Yew Bio-Pharm Group, Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2017

OR

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

FOR THE TRANSITION PERIOD FROM                 TO                 

COMMISSION FILE NUMBER 000-54701

YEW BIO-PHARM GROUP, INC.

(Exact name of registrant as specified in its charter)

9460 Telstar Avenue, Suite 6

El Monte, California 91732

  (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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and ’‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 13, 2017, there were 51,875,000 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, 2017

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, 2016 filed with the Securities & Exchange Commission (“SEC”) on March 31, 2017 

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to these unaudited consolidated financial statements

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 See notes to these unaudited consolidated financial statements  

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See notes to these unaudited consolidated financial statements

YEW BIO-PHARM GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

The accompanying unaudited 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, 2016 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 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, 2016.

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, 2017, and the results of operations and cash flows for the nine-month periods ended September 30, 2017 and 2016, have been made.

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

Certain amounts from prior period financial statements have been reclassified to conform to the current period presentation. This reclassification has resulted in no changes to the Company’s financial position or results of operations presented.

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

(1) Wholly-owned subsidiary of HDS

(2) 51% owned by YBP and 49% owned by HDS

NOTE 2 - PRINCIPLES OF CONSOLIDATION

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

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, 2017 and December 31, 2016, 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 and VIE’s subsidiary are as follows:

NOTE 3 - INVENTORIES

Inventories consisted of raw materials, work-in-progress, finished goods including handicrafts, yew essential oil soap, complex taxus cuspidate extract, northeast yew extract, yew candles, and pine needle extract, yew seedlings, and other trees, which consist of larix, spruce and poplar trees. The Company classifies its inventories based on its historical and anticipated levels of sales; any inventory in excess of its normal operating cycle of one year is classified as long-term on its consolidated balance sheets. As of September 30, 2017 and December 31, 2016, inventories consisted of the following:

Inventories as of September 30, 2017 and December 31, 2016 consisted of the inventory purchased from related parties as follows:

During the nine months ended September 30, 2017, inventories of yew seedlings in the amount of $4,300,033 were reclassified into land use rights and yew forest assets as the Company changed the use of the inventories into productive assets.

NOTE 4 - INCOME TAXES

(a) Federal Income Tax and Enterprise Income Taxes

The Company, YBP, registered in the state of Nevada, and its subsidiary, MC, registered in the State of California, are 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 YBP and MC had no U.S. taxable income as of September 30, 2017 and December 31, 2016.

The Company’s subsidiary, Yew Bio-Pharm (HK), is incorporated in Hong Kong and has no operating profit or tax liabilities during the periods. Yew Bio-Pharm (HK) is subject to tax at 16.5% on the assessable profits arising in or derived from Hong Kong.

The Company’s subsidiary, JSJ, and VIE and its subsidiary, HDS and HYF, 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 sales of handicrafts, yew candle, complex taxus cuspidate extract, northeast yew extract, pine needle extract, and yew essential oil soap, which are not within the scope of agricultural area.     

The table below summarizes the difference between the U.S. statutory federal tax rate and the Company’s effective tax rate for the nine months ended September 30, 2017 and 2016: 

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, 2017 and December 31, 2016, are as follows:

NOTE 5 - SHORT-TERM BORROWINGS AND NOTES PAYABLE

In May 2016, HDS entered into a line of credit agreement with Harbin Rongtong Branch of Bank of Communications (“BOCOM”) for the period from May 3, 2016 through May 3, 2018, pursuant to which the Company obtained a bank loan in the amount of RMB10,000,000 (approximately $1,519,000) on May 30, 2016, payable on May 30, 2017. HDS paid off the loan in full on May 26, 2017. On June 13, 2017, HDS obtained another loan in the amount of RMB10,000,000 (approximately $1,471,000), payable on June 12, 2018, under this credit agreement. The loan carries an interest rate of 5.873% per annum and is payable quarterly. Heilongjiang Zishan Technology Co., Ltd. (“ZTC”), a related party controlled by Zhiguo Wang and his wife Madame Qi, collateralized its buildings and land use right with BOCOM to secure the loans under this credit agreement. In addition, ZTC, Heilongjiang Yew Pharmaceutical Co., Ltd. (“Yew Pharmaceutical”), a related party of the Company, Zhiguo Wang, Madame Qi, Yicheng Wang, the son of Zhiguo Wang and Yuqi Mao, the spouse of Yicheng Wang, provided guarantees to the loans.

