YEW BIO-PHARM GROUP, INC. The following discussion of our consolidated results of operations and cash
flows for the three and nine months ended
Overview
We are a major grower and seller of yew trees and manufacturer of products made from yew trees, 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 third quarter of 2016, we started to sell handmade yew essence oil soaps and candles.
We operated in two reportable business segments. The business of HDS, JSJ, HYF and JCB in PRC was managed and reviewed as PRC segment. The business of YBP,Yew Bio-Pharm (HK), and MC was managed and reviewed asUSA segment. For the three months endedSeptember 30, 2020 and 2019, revenues from the PRC segment accounted for approximately 99.82% and 87.02% of consolidated revenue, respectively; revenues fromUSA segment accounted for approximately 0.18% and 12.980% of consolidated revenue, respectively. For the nine months endedSeptember 30, 2020 and 2019, revenues from the PRC segment accounted for approximately 99.84% and 99.17% of consolidated revenue, respectively; revenues fromUSA segment accounted for approximately 0.16% and 0.83% of consolidated revenue, respectively. The Company's revenues were mostly generated by HDS in the PRC. The expenses incurred in theU.S. were primarily related to fulfilling the reporting requirements of public listed company, stock-based compensation, office daily operations and other costs. As ofSeptember 30, 2020 , the Company had$1,224,293 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$6,000 , including approximately$4,000 in cash onSeptember 30, 2020 . JSJ also holds the VIE interests in HDS through the contractual arrangements (the "Contractual Arrangements") described in Notes to Consolidated Financial Statements. OnNovember 2014 andMarch 2020 , HDS established new subsidiaries, HYF, to develop and cultivate wood ear mushroom drink, and JCB, to sales of yew oil products. As ofSeptember 30, 2020 , 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. OnJune 8, 2016 , YBP established a new subsidiary, MC, to sales the Company's yew products in American market. MC had limited operation activities for the nine months endedSeptember 30, 2020 . InDecember 2019 , COVID-19 was reported inChina . Since then, COVID-19 has spread globally, to includethe United States and several European countries. Many countries around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and have closed non-essential businesses. The pandemics could result in increased travel restrictions, market downturns and changes in the behavior of the terminal customers of our products related to pandemic fears. In addition, our certain customers could decrease the demand on our products due to the outbreak of the COVID-19. To date, our business is impact by the outbreak of the coronavirus (COVID-19) inChina , which resulted the decrease of our revenue during the first half of 2020. The extent to which the coronavirus impacts our results will depend on future developments and reactions inChina , which are highly uncertain and will include emerging information concerning the severity of the coronavirus and the actions taken by governments to attempt to contain the coronavirus. Any decreased collectability of accounts receivable, or reduction of purchase orders could further negatively impact our results of operations.
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 inthe 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. 25 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 the risk of loss for the VIE or is entitled to receive 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. Inventories Inventories consisted of raw materials, work-in-progress, finished goods-handicrafts, yew seedlings, yew candles 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 and direct labor. 26
We estimate the amount of the excess inventories by comparing inventory on hand with the estimated sales that can be sold within our normal operating cycle of one year. Any inventory in excess of our current requirements based on historical and anticipated levels of sales is classified as long-term on our consolidated balance sheets. Our classification of long-term inventory requires us to estimate the portion of inventory that can be realized over the next
12 months. To estimate the amount of slow-moving or obsolete inventories, we analyze movement of our products, monitor competing products and technologies and evaluate acceptance of our products. Periodically, we identify inventories that cannot be sold at all or can only be sold at deeply discounted prices. An allowance will be established if management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record reserves for the difference between the carrying cost and the estimated market value.
Our handicraft and yew furniture products are hand-made by traditional Chinese artisans.
