Yew Bio-Pharm Group, Inc. - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2015

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)

9460 Telstar Avenue, Suite 6

El Monte, California 91731

(Address of principal executive offices) (Zip Code)

(626) 401-9588

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ☒   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 15, 2015, there were 51,500,000 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, 2015

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 16 of our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the securities & Exchange Commission (“SEC”) on March 31, 2015.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS 

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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, 2015

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

The accompanying unaudited interim 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 consolidated balance sheet as of December 31, 2014 was derived from the audited consolidated financial statements of Yew Bio-Pharm Group, Inc. (individually “YBP” and collectively with its subsidiaries and operating variable interest entity, the “Company”). The accompanying unaudited interim consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2014.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2015, and the results of operations and cash flows for the interim periods have been presented.

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

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

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

NOTE 2 – PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the financial statements of YBP, its subsidiaries, operating VIE in which the Company is the primary beneficiary, and VIE’s subsidiary. 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’ operations. Accordingly, HDS has been consolidated as a deemed subsidiary into YBP as a reporting company under ASC 810.

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

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

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

The Company is principally engaged in (1) processing and selling yew raw materials or yew extracts used in the manufacture of traditional Chinese medicine (“TCM”); (2) growing and selling yew tree seedlings and mature trees, including potted miniature yew trees; (3) manufacturing and selling furniture and handicrafts made of yew tree timber; (4) selling wood ear mushroom as finished goods; and (5) the others, mainly consisting of the transactions such as sale of yew candles in the third quarter of 2015. 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, 2015 and December 31, 2014, the carrying amount and classification of the assets and liabilities in the Company’s balance sheets that relate to the Company’s VIE and VIE’s subsidiary are as follows:

NOTE 3 – INVENTORIES

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

See Note 9 for inventories purchased from related parties. 

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, 2015 and December 31, 2014.

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

Income before income tax expenses of $942,485 and $892,716 for the three months ended September 30, 2015 and 2014, respectively, and $3,949,660 and $3,685,428 for the nine months ended September 30, 2015 and 2014, respectively, were attributed to subsidiaries and VIE with operations in China. JSJ and HYF recorded no income tax expense for the three and nine months ended September 30, 2015 and 2014 due to the fact that JSJ has been incurring net losses and HYF did not have any operation since its establishment. HDS recorded income tax expense of $4,071 and $47,200 for the three and nine months ended September 30, 2015, respectively. HDS recorded no income tax expense for the three and nine months ended September 30, 2014 due to the fact that HDS was granted a tax exemption and had loss carry-forwards from previous periods to offset income tax liability generated for handicrafts.

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

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, 2015 and 2014:

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

The Company incurred net operating losses for U.S. income tax purposes for the three and nine months ended September 30, 2015 and 2014. The net operating loss carry-forwards for U.S. income tax purposes amounted to $4,272,586 and $4,000,246 at September 30, 2015 and December 31, 2014, respectively, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2035. Management believes that the realization of the benefits arising from this loss appear to be uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero at September 30, 2015 and December 31, 2014. The valuation allowance at September 30, 2015 and December 31, 2014 was $1,452,679 and $1,360,084, respectively. The net change in the valuation allowance was an increase of $294,477 and an increase of $34,953 during the three months ended September 30, 2015 and 2014, respectively. The net change in the valuation allowance was an increase of $92,595 and an increase of $72,867 during the nine months ended September 30, 2015 and 2014, respectively. Management reviews this valuation allowance periodically and makes adjustments as necessary.

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

For U.S. income tax purposes, the Company has cumulative undistributed earnings of foreign subsidiary and VIE of approximately $29.6 million and $24.7 million as of September 30, 2015 and December 31, 2014, respectively, which are included in consolidated retained earnings and will continue to be indefinitely reinvested in overseas operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted to the U.S. in the future.

(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. 

In the third quarter of 2015, the Company started to sell yew candles to outside mainland China, in which case VAT regulations in the PRC allows an exemption of VAT output and at the same time, all the VAT input would be refunded. As of September 30, 2015 and December 31, 2014, VAT recoverables were $1,072,052 and zero, respectively.