On November 10, 2016, the Company entered into a loan agreement with Shanghai Pudong Development Bank (“SPD Bank”) Harbin Branch, pursuant to which the Company obtained a bank loan in the amount of RMB1,970,000 (approximately $290,000), payable on November 9, 2017. The loan carries an interest rate of 5.873% per annum and is payable quarterly. The proceeds of the loan were used by the Company to purchase raw materials. Madam Qi has secured the loan with her personal assets. In addition, Yew Pharmaceutical, Zhiguo Wang, Yichen Wang, and Yuqi Mao, the spouse of Yichen Wang provided guarantees to the loan.

On December 22, 2016, the Company entered into a credit agreement with China Everbright Bank (“CEB”) which agreed to provide credit line of RMB 20,000,000 (approximately $2,880,000) to the Company for the period of three years. During the nine months ended September 30, 2017, the Company obtained short-term loans from CEB in the total amount of $6,410,000 under this credit agreement and paid off in the total amount of $3,540,000. As of September 30, 2017, the balance of loans borrowed from CEB was $2,870,000. These loans carry interest rates ranging from 4.30% to 4.60% per annum and the interests are payable monthly. The loans with CEB are secured by properties and land use rights of Yew Pharmaceutical. In addition, Zhiguo Wang, Madame Qi, Yew Pharmaceutical, and ZTC provided guarantees to the loan.

On November 4, 2016, the Company issued a commercial acceptance note to Yew Pharmaceutical with the principal amount of RMB8,030,000 (approximately $1,188,000) to pay partial of the account payable owed. The commercial acceptance note was due on November 4, 2017 with no interest, secured by Madam Qi’s personal assets and guaranteed by Madam Qi, Zhiguo Wang, Yicheng Wang, Yuqi Mao and Yew Pharmaceutical.

NOTE 6 - STOCKHOLDERS’ EQUITY

Stock option activities for the nine months ended September 30, 2017 and 2016 were summarized in the following table.

On February 1, 2017, the Company’s board of directors in lieu of an established compensation committee granted options according to the Corporation’s 2012 Equity Incentive Plan to their employee, Jianping Han, pursuant to which Jianping was issued an option to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The option vests immediately on grant date, and will expire on February 1, 2021.

The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at September 30, 2017:

On September 12, 2017, the Company approved to extend the expiration date for the options issued to Zhiguo Wang and Guifang Qi from December 13, 2017 to December 31, 2019, which led to the weighted average remaining contractual life changed from 0.29 years to 2.11 years.

The Company recognized a total of $94,177 and $245,518 stock option expense for the nine months ended September 30, 2017 and 2016, respectively. The value of option was calculated using Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of 0%, volatility of 194%, risk free rate of 1.22%, and expected term of 2 years.

NOTE 7 - EARNINGS PER SHARE

Under the provisions of ASC 260, “Earnings Per Share”, basic income per common share is computed by dividing net income attributable to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted income per share 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 would then share in the income of the company, subject to anti-dilution limitations.

The following table presents a reconciliation of basic and diluted net income per share for the three and nine months ended September 30, 2017 and 2016:

Diluted net income per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding during the respective periods. The potentially dilutive securities that were not included in the calculation of diluted net income per share in the periods presented where their inclusion would be anti-dilutive included options to purchase common shares of 244,322 and 26,805,512 on a weighted average basis for the three months ended September 30, 2017 and 2016, respectively; and option to purchase common shares of 244,322 and 26,805,512 on a weighted average basis for the nine months ended September 30, 2017 and 2016, respectively.

NOTE 8 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

Customers

For the nine months ended September 30, 2017 and 2016, customers accounting for 10% or more of the Company’s revenue were as follows:

* Less than 10%

The three largest customers accounted for 99.9% and 99.8% of the Company’s total outstanding accounts receivable at September 30, 2017 and December 31, 2016, respectively, of which Yew Pharmaceutical, a related party, accounted for 56.6% and 32.4% of total outstanding accounts receivable, respectively; customer B accounted for 38.7% and 35.3% of total outstanding accounts receivable, respectively; customer D, Wonder Genesis Global Ltd., a related party, accounted for 4.6% of total outstanding accounts receivable at September 30, 2017 and customer C accounted for 32.1% of total outstanding accounts receivable at December 31, 2016.

Suppliers

For the nine months ended September 30, 2017 and 2016, suppliers accounting for 10% or more of the Company’s purchase were as follows:

* Less than 10%

Accounts payable to supplier I and supplier J accounted for 49.7% and 32.0% of the Company’s total accounts payable at September 30, 2017.

Accounts payable to supplier F, supplier G, supplier C, Changzhi Du, a related party of the Company, and supplier H accounted for 24.6%, 24.1%, 17.7% and 15.8% of the Company’s total accounts payable at December 31, 2016.