In accordance with ASC 905, "Agriculture", our costs of growing yew seedlings are accumulated until the time of harvest and are reported at the lower of
cost or market. Property and equipment Property and equipment are carried at cost and are depreciated on a straight-line basis (after taking into account their respective estimated residual value) over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The estimated useful lives are as follows: Building 10 - 20 years Machinery and equipment 3 - 10 years Office equipment 2 - 5 years Motor vehicles 4 - 10 years
Land use rights and yew forest assets
All land in the PRC is owned by the PRC government and cannot be sold to any individual or company. We have recorded the amounts paid to the PRC government to acquire long-term interests to utilize land and yew forests as land use rights and yew forest assets. This type of arrangement is common for the use of land in the PRC. Yew trees on land containing yew tree forests are used to supply raw materials such as branches, leaves and fruit to us that will be used to manufacture our products. We amortize these land and yew forest use rights over the term of the respective land and yew forest use right, which ranges from 15 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, yew essential oil soap, pine needle extract, complex taxus cuspidate extract, and composite northeast yew extract. Pursuant to the guidance of ASC 606, we recognize revenue when obligations under the terms of a contract with customer are satisfied; generally, this occurs with the transfer of control of the products sold. Transfer of control to the customer is based on the standardized shipping terms in the contract as this determines when we have the right to payment, the customer has legal title to the asset and the customer has the risks of ownership. Income taxes
We are governed by the Income Tax Law of the PRC,Hong Kong andthe 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. 27 Stock-based compensation
The Company accounts for equity-based compensation cost in accordance with ASC 718, Compensation-Stock Compensation after adoption of ASC 2018-07, which requires the measurement and recognition of compensation expense related to the fair value of equity-based compensation awards that are ultimately expected to vest. Stock-based compensation expense recognized includes the compensation cost for all share-based compensation payments granted to employees and nonemployees, net of estimated forfeitures, over the employees requisite service period or the non-employee performance period based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported.
Recent accounting pronouncements
InFebruary 2016 , theFinancial Accounting Standards Board ("FASB") issued new leasing guidance ("Topic 842") that replaced the existing lease guidance ("Topic 840"). Topic 842 established a right-of-use ("ROU") model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. This guidance also expanded the requirements for lessees to record leases embedded in other arrangements and the required quantitative and qualitative disclosures surrounding leases. The Company adopted Topic 842 on its effective date ofJanuary 1, 2019 using a modified retrospective transition approach; as such, Topic 842 will not be applied to periods prior to adoption and the adoption had no impact on the Company's previously reported results. The Company elected the package of practical expedients permitted under the transition guidance within Topic 842, which allowed the Company to carry forward its identification of contracts that are or contain leases, its historical lease classification and its accounting for initial direct costs for existing leases. The impact of adopting Topic 842 was not material to the Company's result of operations or cash flows for the three and nine months endedSeptember 30, 2020 and 2019. The Company recognized operating lease liabilities of approximately$350,000 upon adoption, with corresponding ROU assets on its balance sheet onJanuary 1, 2019 . Currency exchange rates
Our functional currency is theU.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 ofU.S. dollars and RMB affect our reported levels of revenues and profitability as the results of our operations are translated intoU.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 theU.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 inU.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 inU.S. dollars, any appreciation of the RMB against theU.S. dollar could result in a charge in our statement of operations and a reduction in the value of ourU.S. dollar denominated assets. On the other hand, a decline in the value of RMB against theU.S. dollar could reduce theU.S. dollar equivalent amounts of
our financial results. 28 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 Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Revenues - third parties $ 498,346 $ (16,652 ) $ 679,844 $ 9,799,286
Revenues - related parties 9,856,869 684,178 21,266,710 14,947,466
Total revenues 10,355,215 667,526 21,946,554 24,746,752
Cost of revenues - third
parties 463,359 (224,076 ) 845,929 9,632,431
Cost of revenues - related
parties 8,389,574 932,810 17,870,705 13,350,942
Total cost of revenues 8,829,857 708,734 18,693,558 22,983,373
Gross profit (loss) 1,525,358 (41,208 ) 3,252,996 1,763,379
Operating expenses, net 31,180 (1,113,427 ) 744,930 (990,315 )
Income from operations 1,494,178 1,072,219 2,508,066 2,753,694
Other (expenses) income (471,052 ) 70,481 (595,961 ) 253,958
Net income before income
taxes 1,023,126 1,142,700 1,912,105 3,007,652
(Provision) benefit for
income taxes (27,152 ) 40,933 (27,152 ) (10,554 )
Net income 995,974 1,183,633 1,884,953 2,997,098
Other comprehensive income
(loss):
Foreign currency translation
adjustment 1,671,103 (1,651,817 ) 957,348 (1,603,089 )
Comprehensive income (loss) $ 2,667,077 $ (468,184 ) $ 2,842,301 $ 1,394,009 Three and nine Months Ended
Revenues For the three months endedSeptember 30, 2020 , we had total revenues of$10,355,215 , as compared to$667,526 for the three months endedSeptember 30, 2019 , an increase of$9,687,689 or 1,451.28%. The increase in total revenue was attributable to the increase in revenues of TCM raw materials and extracts.
