a “small reporting company”, we are not required to provide this information.

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

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”). Within the stock option agreement, each of the Optionees 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 and expires on August 1, 2018 from August 1, 2014, vesting commencement date. The options vest over a three-year time period from grant date, 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 July 21, 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 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. The service provider will be providing promotional opportunities related to the Company business and disseminating research material to increase general awareness of the Company and its business to the public.

On July 22, 2014, the Company entered into a Consulting Agreement (the “Agreement”) with a consultant for a period of three years. Pursuant to the Agreement, the Company agreed to issue to the consultant 1,250,000 shares of its Rule 144 restricted common stock for the service period. The consultant will provide financing and certain consultation services to the Company.

We relied upon Section 4(2) and Regulation D of the Securities Act of 1933, as amended, for the issuances of the securities listed above. Where appropriate each prospective investor was given the Company’s Form 10, Form 10-Q and Forms 8-k previously filed with the SEC. These filings included all material aspects of an investment in us, including the business, management, offering details, risk factors and consolidated financial statements. It is the belief of management that each of the individuals who invested has such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the investment and therefore did not need the protections offered by registering their shares under Securities and Act of 1933, as amended. Each investor completed a Stock Purchase Agreement and/or Subscription Agreement whereby the investors certified that they were purchasing the shares for their own accounts, with investment intent. This offering was not accompanied by general advertisement or general solicitation and the share certificates were issued with a Rule 144 restrictive legend. 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On October 29, 2014, the Company organized under the laws of China a new subsidiary, Harbin Yew Food Co. LTD. (“HYF”), to develop and cultivate black fungus. HYF plans to operate three production lines to include black fungus polysaccharide, powder, tea and other packaged black fungus products. The move marks the Company's entrance into the organic food and functional beverage market. HYF will utilize an area of 10,000 square meters for black fungus production workshops, which includes 1,500 square meters of warehouses, a 500 square meter factory building and 600 square meters of laboratories and offices.

Black fungus, also known as "Wood Ear" or "Cloud Ear" herb helps with health issues associated with the lungs, stomach and liver, according to the Institute of Chinese Medicine. Black fungus is rich in iron, protein, vitamins, polysaccharide, fiber, and other minerals, which often are used in Chinese cooking and traditional Chinese medicine.

ITEM 6. EXHIBITS

The following exhibits are attached hereto and filed herewith:

*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.

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.

Date: November 17, 2014

EXHIBIT INDEX

*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.

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