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:

Land use rights and yew forest assets purchased from related parties

Land use rights and yew forest assets purchased from related parties as of September 30, 2017 and December 31, 2016 are as follows:

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 RMB 1,000,000 (approximately $158,000) per metric ton. In addition, the Company entered into a series of wood ear mushroom selling agreements with Yew Pharmaceuticals, pursuant to which the Company sells wood ear mushroom collected from local peasants to Yew Pharmaceuticals for manufacturing of wood ear mushroom products. Furthermore, the Company entered into a series of yew candles, yew essential oil soap, complex taxus cuspidate extract, northeast yew extract, and pine needle extract purchase agreements with Yew Pharmaceuticals, pursuant to which the Company purchases yew candles, yew essential oil soap, complex taxus cuspidate extract, northeast yew extract, and pine needle extract as finished goods and then sells to third party and related party.

For the nine months ended September, 2017 and 2016, total sales to Yew Pharmaceutical under the above agreement amounted to $17,011,006 and $24,063,798, respectively. At September 30, 2017 and December 31, 2016, the Company has $17,116,166 and $6,941,931 accounts receivable from Yew Pharmaceutical, respectively.

For the nine months ended September 30, 2017 and 2016, the total purchase of yew candles, yew essential oil soap, complex taxus cuspidate extract, northeast yew extract, and pine needle extract from Yew Pharmaceutical amounted to $14,934,540 and $29,330,000, respectively. For the nine months ended September 30, 2017 and 2016, the products purchased from Yew Pharmaceutical in the amount of $17,804,944 and $14,231,044 were sold and included in the total cost of revenue of $23,185,196 and $34,885,324, respectively.

For the nine months ended September 30, 2017 and 2016, HYF purchased wood ear mushroom extract from Yew Pharmaceutical in the amount of $0 and $3,660, respectively, and had accounts payable of $49,198 and $47,149 to Yew Pharmaceutical at September 30, 2017 and December 31, 2016, respectively.

At September 30, 2017 and December 31, 2016, HYF had $39,085 and $37,457, respectively, due to Yew Pharmaceutical, which represents an unsecured loan bearing no interest and payable on demand and was included in due to related parties on the accompanying consolidated balance sheets.

Transactions with HBP

For the nine months ended September 30, 2017 and 2016, HBP paid off operation expense on behalf of HYF in the amount of $34,341 and $27,214, respectively. As of September 30, 2017 and December 31, 2016, HYF had due to HBP in the amount of $95,827 and $58,178, respectively, which was included in due to related parties in the accompanying consolidated balance sheets. 

Transactions with HDS Development

For the nine months ended September 30, 2016, HDS prepaid $310,334 to HDS Development for purchasing yew seedlings. On June 30, 2016, the prepayment was returned to the Company in full due to the cancellation of the purchase.

Transactions with Changzhi Du

For the nine months ended September 30, 2017 and 2016, HDS purchased yew seedlings from Changzhi Du in the amount of $2,395,051 and $2,475,283, respectively. As of September 30, 2017 and December 31, 2016, the Company had accounts payable of $0 and $591,169 to Changzhi Du, respectively. 

Transactions with Wonder Genesis Global Ltd.

For the nine months ended September 30, 2017 and 2016, total sales to Wonder Genesis Global Ltd. amounted to $1,352,660 and $0, respectively. At September 30, 2017 and December 31, 2016, the Company has $1,383,395 and $0 accounts receivable from Wonder Genesis Global Ltd., 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 $24,000). 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 nine months ended September 30, 2017 and 2016, rent expense related to the ZTC Lease amounted to $17,902 and $18,518, respectively. At September 30, 2017 and December 31, 2016, prepaid rent to ZTC amounted to $61,030 and $76,035, respectively, which was included in prepaid expenses - related party on the accompanying consolidated balance sheets.

On January 1, 2010, the Company entered into a lease for office space with Mr. Wang (the “Office Lease”). Pursuant to the Office Lease, annual payments of RMB15,000 (approximately $2,000) are due for each of the term. The term of the Office Lease is 15 years and expires on December 31, 2025. For the nine months ended September 30, 2017 and 2016, rent expense related to the Office Lease amounted to $1,653 and $ 1,710, respectively. As of September 30, 2017 and December 31, 2016, the unpaid rent was $3,529 and $1,762, respectively, which was included in due to related parties in the accompanying consolidated balance sheets.

On July 1, 2012, the Company entered into a lease for office space with Zhiguo Wang (the “JSJ Lease”). Pursuant to the JSJ Lease, JSJ leases approximately 30 square meter of office space from Zhiguo Wang in Harbin. Rent under the JSJ Lease is RMB10,000 (approximately $1,500) 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 nine months ended September 30, 2017 and 2016, rent expense related to the JSJ Lease amounted to $1,102 and $1,140, respectively. As of September 30, 2017 and December 31, 2016, the unpaid rent was $4,884 and $3,600, respectively, which was included in due to related parties in the accompanying consolidated balance sheets.