NOTE 5 – SHORT-TERM BORROWINGS

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

NOTE 6 – STOCKHOLDERS’ EQUITY

(a) Common Stock

On July 22, 2014, the Company entered into a Service Provider Agreement (the “SPA”) with a service provider to commence service on July 22, 2014 for a period of three years. Pursuant to the SPA, the Company agreed to issue to the service provider 1,250,000 shares of its Rule 144 restricted common stock for the service period. The shares are payable in 875,000 shares of its restricted common stock on or before July 22, 2014 for the first year of service under the SPA and 375,000 shares of its restricted common stock to be issued on or before July 22, 2015, for the second and third year of service under the SPA. For the nine months ended September 30, 2015, a total of $65,856 was expensed under the SPA. 

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 would provide financing and certain consultation services to the Company. The fair value of these common shares was determined to be $187,500 and was fully recognized upon the share issuance. On August 24, 2015, the Company signed a mutual rescission agreement with the consultant to rescind the Agreement. To execute the rescission, the Company shall cancel the 1,250,000 shares of the restricted common stock, and re-issue 625,000 shares of its Rule 144 restricted common stock as a settlement. Pursuant to the mutual rescission agreement, the Company reversed $62,500 compensation expense in the nine months ended September 30, 2015.

(b) Stock Options

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

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

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

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

As of September 30, 2015, the Company's outstanding stock options and exercisable stock options had no intrinsic value, based upon the Company's closing stock price of $0.13. Stock option expense recognized during the nine months ended September 30, 2015 amounted to $800,954.

NOTE 7 – EARNINGS PER SHARE 

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

NOTE 8 – CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

Customers

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

For the three and nine months ended September 30, 2015, three largest customers accounted for 78% and 84% of the Company's total sales, respectively. The Company did not have any receivable balance due from these customers as of September 30, 2015.

For the three and nine months ended September 30, 2014, the three largest customers accounted for 33% and 41% of the Company's total sales, respectively. The Company did not have any receivable balance due from these customers as of September 30, 2014.

Suppliers

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

For the three and nine months ended September 30, 2015, three largest suppliers accounted for 92% and 85% of the Company’s purchases, respectively, and accounted for 98% of the Company’s payable balance as of September 30, 2015. 

For the three and nine months ended September 30, 2014, the three largest suppliers accounted for 100% and 86.2% of the Company’s total purchases, respectively, and the Company did not have any payable balance due to these suppliers as of September 30, 2014.

Some of the customers and suppliers listed above are related parties. See Note 9 for related party transactions.

NOTE 9 – RELATED PARTY TRANSACTIONS

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

Transactions with Yew Pharmaceutical

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

For the three months ended September 30, 2015 and 2014, sales to Yew Pharmaceutical under the above agreements amounted to $2,999,203 and $565,099, respectively. For the nine months ended September 30, 2015 and 2014, sales to Yew Pharmaceutical under the above agreements amounted to $6,868,985 and $1,302,390, respectively.

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

During the three months ended September 30, 2015, the Company entered into a series of agreements with Yew Pharmaceutical to purchase yew candles and pine needle extract. For the three months ended September 30, 2015, purchase of inventories from Yew Pharmaceutical amounted to $5,466,865, with $3,516,529 inventory balance remained as of the end of the reporting period. As of September 30, 2015, the Company had $1,480,698 accounts payable to Yew Pharmaceutical.

Operating Leases

On March 25, 2005, the Company entered into an Agreement for the Lease of Seedling Land with ZTC (the “ZTC Lease”). Pursuant to the ZTC Lease, the Company leased 361 mu of land from ZTC for a period of 30 years, expiring on March 24, 2035. Annual payments under the ZTC Lease are RMB162,450 (approximately $26,000). The payment for the first five years of the ZTC Lease was due prior to December 31, 2010 and beginning in 2011, the Company was required to make full payment for the land use rights in advance for each subsequent five-year period. For the three months ended September 30, 2015 and 2014, rent expense related to the ZTC Lease amounted to $6,489 and $6,590, respectively. For the nine months ended September 30, 2015 and 2014, rent expense related to the ZTC Lease amounted to $19,777 and $19,810, respectively. At September 30, 2015 and December 31, 2014, prepaid rent to ZTC amounted to $115,053 and $6,600, which was included in prepaid expenses – related parties on the accompanying unaudited consolidated balance sheets.