For the nine months ended
29
Total revenue is summarized as follows:
Three Months Ended
September 30, Increase Percentage
2020 2019 (Decrease) Change
TCM raw materials $ 6,844,205 $ 766,763 $ 6,077,442 792.61 %
Handicrafts 9,599 1,049 8,550 815.06 %
Extracts 3,482,058 (192,601 ) 3,674,659 (1,907.91 )
Others 19,353 92,315 (72,962 ) (79.04 )%
Total $ 10,355,215 $ 667,526 $ 9,687,689 1,451.28 %
Nine Months Ended
September 30, Increase Percentage
2020 2019 (Decrease) Change
TCM raw materials $ 13,927,843 $ 7,755,545 $ 6,172,298 79.59 %
Handicrafts 9,599 7,167 2,432 33.93 %
Extracts 7,808,261 16,772,649 (8,964,388 ) (53.45 )
Others 200,851 211,391 (10,540 ) (4.99 )%
Total $ 21,946,554 $ 24,746,752 $ (2,800,198 ) (11.32 )%
For the three months ended September 30, 2020 compared to September 30, 2019 ,
the increase in extracts was mainly attributable to the increase in demand of
pine needle extract, complex taxus cuspidate extract, and composite northeast
yew extract. The increase in revenue of TCM raw material was mainly attributable
to the increase in demand from our related party, Yew Pharmaceutical.
For the nine months ended September 30, 2020 compared to September 30, 2019 , the
decrease in extracts was mainly attributable to the decrease in demand of pine
needle extract, complex taxus cuspidate extract, and composite northeast yew
extract. The increase in revenue of TCM raw material was mainly attributable to
the increase in demand from our related party, Yew Pharmaceutical.
Cost of Revenues
For the three months ended
For the nine months endedSeptember 30, 2020 , cost of revenues amounted to$18,693,558 as compared to$22,983,373 for the nine months endedSeptember 30, 2019 , a decrease of$4,496,687 or 33.68%. For the nine months endedSeptember 30, 2020 , cost of revenues accounted for 85.17% of total revenues compared to 92.87% of total revenues for the nine months endedSeptember 30, 2019 .
Cost of revenues by product categories is as follows:
Three Months Ended
September 30, Increase Percentage
2020 2019 (Decrease) Change
TCM raw materials $ 5,255,828 $ 1,015,388 $ 4,240,440 417.62 %
Handicrafts 9,452 1,080 8,372 775.36 %
Extracts 3,647,661 (192,162 ) 3,839,823 (1,998.22 )%
Others (83,084 ) (115,572 ) 32,489 (28.11 )%
Total $ 8,829,857 $ 708,734 $ 8,121,123 1,145.86 %
30
Nine Months Ended
September 30, Increase Percentage
2020 2019 (Decrease) Change
TCM raw materials $ 10,825,135 $ 6,159,705 $ 4,665,430 75.74 %
Handicrafts 9,452 2,055 7,397 359.99 %
Extracts 7,497,537 16,734,324 (9,236,787 ) (55.20 )%
Others 361,434 87,289 274,146 314.07 %
Total $ 18,693,558 $ 22,983,373 $ (4,289,815 ) (18.66 )%
The increase and decrease in our cost of revenues for the three and nine months
ended
Gross Profit
For the three months endedSeptember 30, 2020 , gross profit was$1,525,358 as compared to$(41,208) for the three months endedSeptember 30, 2019 , representing gross profit margins of 14.73% and (6.17) %, respectively. For the nine months endedSeptember 30, 2020 , gross profit was$3,252,996 as compared to$1,763,379 for the nine months endedSeptember 30, 2019 , representing gross profit margins of 14.82% and 7.13%, respectively. Gross profit margins by categories are as follows: Three Months Ended Nine Months Ended September 30, September 30, (Decrease) (Decrease) 2020 2019 Increase 2020 2019 Increase TCM raw materials 23.21 % (32.43 )% 55.64 % 22.28 % 20.58 % 1.70 % Handicrafts 1.54 % (2.93 )% 4.47 % 1.54 % 71.33 % (69.79 )% Extracts (4.76 )% 0.23 % (4.99 )% 3.98 % 0.23 % 3.75 % Others 529.32 % 225.19 % 304.13 % (79.95 )% 58.71 % (138.66 )% Total 14.73 % (6.17 )% 20.90 % 14.82 % 7.13 % 7.69 % The increase in our overall gross profit margin for the three and nine months endedSeptember 30, 2020 as compared to the three and nine months endedSeptember 30, 2019 were primarily attributable to the increased sales percentage of TCM raw materials and extracts which have higher gross margin. Operating Expenses
For the three months endedSeptember 30, 2020 , operating expenses amounted to$31,180 , as compared to$(1,113,427) for the three months endedSeptember 30, 2019 , an increase of$1,144,608 or 102.80%. The increase was mainly due to the decrease of bad debt recovery occurred during the three months endedSeptember 30, 2020 , as compared to that occurred during the three months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , operating expenses amounted to$744,930 as compared to$(990,315) for the nine months endedSeptember 30, 2019 , an increase of$1,735,245 or 175.22%. The increase was mainly due to the decrease of bad debt recovery occurred during the nine months endedSeptember 30, 2020 , as compared to that occurred during the nine months endedSeptember 30, 2019 . 31 Income from Operations