On January 1, 2015, HYF entered into an lease agreement with HBP, pursuant to which HBP leases a warehouse, with an area of 225 square meters, and a workshop, with an area of 50 square meters, both of which are located at No.1 Zisan Road, Shangzhi economic development district, Shangzhi City, Heilongjiang Province, to HYF in exchange for no consideration for the period from January 1, 2015 to December 31, 2020.

The Company leased office space in the A’cheng district in Harbin (the “A’cheng Lease”) from HDS Development on March 20, 2002. The A’cheng Lease is for a term of 23 years and expires on March 19, 2025. Pursuant to the A’cheng Lease, lease payment shall be made as follows:

For the nine months ended September 30, 2017 and 2016, rent expense related to the A’cheng Lease amounted $2,635 and $2,726, respectively. At September 30, 2017 and December 31, 2016, the unpaid rent was $939 and $5,401, respectively, which was included in due to related parties on the accompanying consolidated balance sheets.

Due to Related Parties

The Company’s officers, directors and other related parties, from time to time, provided advances to the Company for working capital purpose. These advances are usually short-term in nature, non-interest bearing, unsecured and payable on demand. Due to Zhiguo Wang and Madame Qi, excluding the unpaid rents disclosed above and the borrowings from Madame Qi as disclosed below, amounted to $41,051 and $178,228 at September 30, 2017 and December 31, 2016, 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. On January 15, 2016 and 2017, the Company and Madame Qi entered into agreements to further extend the Due Date of the note to December 31, 2016 and 2017, respectively. During the nine months ended September 30, 2017 and 2016, the Company made repayments of $105,875 and $49,030 to Madame Qi, respectively. As of September 30, 2017 and December 31, 2016, the total borrowings including the interest were $493,095 and $598,970, respectively, which were included in due to related parties on the accompanying consolidated balance sheets. 

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, 2017, Kairun has not yet completed the services provided for in the Technology Agreement and, therefore, no payment was made to Kairun. 

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.

For the nine months ended September 30, 2017 and 2016, the Company operated in four reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials or yew tree extract used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees; (3) the handicrafts segment, consisting of the manufacture and sale of handicrafts and furniture made of yew timber; (4) Others segment, consisting of the sale of yew candles, pine needle extract, yew essential oil soap, complex taxus cuspidate extract, and northeast yew extract. 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 candles, pine needle extract, yew essential oil soap, complex taxus cuspidate extract, and northeast yew extract are conducted in the PRC.

Information with respect to these reportable business segments for the nine months ended September 30, 2017 and 2016 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 PRC. All revenues are derived from customers in the PRC. All of the Company’s operating assets are located in the PRC.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Operating Lease 

On February 1, 2015, the Company entered into a lease for its U.S. principal office space in California. Pursuant to the office lease, the monthly payment of $3,039 is due on the first day of each month of the first year, $3,150 for each month of the second year and $3,261 for each month of the third year. The term of the lease is for 3 years and expires on January 31, 2018. For the nine months ended September 30, 2017 and 2016, rent expense related to the U.S. principal office lease amounted to $30,348 and $30,352, respectively.

On May 1, 2017, the Company entered into a lease for product exhibition and promotion in California. The lease is on month by month basis and the monthly rent is $2,800. For the nine months ended September 30, 2017, the related rent expense amounted to $14,000.

See Note 9 for related party operating lease commitments.

Seedling Purchase and Sale Long-Term Cooperation Agreement

On November 25, 2010, HDS entered into a Seedling Purchase and Sale Long-Term Cooperation Agreement (the “Seedling Agreement”) with Wuchang City Xinlin Foresty Co., Ltd (“Xinlin”), a related party of the Company, pursuant to which HDS will sell yew seedlings to Xinlin at a price equal to 90% of HDS’s publicly-published wholesale prices. Xinlin has agreed to purchase from the Company 10,000 yew seedlings annually. For the nine months ended September 30, 2017 and 2016, the Company didn’t make sales under the Seedling Agreement.

NOTE 12 - RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323)”. This pronouncement amends the SEC’s reporting requirements for public filers in regard to new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.

In May 2017, the FASB issue ASU 2017-09, “Compensation – stock compensation (Topic 718): scope of modification accounting”. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. An entity should account for the effects of a modification unless all the following are met: 1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. 2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. 3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements. 