On January 1, 2010, the Company entered into a lease for office space with Mr. Wang (the “Office Lease”). Pursuant to the Office Lease, annual payments of RMB15,000 (approximately $2,000) are due for each of the term. The term of the Office Lease is 15 years and expires on December 31, 2025. For the three months ended September 30, 2015 and 2014, rent expense related to the Office Lease amounted to $599 and $609, respectively. For the nine months ended September 30, 2015 and 2014, rent expense related to the Office Lease amounted to $1,826 and $1,829, respectively. 

On July 1, 2012, the Company entered into a lease for office space with Mr. Wang (the “JSJ Lease”). Pursuant to the JSJ Lease, JSJ leases approximately 30 square meter of office space from Mr. Wang in Harbin. Rent under the JSJ Lease is RMB10,000 (approximately $1,600) annually. The term of the JSJ Lease is three years and expires on June 30, 2015. On July 1, 2015, the Company and Mr. Wang renewed the JSJ Lease. The renewed lease expires on June 30, 2018. For the three months ended September 30, 2015 and 2014, rent expense related to the JSJ Lease amounted to $399 and $406, respectively. For the nine months ended September 30, 2015 and 2014, rent expense related to the JSJ Lease amounted to $1,217 and $1,219, respectively.

On September 30, 2015 and December 31, 2014, the total prepaid rent for the above operating leases with related parties amounted to $115,053 and $5,787, respectively, which was included in prepaid expenses-related party on the accompanying unaudited consolidated balance sheets.

Due to Related Parties

The Company’s officers, directors and other related parties, from time to time, provided advances to the Company for working capital purpose. These advances are usually short-term in nature, non-interest bearing, unsecured and payable on demand. Due to Zhiguo Wang and other shareholders, excluding the borrowings from Madame Qi as disclosed below, amounted to $44,621 and $45,040 at September 30, 2015 and December 31, 2014, respectively.  

On May 15, 2015, the Company borrowed $648,000 from Madame Qi through the issuance of a subordinated promissory note. The note bears 2% interest per annum and shall be payable on or before November 15, 2015 (“Due Date”). Interest payment shall be made with principal on Due Date. On September 28, 2015, Madame Qi and the Company agreed to extend the Due Date to January 31, 2016, with the remaining terms of the note unchanged. As of September 30, 2015, the total borrowings including the interest were $652,900.

Due from Related Parties

During the nine months ended September 30, 2015, the Company transferred a LandRover car, with a net book value of RMB22,348 (approximately $3,500), to HBP for a consideration of RMB220,000 (approximately $35,000). As of September 30, 2015, HBP did not pay the consideration to the Company.

For the nine months ended September 30, 2015, Mr. Wang received advance payments of RMB101,200 (approximately $16,000) from the Company for traveling expenditures and made full repayment in October, 2015.

As of September 30, 2015, due from related parties resulted from the above transactions, net of amount due to Mr. Wang aforementioned, totaled $47,601.

Prepaid Expenses – Related Parties

During the nine months ended September 30, 2015, the Company made a payment of RMB1,615,000 (approximately $254,000) to ZTC for future purchase of yew seedlings. The seedlings have been delivered to the Company in October of 2015. As of September 30, 2015, prepaid expenses for the seedlings amounted to $254,179.

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, the Company entered into a supplemental agreement with Kairun, extending the term of the Technology Agreement indefinitely until project results specified in the original Technology Agreement have been achieved. Kairun is owned directly and indirectly primarily by Mr. Wang and Madame Qi. As of September 30, 2015, Kairun has not yet completed the services provided for in the Technology Agreement and, therefore, no payment was made to Kairun.  

NOTE 10 – GOVERNEMNT GRANT

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

NOTE 11 – STATUTORY RESERVES

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

The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. For the three months ended September 30, 2015 and 2014, the Company appropriated to the statutory surplus reserve in the amount of $128,459 and $128,732, respectively. For the nine months ended September 30, 2015 and 2014, the Company appropriated to the statutory surplus reserve in the amount of $493,732 and $419,818, respectively. The accumulated balance of the statutory reserve of the Company as of September 30, 2015 and December 31, 2014 was $3,594,628 and $3,100,766, respectively.

NOTE 12 – SEGMENT INFORMATION

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

For the three and nine months ended September 30, 2015, the Company operated in five reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials or yew tree extracts used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees, including potted miniature yew trees; (3) the handicrafts segment, consisting of the manufacture and sale of handicrafts and furniture made of yew timber; (4) the wood ear mushroom segment, consisting of the sale of wood ear mushroom; and (5) the others, mainly consisting of the transactions such as sale of yew candles in the third quarter of 2015. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of the Company’s operations except the sales of yew tree extracts are conducted in the PRC.