For the three months ended
For the nine months endedSeptember 30, 2020 , income from operations was$2,508,066 , as compared to income from operations of$2,753,694 for the nine months endedSeptember 30, 2019 , a decrease of$245,628 or 8.92%. The increase was primarily attributable to the increase in gross profit after offset by the decrease in bad debt recovery. Other (Expense) Income For the three months endedSeptember 30, 2020 , total other expense was$471,052 as compared to total other income of$70,481 for the three months endedSeptember 30, 2019 . The decrease was primarily attributable to the decrease
of exchange gain. For the nine months endedSeptember 30, 2020 , total other expense was$595,961 as compared to total other income of$253,958 for the nine months endedSeptember 30, 2019 . The decrease was primarily attributable to the decrease
of exchange gain. Net Income
As a result of the factors described above, our net income was$995,974 or$0.02 (basic and diluted), for the three months endedSeptember 30, 2020 , as compared to net income of$1,183,633 or$0.02 (basic and diluted), for the three months endedSeptember 30, 2019 . As a result of the factors described above, our net income was$1,884,953 or$0.04 (basic and diluted), for the nine months endedSeptember 30, 2020 , as compared to net income of$2,997,098 or$0.06 (basic and diluted), for the nine months endedSeptember 30, 2019 .
Foreign Currency Translation Adjustment
For the three months endedSeptember 30, 2020 , we reported an unrealized gain on foreign currency translation of$1,671,103 , as compared to an unrealized loss of$1,651,817 for the three months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , we reported an unrealized gain on foreign currency translation of$957,348 , as compared to an unrealized loss of$1,603,089 for the nine months endedSeptember 30, 2019 . The change reflects the effect of the value of theU.S. dollar in relation to the RMB. 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 inU.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 and comprehensive income. Comprehensive Income For the three months endedSeptember 30, 2020 , comprehensive income of$2,667,077 was derived from the sum of our net income of$995,974 with foreign currency translation gain of$1,671,103 . For the three months endedSeptember 30, 2019 , comprehensive loss of$468,184 was derived from the sum of our net income of$1,183,633 with foreign currency translation loss of$1,651,817 . For the nine months endedSeptember 30, 2020 , comprehensive income of$2,842,301 was derived from the sum of our net income of$1,884,953 with foreign currency translation gain of$957,348 . For the nine months endedSeptember 30, 2019 , comprehensive income of$1,394,009 was derived from the sum of our net income of$2,997,098 with foreign currency translation loss of$1,603,089 . Segment Information For the three and nine months endedSeptember 30, 2020 as compared to the three and nine months endedSeptember 30, 2019 , we operated in two reportable business segments. The business of HDS, JSJ, HYF and JCB in PRC was managed and reviewed as PRC segment. The business of YBP,Yew Bio-Pharm (HK), and MC was managed
and reviewed asUSA segment. 32
Information with respect to these reportable business segments for the three
months ended
For the three months For the three months
September 30, 2020 September 30, 2019
Revenues- Revenues - Revenues- Revenues -
third related third related
parties party Total parties party Total
Revenues:
PRC $ 481,661 $ 9,856,869 $ 10,338,530 $ (103,299 ) $ 684,178 $ 580,879
USA 16,685 - 16,685 86,647 - 86,647
Total revenues$ 498,346 $ 9,856,869 $ 10,355,215 $
(16,562 )$ 684,178 $ 667,526
Information with respect to these reportable business segments for the nine
months ended
For the six months For the six months
September 30, 2020 September 30, 2019
Revenues- Revenues - Revenues- Revenues -
third related third related
parties party Total parties party Total