In September 2017, the FASB issue ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments”. The pronouncements add SEC paragraphs pursuant to an SEC Staff Announcement made at the July 20, 2017 Emerging Issues Task Force (EITF) meeting. The SEC staff announced that it will not object if an entity that qualifies as a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC adopts ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU 2016-02, Leases (Topic 842) using the effective dates applicable to private entities. The amendments represent guidance related to the effective dates of the standards noted above, therefore, the amendments themselves do not have an effective date. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

NOTE 13 - SUBSEQUENT EVENTS

In October and November, the Company repaid loans from CEB in the amount of $1,220,000 and obtained additional short-term loans in the total amount of $1,220,000 under the credit agreement entered into on December 22, 2016 (See Note 5). The loans carry and interest rates of 4.30% per annum and the interests are payable monthly. The loans with CEB are secured by properties and land use rights of Yew Pharmaceutical. In addition, Zhiguo Wang, Madame Qi, Yew Pharmaceutical, and ZTC provided guarantees to the loans.

On November 2, 2017, the Company’s Board of Directors was granted the discretionary authority by the annual meeting of stockholders to make a reverse split of its common stock between1-for-4 and 1-for-8 by June 30, 2018. As of the filing date, the reverse split has not occurred.

On November 6, 2017, the Company paid off the commercial acceptance note issued to Yew Pharmaceutical in full (See Note 5).

On November 9, 2017, the Company paid off the loan from SPD Bank in full (See Note 5).

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

The following discussion of our consolidated results of operations and cash flows for the nine months ended September 30, 2017 and 2016, and consolidated financial conditions as of September 30, 2017 and December 31, 2016 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 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, 2017 and 2016, we operated in four reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials or yew tree extract used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees; (3) the handicrafts segment, consisting of the manufacture and sale of handicrafts and furniture made of yew timber; and (4) the “Others” segment, consisting of the sales of yew candles, pine needle extract, yew essential oil soap, complex taxus cuspidate extract, and northeast yew extract. Our reportable segments are strategic business units that offer different products. The four business segments are managed separately based on the fundamental differences in their operations. All of the Company’s operations except sales of yew candles, pine needle extract, yew essential oil soap, complex taxus cuspidate extract, and northeast yew extract are conducted in the PRC for the three and nine months ended September 30, 2017.

For the nine months ended September 30, 2017, revenues from the sales of TCM raw materials represented approximately 48.54% of consolidated revenue (including 48.54% of consolidated revenues from a related party); sales of yew trees represented approximately 0.03% of consolidated revenue; sales of handicrafts represented approximately 0.02% of consolidated revenue; and the sales of others represented approximately 51.42% of consolidated revenue (including 3.86% of consolidated revenues from a related party). For the nine months ended September 30, 2016, revenues from the sales of TCM raw materials represented approximately 61.16% of consolidated revenue (including 61.16% of consolidated revenues from a related party); sales of yew trees represented approximately 0.06% of consolidated revenue; sales of handicrafts represented approximately 0.25% of consolidated revenue; and sales of others represented approximately 38.54% of consolidated revenue.

For the three months ended September 30, 2017, revenues from the sales of TCM raw materials represented approximately 25.42% of consolidated revenue (including 25.42% of consolidated revenues from a related party); sales of yew trees represented approximately 0.09% of consolidated revenue; sales of handicrafts represented approximately 0.03% of consolidated revenue; and the sales of others represented approximately 74.47% of consolidated revenue (including 11.70% of consolidated revenues from a related party). For the three months ended September 30, 2016, revenues from the sales of TCM raw materials represented approximately 46.87% of consolidated revenue (including 46.87% of consolidated revenues from a related party); sales of yew trees represented approximately 0% of consolidated revenue; sales of handicrafts represented approximately 0.01% of consolidated revenue; and sales of others approximately 53.13% of consolidated revenue.

YBP’s revenues were mostly generated by HDS and in the PRC. The expenses (approximately $434,757 and $565,747 for the nine months ended September 30, 2017 and 2016, respectively) incurred in the U.S. were primarily related to fulfilling the reporting requirements of public listed company, stock-based compensation, office daily operations and other costs. As of September 30, 2017, YBP had approximately $1,339,673 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 $3,011, including approximately $3,011 in cash at September 30, 2017. JSJ also holds the VIE interests in HDS through the contractual arrangements (the “Contractual Arrangements”) described in Notes to Unaudited 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, 2017, HYF had started pilot production with limited amount of sales. 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, and 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 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’ 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, 2017 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, yew candles and other yew-related products 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 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 yew handicraft products, sales of “Others” including yew candles, pine needle extract, yew essential oil soap, complex taxus cuspidate extract, and northeast yew extract.. 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 January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323)”. This pronouncement amends the SEC’s reporting requirements for public filers in regard to new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.

In May 2017, the FASB issue ASU 2017-09, “Compensation – stock compensation (Topic 718): scope of modification accounting”. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. An entity should account for the effects of a modification unless all the following are met: 1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. 2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. 3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements. 