The Company operated in the TCM segment, yew tree segment, and handicrafts segment for the three and nine months ended September 30, 2014. The wood ear mushroom segment was established in the fourth quarter of 2014 and the others include transactions occurred in the third quarter of 2015.

Information with respect to these reportable business segments for the three and nine months ended September 30, 2015 and 2014 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 corporate level. In addition, the specified amounts for interest expense and income tax expense are not included in the measurement of segment profit or loss reviewed by the chief operating decision maker and these specified amounts are not regularly provided to the chief operating decision maker. Therefore, the Company has not disclosed interest expense and income tax expense for each reportable segment.

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

NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS

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

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

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

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

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

Overview

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

For the three and nine months ended September 30, 2015 as compared to three and nine months ended September 30, 2014, we operated in five reportable business segments: (1) the TCM raw materials segment, consisting of the production and sales of yew raw materials or yew tree extracts used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sales of yew tree seedlings and mature trees, including potted miniature yew trees; (3) the handicrafts segment, consisting of the manufacture and sales of furniture and handicrafts made of yew timber; (4) the wood ear mushroom segment, consisting of the sales of wood ear mushroom; and (5) the others, consisting of the sales of yew candle. Our reportable segments are strategic business units that offer different products. Compared with the three and nine months ended September 30, 2015, there were no wood ear mushroom and yew candle sales for the three and nine months ended September 30, 2014. The five business segments are managed separately based on the fundamental differences in their operations. All of our operations except the sales of yew tree extracts are conducted in the PRC. We are located in Harbin, Heilongjiang Province, China.

For the nine months ended September 30, 2015, revenues from the sales of TCM raw materials represented approximately 62.7% of consolidated revenue (including 44.0% of consolidated revenues from a related party); sales of yew trees represented approximately 9.3% of consolidated revenue; sales of wood ear mushroom represented approximately 11.7% of consolidated revenue; sales of handicrafts represented approximately 0.9% of consolidated revenue; and the sales of others represented approximately 15.5% of consolidated revenue. For the nine months ended September 30, 2014, revenues from the sales of TCM raw materials represented approximately 57.6% of consolidated revenue (including 22% of consolidated revenues from a related party); sales of yew trees represented approximately 40.3% of consolidated revenue; and the sales of handicrafts represented approximately 2.1% of consolidated revenue.

For the three months ended September 30, 2015, revenues from the sales of TCM raw materials represented approximately 56.9% of consolidated revenue (including 57% of consolidated revenues from a related party); sales of yew trees represented approximately 1.9% of consolidated revenue; sales of wood ear mushroom represented approximately 2.7% of consolidated revenue; sales of handicrafts represented approximately 0.3% of consolidated revenue; and the sales of others represented approximately 38.1% of consolidated revenue. For the three months ended September 30, 2014, revenues from the sales of TCM raw materials represented approximately 68.3% of consolidated revenue (including 33% of consolidated revenues from a related party); sales of yew trees represented approximately 30.2% of consolidated revenue; and the sales of handicrafts represented approximately 1.5% of consolidated revenue.

YBP’s revenues were mostly generated by HDS and in the PRC. YBP has no significant business operations in the U.S. for the current reporting period except for a one-time sales contract to sell yew tree extracts to a third party in Hong Kong, China. The expenses (approximately $1,052,160 and $216,458 for the nine months ended September 30, 2015 and 2014, respectively) incurred in the U.S. were primarily related to fulfilling the reporting requirements of public listed company, stock-based compensation, and other costs related to issuance of common stock for professional service. As of September 30, 2015, YBP had approximately $171,483 in cash and held the 100% equity interests in its subsidiaries Yew HK and JSJ. Yew HK itself has no business operations or assets other than holding of equity interests in JSJ. JSJ has no business operations and assets with a book value of approximately $3,139, including approximately $3,139 in cash at September 30, 2015. JSJ also holds the VIE interests in HDS through the contractual arrangements (the “Contractual Arrangements”) described in Notes to Consolidated Financial Statements. On November 4, 2014, HDS established a new subsidiary, Harbin Yew Food Co. LTD. (“HYF”), to develop and cultivate wood ear mushroom. As of September 30, 2015, Harbin Yew Food Co. Ltd., had no business operation yet. In the event that we are unable to enforce the Contractual Agreements, we may not be able to exert effective control over HDS and HYF, and our ability to conduct our business may be materially and adversely affected. If the applicable PRC authorities invalidate our Contractual Agreements for any violation of PRC laws, rules and regulations, we would lose control of the VIE and its subsidiary resulting in its deconsolidation in financial reporting and severe loss in our market valuation.