Revenues:
PRC $ 641,316 $ 21,266,710 $ 21,908,026 $ 9,593,592 $ 14,947,466 $ 24,541,058
USA 38,528 - 38,528 205,694 - 205,694
Total revenues $ 679,844 $ 21,266,710 $ 21,946,554 $ 9,799,286 $ 14,947,466 $ 24,746,752 During the three months endedSeptember 30, 2020 and 2019, the revenue from PRC segment was$10,338,530 and$580,879 , respectively, increase of$9,757,651 or 1,679.81% due to the increase demand onAsia market. The increase in PRC segment was mainly due to the increase in revenue from related parties in the amount of$9,172,691 , and the increase in revenue from third parties in the amount of 584,960. During the three months endedSeptember 30, 2020 and 2019, the revenue fromUSA segment was$16,658 and$86,647 , respectively, decrease of$69,962 or 80.74%. The decrease in USA segment was due to the decrease in revenue from third parties in the amount of$69,962 attributable to ourChina customers decreased oversea demand.
During the nine months endedSeptember 30, 2020 and 2019, the revenue from PRC segment was$21,908,026 and$24,541,058 , respectively, decrease of$2,633,032 or 10.73% due to the decrease demand onAsia market. The decrease in PRC segment was mainly due to the decrease in revenue from third parties in the amount of$8,952,276 , offset by the increase in revenue from related parties in the amount of 6,319,244.
During the nine months endedSeptember 30, 2020 and 2019, the revenue fromUSA segment was$38,528 and$205,694 , respectively, decrease of$167,166 or 81.27%. The decrease in USA segment was due to the decrease in revenue from third parties in the amount of$167,166 attributable to ourChina customers decreased oversea demand. 33
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. OnSeptember 30, 2020 andDecember 31, 2019 , we had cash balances of$1,224,293 and$742,294 , respectively. These funds are primarily located in various financial institutions located inChina . Our primary uses of cash have been for the purchase of yew trees, land use rights and yew forest assets. Additionally, we use cash for employee compensation and working capital. The following table sets forth information as to the principal changes in the components of our working capital fromDecember 31, 2019 toSeptember 30, 2020 : September 30, December 31, Percentage Category 2020 2019 Change change Current assets: Cash$ 1,224,293 $ 742,294 $ 481,999 64.93 % Accounts receivable 2,180,937 7,692,613 (5,511,676 ) (71.65 )% Accounts receivable - related parties, net 7,113,073 198,829 6,914,244 3,477.48 % Inventories, net 2,648,954 2,637,389 11,565 0.44 % Prepaid expenses and other assets 88,215 51,140 37,075 72.50 % VAT recoverable 367,083 349,096 17,987 5.15 % Current liabilities: Accounts payable for acquisition of yew forests and others 678,519 920,459 (241,940 ) (26.28 )% Accounts payable for acquisition of yew forests and others - related parties 103,363 16,629
86,734 521.58 % Advances from customers 182,534 50,071 132,463 264.55 % Accrued expenses and other payables 344,516 266,749 77,767 29.15 % Due to related parties 660,756 633,779 26,977 4.26 % Short-term borrowings 8,166,609 8,541,517 (374,908 ) (4.39 )% Operating lease liabilities, current 61,773 52,104 9,669 18.56 % Working capital: Total current assets$ 13,596,960 $ 11,671,361 $ 1,925,599 16.50 % Total current liabilities 10,198,070 10,481,308 (283,238 ) (2.70 )% Working capital$ 3,398,890 $ 1,190,053 $ 2,208,837 185.61 % 34
Our working capital increased by
? an increase in accounts receivable - related parties of approximately
$6,900,000
? an increase in cash of approximately $480,000
? a decrease in short-term borrowings of approximately $380,000
partially offset by:
? a decrease in accounts receivable of approximately
? a decrease in accounts payable for acquisition of yew forests and others of
approximately $240,000
For the nine months ended September 30, 2020 , net cash flow provided by
operating activities was $12,210,618 , as compared to net cash flow provided by
operating activities of $11,541,211 for the nine months ended September 30,
2019 , an increase of $669,406 . Because the exchange rate conversion is different
for the balance sheet and the statements of cash flows, the changes in assets
and liabilities reflected on the statements of cash flows are not necessarily
identical with the comparable changes reflected on the balance sheets.