In September 2017, the FASB issue ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments”. The pronouncements add SEC paragraphs pursuant to an SEC Staff Announcement made at the July 20, 2017 Emerging Issues Task Force (EITF) meeting. The SEC staff announced that it will not object if an entity that qualifies as a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC adopts ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU 2016-02, Leases (Topic 842) using the effective dates applicable to private entities. The amendments represent guidance related to the effective dates of the standards noted above, therefore, the amendments themselves do not have an effective date. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

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.

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. The discussion following the table is based on these results:

Three and Nine Months Ended September 30, 2017 Compared to Three and Nine Months Ended September 30, 2016

Revenues

For the three months ended September 30, 2017, we had total revenues of $11,564,915 as compared to $14,667,099 for the three months ended September 30, 2016, a decrease of $3,102,184 or 21.15%. The decrease in total revenue was attributable to the decrease in revenues from TCM raw materials.

For the nine months ended September 30, 2017, we had total revenues of $35,044,755, as compared to $39,347,578 for the nine months ended September 30, 2016, a decrease of $4,302,823 or 10.94%. The decrease in total revenue was attributable to the decrease in revenues from TCM raw materials, yew trees and handicrafts segments. 

Total revenue is summarized as follows:

For the three months ended September 30, 2017 compared to September 30, 2016, the decrease in revenue of TCM raw material was mainly attributable to the decrease in demand from our related party, Yew Pharmaceutical. The increase in revenue of yew tree was mainly attributable to the increase in demand from third party. The increase in revenue of others was mainly attributable to higher demand in export market.

For the nine months ended September 30, 2017 compared to September 30, 2016, the decrease in revenue of TCM raw material was mainly attributable to the decrease in demand from our related party, Yew Pharmaceutical. The decrease in revenue of yew trees was mainly attributable to the Company’s strategy adjustment to reserve more yew trees for future TCM raw materials sales. The decrease in revenue of handicrafts was mainly attributable to the decrease in market demand.  The increase in revenue of others was mainly attributable to the increase in demand of yew candles, pine needle extract, handmade essential oil soaps, complex taxus cuspidate extract, and northeast yew extract.

Cost of Revenues

For the three months ended September 30, 2017, cost of revenues amounted to $10,814,999 as compared to $13,248,067 for the three months ended September 30, 2016, a decrease of $2,433,068 or 18.37%. For the three months ended September 30, 2017, cost of revenues accounted for 94% of total revenues compared to 90% of total revenues for the three months ended September 30, 2016.

For the nine months ended September 30, 2017, cost of revenues amounted to $23,185,196 as compared to $34,885,324 for the nine months ended September 30, 2016, a decrease of $11,700,128 or 33.54%. For the nine months ended September 30, 2017, cost of revenues accounted for 66% of total revenues compared to 89% of total revenues for the three months ended September 30, 2016.

Cost of revenues by product categories is as follows:

The decrease in our cost of revenues for the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016 was primarily a result of the decrease in costs of revenue in TCM raw materials and offset by increasing in costs of revenue of Others segments.

The decrease in cost of revenue in TCM raw material segment was primarily attributable to the decrease in the unit cost of TCM raw materials sold to our related party, Yew Pharmaceutical. Prior to the third quarter of 2015, we obtained yew foliage by picking the leaves from the grown yew trees. The unit cost of the TCM raw material only consisted of the picking labor cost and amortization. Since the third quarter of 2015, the demand for TCM raw material increased sharply due to our related party, Yew Pharmaceutical, started to use yew foliage to develop new yew related products, such as yew candle, pine needle extract, and essential oil soap. As a result, the purchase of TCM from us increased dramatically. We did not have enough leaves to be picked from the grown yew trees. Thus, the Company cut down certain whole grown yew to produce TCM raw material, which led to significantly increase in the unit price due to the fact that the cost consisted of the unit price of the grown tree. Since 2016, we changed our strategy by decreasing our yew seedling sales and growing the seedlings for picking leaves, which was contributable to less grown yew cut down during the nine months ended September 30, 2017. Thus our unit cost decreased accordingly.

The increase in cost of revenue in “Others” segment for the three and nine months ended September 30, 2017 as compared to the three months ended September 30, 2016 was primarily due to the increased sales of yew candles, pine needle extract, essential oil soaps, complex taxus cuspidate extract, and northeast yew extract, which was in line with the increase in revenue.  