Critical accounting policies and estimates

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

Variable interest entities

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

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

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

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

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

Accounts receivable

Accounts receivable are presented net of an allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses. We review the accounts receivable balance on a periodic basis and make general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of an individual receivable balance, we consider many factors, including the age of the balance, a customer’s historical payment data, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. We recognize the probability of the collection for each customer and believe the amount of the balance as of September 30, 2015 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, yew seedlings and other trees (consisting of larix, spruce and poplar trees). We classify our inventories based on our historical and anticipated levels of sales; any inventory in excess of its normal operating cycle of one year is classified as long-term on our consolidated balance sheets. Inventories are stated at the lower of cost or market value utilizing the weighted average method. Raw materials primarily include yew timber used in the production of products such as handicrafts, furniture and other products containing yew timber. Finished goods and yew seedlings include direct materials, direct labor and an appropriate proportion of overhead.

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

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

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

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

Property and equipment

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

Land use rights and yew forest assets

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

Revenue recognition

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

Income taxes

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

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

Stock-based compensation

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

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

Recent accounting pronouncements

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

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

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

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

Currency exchange rates

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

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

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

Results of Operations

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

Three and Nine Months Ended September 30, 2015 Compared to Three and Nine Months Ended September 30, 2014

Revenues

For the three months ended September 30, 2015, we had total revenues of $4,997,201, as compared to $1,700,924 for the three months ended September 30, 2014, an increase of $3,296,277 or 193.8%. The increase in total revenue was attributable to the increase in revenues from TCM raw materials, wood ear mushroom and the others segment.

For the nine months ended September 30, 2015, we had total revenues of $12,306,578, as compared to $5,832,468 for the nine months ended September 30, 2014, an increase of $6,474,110 or 111%. The increase in total revenue for the nine month ended September 30, 2015 as compared to September 30, 2014 was attributable to the increase in revenues from TCM raw materials, wood ear mushroom and the others segment. Total revenue is summarized as follows:

For the three months ended September 30, 2015 compared to September 30, 2014, the increase in revenue of TCM raw material was mainly attributable to the increase in demand from our related party, Yew Pharmaceutical. The decrease in revenue of yew tree was mainly attributable to the Company’s strategy adjustment to reserve more yew trees for future TCM raw materials sales and normal sales fluctuation. The decrease in revenue of handicrafts was mainly due to the decreased market demands with sales fluctuation. The Company started to sell wood ear mushroom in the last quarter of 2014 and therefore there was no comparable sales amount for the three months ended September 30, 2014. The “Others” segment includes the sales of yew candles that the Company started to sell in the third quarter of 2015, and therefore there was no comparable sales amount for the three months ended September 30, 2014 as well.

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

Cost of Revenues

For the three months ended September 30, 2015, cost of revenues amounted to $3,578,043 as compared to $293,797 for the three months ended September 30, 2014, an increase of $3,284,246 or 1,117.9%. For the three months ended September 30, 2015, cost of revenues accounted for 71.6% of total revenues compared to 17.3% of total revenues for the three months ended September 30, 2014.

For the nine months ended September 30, 2015, cost of revenues amounted to $7,036,132 as compared to $1,246,466 for the nine months ended September 30, 2014, an increase of $5,789,666 or 464.5%. For the nine months ended September 30, 2015, cost of revenues accounted for 57.2% of total revenues compared to 21.4% of total revenues for the nine months ended September 30, 2014.

Cost of revenues by product categories is as follows:

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

The increase in cost of revenue in TCM raw material segment was mainly attributable to the increase in sales to our related party, Yew Pharmaceutical.  We also sold some TCM raw materials processed from the whole yew trees in PingShan plantation during the third quarter of 2015 that eventually increased the unit cost of TCM raw materials for the three months ended September 30, 2015. In addition, we temporally purchased some TCM raw materials from the third party supplier to fulfill the demands of our related party, Yew Pharmaceutical.