For the nine months ended
? net income of approximately
items, such as sale of yew forest assets as inventory of approximately
8,800,000 and amortization of land use rights and yew forest assets of
approximately $2,000,000 ; and
? Changes in operating assets and liabilities, such as a decrease in accounts
receivable of approximately $5,600,000 , and an increase in accounts
receivable-related parties of approximately $6,900,000 .
35
For the nine months ended
? net income of approximately
items, such as sale of yew forest assets as inventory of approximately
4,788,000, amortization of land use rights and yew forest assets of
approximately
and
? Changes in operating assets and liabilities, such as an increase in accounts
receivable of approximately $7,983,000 , a decrease in accounts
receivable-related parties of approximately $4,197,000 , a decrease in
inventories of approximately $5,881,000 , and an increase in accounts
payable-related party of approximately $1,268,000 .
Net cash flow used in investing activities was approximately $11,000,000 for the
nine months ended September 30, 2020 . During the nine months ended September 30,
2020 , we have made payment in approximately $11,000,000 for purchase of yew
forest assets and made payment for purchase of property and equipment $150,000 .
Net cash flow used in investing activities was approximately $14,000,000 for the
nine months ended September 30, 2019 . During the nine months ended September 30,
2019 , we have made payment in approximately $14,000,000 for purchase of yew
forest assets, and in approximately $19,000 for purchase of property and
equipment.
Net cash flow provided by financing activities was approximately $500,000 for
the nine months ended September 30, 2020 and consisted of proceeds of
$10,920,000 from banks and offset by repayments of approximately $10,420,000 .
Net cash flow provided by financing activities was approximately $2,519,000 for
the nine months ended September 30, 2019 and consisted of proceeds of
$10,543,000 from banks and offset by repayments of approximately $8,045,000 .
We have historically financed our operations and capital expenditures through
cash flows from operations, bank loans and advances from related parties. From
March 2008 to September 2009 , we received approximately $2.9 million of proceeds
in the aggregate from offerings and sales of our common stock. Except for the
portion used to pay for professional and other expenses in the U.S. , substantial
portions of the proceeds we received through sales of our common stock were
retained in the PRC and used to fund our working capital requirements. As the
PRC government imposes controls on PRC companies' ability to convert RMB into
foreign currencies and the remittance of currency out of China , from time to
time, in order to fund our corporate activities in the U.S. , Zhiguo Wang , our
President and CEO, advanced funds to us in the U.S. and we repaid the amounts
owed to him in RMB in the PRC.
It is management's intention to expand our operations as quickly as reasonably
practicable to capitalize on the demand opportunity for our products. We
regularly review our cash funding requirements and attempt to meet those
requirements through a combination of cash on hand, cash provided by operations
and any potential available bank borrowings. We believe that we can continue
meeting our cash funding requirements for our business in this manner over at
least the next twelve months. The majority of our funds are maintained in RMB in
bank accounts in China . We receive most of our revenue in the PRC. Under
existing PRC foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and expenditures from trade
related transactions, can be made in foreign currencies by complying with
certain procedural requirements. However, approval from China's State
Administration of Foreign Exchange ("SAFE") or its local counterparts is
required where RMB is to be converted into foreign currency and remitted out of
China to pay capital expenses such as the repayment of loans denominated in
foreign currencies. The PRC government may also, at its discretion, restrict
access to foreign currencies for current account transactions. As of September
30, 2020 , and December 31, 2019 , approximately $48.4 million and $44.6 million ,
respectively, of our net assets are located in the PRC. If the foreign exchange
control system in the PRC prevents us from obtaining sufficient foreign currency
to satisfy our currency demands, we may not be able to transfer funds deposited
within the PRC to fund working capital requirements in the U.S. or pay any
dividends in currencies other than the RMB, to our shareholders.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. 36
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