Gross Profit

For the three months ended September 30, 2017, gross profit was $749,916 as compared to $1,419,032 for the three months ended September 30, 2016, representing gross profit margins of 6.5% and 9.7%, respectively. For the nine months ended September 30, 2017, gross profit was $11,859,559 as compared to $4,462,254 for the nine months ended September 30, 2016, representing gross profit margins of 33.8% and 11.3%, respectively. Gross profit margins by categories are as follows:

The decrease in our overall gross profit margin for the three month ended September 30, 2017 as compared to the three month ended September 30, 2016 were primarily attributable to the lower gross margin yields of Others which offset the increased gross margin yields of TCM raw materials. The increase in our overall gross profit margin for the nine month ended September 30, 2017 as compared to the nine month ended September 30, 2016 were primarily attributable to the higher gross margin yields of TCM raw materials.

The increase in our gross margin percentage related to the sale of TCM raw materials for the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016 was primarily attributable to the significant decrease in the unit cost of TCM raw materials for the three and nine months ended September 30, 2017.

The increase in our gross margin percentage related to the sale of yew trees for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 was primarily attributable to the increase selling price for yew trees in the first three quarters of 2017.

The increase in our gross margin percentage related to the sale of handicrafts for the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016 was primarily attributable to the increase of selling price for handicraft in the first three quarters of 2017.

The decrease in our gross margin percentage of “Others” segment for the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016 was primarily attributable to the sales of pine needle extract that had a lower gross profit margin.

Selling Expenses 

For the three months ended September 30, 2017, selling expense was $64,347 as compared to $5,667 for the three months ended September 30, 2016, an increase of $58,680, or 1035.47%. For the nine months ended September 30, 2017, selling expense was $64,678 as compared to $17,754 for the nine months ended September 30, 2016, an increase of $46,924 or 264.30%.   

General and Administrative Expenses  

For the three months ended September 30, 2017, general and administrative expenses amounted to $196,569, as compared to $293,850 for the three months ended September 30, 2016, a decrease of $97,281, or 33.11%. For the nine months ended September 30, 2017, general and administrative expenses amounted to $794,555, as compared to $938,920 for the nine months ended September 30, 2016, a decrease of $144,365, or 15.38%.  

General and administrative expenses consisted of the following: 

The decrease in our general and administrative expenses for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016 was primarily attributable to the decrease in depreciation and professional fees.  

The changes in general and administrative expenses for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, consisted of the following: 

Income from Operations

For the three months ended September 30, 2017, income from operations was $489,000, as compared to income from operations of $1,119,515 for the three months ended September 30, 2016, a decrease of $630,515, or 56.32%. The decrease was primarily attributable to the decrease in gross profit from “Others” segment.

For the nine months ended September 30, 2017, income from operations was $11,000,325, as compared to income from operations of $3,505,580 for the nine months ended September 30, 2016, an increase of $7,494,745, or 213.79%. The increase was primarily attributable to the increase in gross profit from TCM raw materials segment.

Other Income (Expenses)

For the three months ended September 30, 2017, total other income was $126,017 as compared to total other expense of $38,977 for the three months ended September 30, 2016. The increase was primarily attributable to the increase of exchange gain of $181,454

For the nine months ended September 30, 2017, total other income was $40,109 as compared to total other expense of $68,435 for the nine months ended September 30, 2016. The increase was primarily attributable to the increase of exchange gain of $140,510.

Net Income

As a result of the factors described above, our net income was $614,407 or $0.01 (basic and diluted), for the three months ended September 30, 2017, as compared to net income of $1,080,538 or $0.02 (basic and diluted), for the three months ended September 30, 2016. As a result of the factors described above, our net income was $11,039,824 or $0.21 and $0.20 (basic and diluted, respectively), for the nine months ended September 30, 2017, as compared to net income of $3,437,145 or $0.07 (basic and diluted), for the nine months ended September 30, 2016.

Foreign Currency Translation Adjustment

For the three months ended September 30, 2017, we reported an unrealized gain on foreign currency translation of $790,549, as compared to a loss of $198,125 for the three months ended September 30, 2016. For the nine months ended September 30, 2017, we reported an unrealized gain on foreign currency translation of $1,870,030, as compared to a loss of $1,096,794 for the nine months ended September 30, 2016. 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, 2017, comprehensive income of $1,404,956 was derived from the sum of our net income of $614,407 with foreign currency translation gain of $790,549. For the three months ended September 30, 2016, comprehensive income of $882,413 was derived from the sum of our net income of $1,080,538 with foreign currency translation loss of $198,125.

For the nine months ended September 30, 2017, comprehensive income of $12,909,854 was derived from the sum of our net income of $11,039,824 with foreign currency translation gain of $1,870,030. For the nine months ended September 30, 2016, comprehensive income of $2,340,351 was derived from the sum of our net income of $3,437,145 with foreign currency translation loss of $1,096,794.