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

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

We started to sell yew candle product which is included in “Others” segment in the third quarter of 2015, and therefore there were no comparative costs for the three months end September 30, 2015 and 2014.

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

The increase in cost of revenue in TCM raw material segment were primarily attributable to the one-time sales of yew tree extracts and the increase in sales to our related party, Yew Pharmaceutical.  We also sold some TCM raw materials processed from the whole yew trees in PingShan plantation during the third quarter of 2015 that eventually increased the unit cost of our TCM raw materials. In addition, we temporally purchased some TCM raw materials from the third party supplier to fulfill the demands of our related party, Yew Pharmaceutical in the third quarter of 2015.

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

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

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

We started to sell yew candle product which is included in “Others” segment in the third quarter of 2015, and therefore there were no comparative costs for the three months end September 30, 2015 and 2014.

Gross Profit

For the three months ended September 30, 2015, gross profit was $1,419,158 as compared to $1,407,127 for the three months ended September 30, 2014, representing gross profit margins of 28.4% and 82.7%, respectively. For the nine months ended September 30, 2015, gross profit was $5,270,446 as compared to $4,586,002 for the nine months ended September 30, 2014, representing gross margins of 42.8% and 78.6%, respectively. Gross profit margins by categories were as follows:

The decrease in our overall gross profit margin for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 were primarily attributable to the lower gross margin yield of TCM raw materials and handicrafts.

The decrease in our gross profit margin related to the sale of TCM raw materials for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was primarily attributable to the sales of some TCM raw materials processed from the whole yew trees in PingShan plantation during the third quarter of 2015 that eventually decreased the gross profit margin of TCM raw materials for the three months ended September 30, 2015. In addition, we temporally purchased some TCM raw materials from the third party supplier to fulfill the demands of our related party, Yew Pharmaceutical, which also contributed lower gross profit margin for the three months ended September 30, 2015.

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

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

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

The gross margin percentage related to the sale of yew candle which is included in the “Others” segment for the three months ended September 30, 2015 was 3.4%. We started to sell yew candle product in the third quarter of 2015, and therefore there were no comparative gross profit margins for the three months ended September 30, 2015 and 2014.

The decrease in our overall gross profit margin for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 were primarily attributable to the lower gross margin yield of TCM raw materials.

The decrease in our gross margin percentage related to the sale of TCM raw materials for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 was primarily attributable to the lower gross profit margin of the one-time sales of yew tree extracts in June, 2015. Also, we sold some TCM raw materials processed from the whole yew trees in PingShan plantation during the third quarter of 2015 that eventually decreased the gross profit margin of TCM raw materials in the third quarter of 2015. In addition, we temporally purchased some TCM raw materials from the third party supplier to fulfill the demands of our related party, Yew Pharmaceutical in the third quarter of 2015 which also contributed lower gross profit margin of TCM raw materials for the nine months ended September 30, 2015.

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

The gross margin percentage related to the sale of wood ear mushroom for the nine months ended September 30, 2015 was 12.2%. We started to sell wood ear mushroom product in the fourth quarter of 2014, and therefore there were no comparative gross profit margins for the nine months ended September 30, 2015 and 2014.

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

The gross margin percentage related to the sale of yew candle which is included in the “Others” segment for the nine months ended September 30, 2015 was 3.4%. We started to sell yew candle product in the third quarter of 2015, and therefore there were no comparative gross profit margins for the three months ended September 30, 2015 and 2014.

Selling Expenses

Selling expenses consisted of the following:

For the three months ended September 30, 2015, selling expense was $10,013 as compared to $6,973 for the three months ended September 30, 2014, an increase of $3,040, or 43.6%. The increase in our selling expenses for the three months ended September 30, 2015 was primarily attributable to the increase of other miscellaneous expenses, partially offset by decrease in shipping and handling expenses and in salary and related benefit expenses.

For the nine months ended September 30, 2015, selling expense was $23,776 as compared to $9,394 for the nine months ended September 30, 2014, an increase of $14,382, or 153.1%. The increase in our selling expenses for the nine months ended September 30, 2015 was primarily attributable to increase in salary and related benefit expenses and other miscellaneous expenses, partially offset by decrease in shipping and handling expenses.

General and Administrative Expenses

For the three months ended September 30, 2015, general and administrative expenses amounted to $474,560, as compared to $506,566 for the three months ended September 30, 2014, a decrease of $32,006, or 6.3%.

For the nine months ended September 30, 2015, general and administrative expenses amounted to $1,417,338, as compared to $892,563 for the nine months ended September 30, 2014, an increase of $524,775, or 58.8%.

General and administrative expenses consisted of the following:

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

Income from Operations

For the three months ended September 30, 2015, income from operations was $934,585 as compared to income from operations of $893,588 for the three months ended September 30, 2014, an increase of $40,997, or 4.6%. The increase were primarily attributable to the increase in revenues from TCM raw materials, wood ear mushroom and others segment.

For the nine months ended September 30, 2015, income from operations was $3,829,332 as compared to income from operations of $3,684,045 for the nine months ended September 30, 2014, an increase of $145,287, or 3.9%. The increase were primarily attributable to the increase in revenues from TCM raw materials, wood ear mushroom and others segment.

Other Income

For the three months ended September 30, 2015, total other income amounted to $3,000 as compared to total other expense of $872 for the three months ended September 30, 2014. The increase was mainly attributable to the exchange gain generated from the normal business operations.

For the nine months ended September 30, 2015, total other income amounted to $115,428 as compared to total other income of $1,383 for the nine months ended September 30, 2014. The increase is mainly attributable to the receipt of PRC government subsidy for planting TCM raw materials.

Provision for Income Taxes

For the three months ended September 30, 2015, provision for income taxes amounted to $4,071 as compared to $0 for the three months ended September 30, 2014.

For the nine months ended September 30, 2015, provision for income taxes amounted to $47,200 as compared to $0 for the nine months ended September 30, 2014.

Net Income

As a result of the factors described above, our net income was $933,514 or $0.02 per share (basic and diluted), for the three months ended September 30, 2015, as compared to net income of $892,716 or $0.02 per share (basic and diluted), for the three months ended September 30, 2014. As a result of the factors described above, our net income was $3,897,560 or $0.07 (basic and diluted), for the nine months ended September 30, 2015, as compared to net income of $3,685,428 or $0.07 and $0.06 per share (basic and diluted, respectively), for the nine months ended September 30, 2014.

Foreign Currency Translation Adjustment

For the three months ended September 30, 2015, we reported an unrealized loss on foreign currency translation of $1,701,546, as compared to gain of $10,560 for the three months ended September 30, 2014. For the nine months ended September 30, 2015, we reported an unrealized loss on foreign currency translation of $1,319,999, as compared to a loss of $211,926 for the nine months ended September 30, 2014. The change reflects the effect of the value of the U.S. dollar in relation to the RMB. These gains and loss are non-cash items. As described elsewhere herein, the functional currency of our subsidiary, JSJ, and our VIE, HDS, is the RMB. The accompanying consolidated financial statements have been translated and presented in U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange for the period for net revenues, costs, and expenses. Net gains resulting from foreign exchange transactions, if any, are included in the consolidated statements of income.

Comprehensive Income

For the three months ended September 30, 2015, comprehensive loss of $768,032 was derived from the sum of our net income of $933,514 and a foreign currency translation loss of $1,701,546. 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 and a foreign currency translation gain of $10,560.

For the nine months ended September 30, 2015, comprehensive income of $2,577,561 was derived from the sum of our net income of $3,897,560 and a foreign currency translation loss of $1,319,999. 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 and a foreign currency translation loss of $211,926.

Segment Operations

For the three and nine months ended September 30, 2015 as compared to the three and nine months ended September 30, 2014, we operated in five reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials and yew tree extracts used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees, including potted miniature yew trees; (3) the handicrafts segment, consisting of the manufacture and sale of furniture and handicrafts made of yew timber; (4) the wood ear mushroom segment, consisting of the sale of wood ear mushroom; and (5) the others, mainly consisting of the transactions such as sale of yew candles in the third quarter of 2015. Our reportable segments are strategic business units that offer different products. Compared with the three and nine months ended September 30, 2015, there were no wood ear mushroom and others segments for the three and nine month ended September 30, 2014. The five business segments are managed separately based on the fundamental differences in their operations. All of our operations except sales of yew tree extracts are conducted in the PRC.

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

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