Segment Information

For the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016, we operated in four reportable business segments: (1) the TCM raw materials segment, consisting of the production and sale of yew raw materials and yew tree extract used in the manufacture of TCM; (2) the yew tree segment, consisting of the growth and sale of yew tree seedlings and mature trees; (3) the handicrafts segment, consisting of the manufacture and sale of furniture and handicrafts made of yew timber; and (4) the “Others” segment, consisting of the sales of yew candles, pine needle extract, essential oil soaps, complex taxus cuspidate extract, and northeast yew extract. Our reportable segments are strategic business units that offer different products. The four business segments are managed separately based on the fundamental differences in their operations. All of the Company’s operations except the sales of export commodities are conducted in the PRC.

Information with respect to these reportable business segments for the three months ended September 30, 2017 and 2016 was as follows:

Information with respect to these reportable business segments for the nine months ended September 30, 2017 and 2016 was as follows:

 TCM raw materials

During the three months ended September 30, 2017, we sold 11,902 kg of TCM raw materials as compared to 76,517 kg of TCM raw materials during the three months ended September 30, 2016, an 84.45% decrease in sales volume primarily attributable to decrease in sales volume to our related party, Yew Pharmaceutical.

During the nine months ended September 30, 2017, we sold 77,383 kg of TCM raw materials as compared to 113,713 kg of TCM raw materials during the nine months ended September 30, 2016, a 31.95% decrease in sales volume primarily attributable to decrease in sales volume to our related party, Yew Pharmaceutical.

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

For the three months ended September 30, 2017 and 2016, we had revenue of $2,939,959 and $6,873,988, respectively, from the sale of TCM raw materials to Yew Pharmaceutical. For the three months ended September 30, 2017 and 2016, no revenue from the sale of TCM raw materials to third parties.

For the nine months ended September 30, 2017 and 2016, we had revenue of $17,011,006 and $24,063,798, respectively, from the sale of TCM raw materials to Yew Pharmaceutical. For the nine months ended September 30, 2017 and 2016, no revenue from the sale of TCM raw materials to third parties.

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.

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, 2017, we sold approximately 260 pieces of yew seedlings and trees, as compared to approximately 4,860 pieces of yew seedlings and trees for the three months ended September 30, 2016, a decrease in volume of 94.7%.

During the nine months ended September 30, 2017, we sold approximately 260 pieces of yew seedlings and trees, as compared to approximately 4,860 pieces of yew seedlings and trees for the nine months ended September 30, 2016, a decrease in volume of 94.7%.

The decrease in revenue of yew tree for the three and nine months ended September 30, 2017 was mainly attributable to the company’s strategy adjustment to reserve more yew trees for future TCM raw materials sales as compared to the three and nine months ended September 30, 2016.

In connection with our entering into a land use agreement in July 2012 (the “Fuye Field Agreement”), we acquired more than 80,000 trees - which are not yew trees - located on that property. These trees consist of approximately 20,000 larix, 56,700 spruce and 3,700 poplar trees. Larix trees are used primarily in landscaping and we began selling larix trees to customers during 2013. Spruce and poplar trees are used primarily as building materials. Since March 31, 2014, we began to sell spruce trees to customers and anticipate selling poplar trees in the next few years once these trees reach their maturities.

Handicrafts

During the three months ended September 30, 2017 and 2016, revenue from the sale of handicrafts made from yew timber amounted to $2,916 and $1,087, respectively, increase of $1,829, or 168.26%. During the nine months ended September 30, 2017 and 2016, revenue from the sale of handicrafts made from yew timber amounted to $5,284 and $97,560, respectively, decrease of $92,276, or 94.58%. The decrease in revenues of handicrafts was mainly due to the decline in market demands.

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

Others

During the three months ended September 30, 2017, we sold $nil yew candles, 2,160 kilograms complex taxus cuspidate extract in the amount of $7,259,474 to third party. For the same period, we sold 240 kilograms northeast yew extract in amount of $1,352,660 to a related party. During the nine months ended September 30, 2017, we sold approximately 99,504 yew candles, 3,090 kilograms of pine needle extract, and 2,160 kilograms of complex taxus cuspidate extract in amount of $16,665,899 to third party. For the same period, we sold 240 kilograms northeast yew extract in the amount of $1,352,660 to a related party.

During the three months ended September 30, 2016, we sold approximately 22,008 yew candles, 3,600 kilograms pine needle extract, and 385 bottles of “Auri Essence” in the amount of $7,792,024 to third party. During the nine months ended September 30, 2016, we sold approximately 30,408 yew candles, 6,960 kilograms pine needle extract and 425 bottles of “Auri Essence” in amount of $15,162,974 to third party.

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, 2017 and December 31, 2016, we had cash balances of $1,339,673 and $278,991, 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, 2016 to September 30, 2017: