YEW BIO-PHARM GROUP, INC. The following discussion of our consolidated results of operations and cash flows for the years endedDecember 31, 2019 and 2018, and consolidated financial conditions as ofDecember 31, 2019 , andDecember 31, 2018 should be read in conjunction with our 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, 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-related products, such as yew essence oil soaps, yew candles and yew extracts. For the years endedDecember 31, 2019 and 2018, we operated in two reportable business segments. The business of HDS, JSJ and HYF 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 year endedDecember 31, 2019 and 2018, revenues from the PRC segment accounted for approximately 98.73% and 98.96% of consolidated revenue; revenues fromUSA segment accounted for approximately 1.27% and 1.04% of consolidated revenue. 27 YBP'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, inventory write-down and other costs. As ofDecember 31, 2019 , YBP had approximately$800K assets 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 had no business operations and assets with a book value of approximately$9,000 , including approximately$6 ,600in cash atDecember 31, 2019 . JSJ also holds the VIE interests in HDS through the contractual arrangements (the "Contractual Arrangements") described in Notes to Consolidated Financial Statements. OnNovember 4, 2014 , HDS established a new subsidiary,Harbin Yew Food Co. LTD. ("HYF"), to develop and cultivate wood ear mushroom. For the year endedDecember 31, 2019 , HYF had limited activities. 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 Commerce Holding Inc. (MC), to sales the Company's yew products in American market. MC had limited operation activities for the year endedDecember 31, 2019 . 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. To date, COVID-19 has not had a financial impact on the Company. However our business is slightly subject to the impact of the outbreak of the coronavirus (COVID-19) inChina . The pandemics could resulted 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. 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. Wider-spread COVID-19 inChina and globally could cause decreases in or delays in spending and negatively impact our short-term ability to grow our revenues. Any decreased collectability of accounts receivable, or reduction of purchase orders could 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 land use rights and yew forest assets, recovery of long-lived assets, 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 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 the risk of loss from HDS activities and is entitled to receive 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. 28 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 net realizable 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. 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 net realizable 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 net realizable 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 net realizable value, with cost computed on a weighted-average basis.
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
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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
The Company accounts for revenue arising from contracts and customers in
accordance with Accounting Standards Update (ASU or Update) No. 2014-09, Revenue
from Contracts with Customers ("ASC 606"), which was adopted on January 1, 2018
using the full retrospective method. The adoption of ASC 606 did not impact the
Company's previously reported financial statements in any prior period nor did
it result in a cumulative effect adjustment to retained earnings.
Under ASC 606, the Company recognizes revenue when its customer obtains control
of promised goods, in an amount that reflects the consideration which the
Company expects to receive in exchange for those goods. To determine revenue
recognition for arrangements that the Company determines are within the scope of
ASC 606, the Company performs the following five steps: (i) identify the
contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v) recognize revenue
when (or as) the Company satisfies a performance obligation. The Company only
applies the five-step model to contracts when it is probable that Company will
collect the consideration it is entitled to in exchange for the goods it
transfers to the customer. At contract inception, once the contract is
determined to be within the scope of ASC 606, the Company assesses the goods
promised within each contract and determines those that are performance
obligations and assesses whether each promised good is distinct. The Company
then recognizes as revenue the amount of the transaction price, which is
allocated to the respective performance obligation, when the performance
obligation is satisfied. Generally, the Company's performance obligations are
satisfied when the customers take possession of the products, which normally
occurs upon shipment or delivery depending on the terms of the contracts.
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. 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.
On
30
Operating leases
Prior to the adoption of ASC 842 on
Leases, mainly leases of offices, where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases are recognized as an expense on a straight-line basis over the lease term. The Company had no finance leases for any of the periods stated herein.
Upon and hereafter the adoption of ASC 842 on
The Company determines if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use ("ROU") assets, operating
lease liability, and operating lease liability, non-current in the Company's
consolidated balance sheets. ROU assets represent the Company's right to use an
underlying asset for the lease term and lease liabilities represent the
Company's obligation to make lease payments arising from the lease. Operating
lease ROU assets and liabilities are recognized at commencement date based on
the present value of lease payments over the lease term. When determining the
lease term, the Company includes options to extend or terminate the lease when
it is reasonably certain that it will exercise that option, if any. As the
Company's leases do not provide an implicit rate, the Company used an
incremental borrowing rate based on the information available at commencement
date in determining the present value of lease payments. The Company has elected
to adopt the following lease policies in conjunction with the adoption of ASU
2016-02: (i) for leases that have lease terms of 12 months or less and does not
include a purchase option that is reasonably certain to exercise, the Company
elected not to apply ASC 842 recognition requirements; and (ii) the Company
elected to apply the package of practical expedients for existing arrangements
entered into prior to January 1, 2019 to not reassess (a) whether an arrangement
is or contains a lease, (b) the lease classification applied to existing leases,
and(c) initial direct costs.
Segment reporting
ASC Topic 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. The Company managed and reviewed
its business as two operating segments starting from year 2018. The business of
HDS, JSJ and HYF in PRC was managed and reviewed as PRC segment. The business of
YBP, Yew Bio-Pharm (HK), and MC was managed and reviewed as USA segment. PRC and
USA segments retain all of the reported consolidated amounts.
Related party transactions
A related party is generally defined as (i) any person that holds 10% or more of the Company's securities including such person's immediate families, (ii) the Company's management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Collaborative arrangement HDS entered into a Joint Venture Planting Agreement withWuchang City Forestry Bureau onMarch 21, 2004 and certain Joint Venture Planting Agreements with Qingan State-owned Bureau (the "Qingan Forest Bureau ") inJune 2018 andMay 2019 , respectively (see Note 16), which is considered a collaborative arrangement underU.S. GAAP. The purpose of this arrangement is to share some of the risks and rewards associated with this Joint Venture Planting Agreement. The Company's current share of profits is 80% for the collaborative agreement withWuchang City Forestry Bureau and Qingan State-owned Bureau dated inJune 2018 , and is 70% for the collaborative agreement with Qingan State-owned Bureau dated inMay 2019 . The Company accounts for this collaborative arrangement under ASC 808, "Collaborative Arrangements" and related topics and will record revenue gross as the prime contractor. ASC Topic 808-10-15 defines collaborative arrangements and requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational and consistent accounting policy is to be elected. The Company adopted the provisions of ASC 808-10-15. The adoption of this statement did not have an impact on the Company's consolidated financial position, results of operations or cash flows. For the years endedDecember 31, 2019 and 2018, the Company has not generated any revenues or activity from this collaborative agreement.
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. 31 The Company adopted Topic 842 on its effective date ofJanuary 1, 2019 using a modified retrospective transition approach; as such, Topic 842 was not 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 year endedDecember 31, 2019 . The Company recognized operating lease liabilities of approximately$350,000 upon adoption, with corresponding ROU assets on its balance sheet. InJune 2018 , the FASB issued ASU 2018-07, "Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting", which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. These amendments align the accounting for share-based payment transactions with non-employees with accounting for share-based payment transactions with employees. An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date. The entity must not remeasure assets that are completed. This standard was effective for public business entities for fiscal years beginning afterDecember 15, 2018 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity's adoption date of Topic 606. The adoption of the guidance didn't have a material impact on its consolidated financial statements. InJuly 2018 , the FASB issued ASU 2018-09, "Codification Improvements", which affects a wide variety of Topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. These amendments represent changes to clarify, correct errors in, or make minor improvements to the Codification, eliminating inconsistencies and providing clarifications in current guidance. Some of the amendments do not require transition guidance and were effective upon issuance. However, many of the amendments do have transition guidance with effective dates for annual periods beginning afterDecember 15, 2018 , for public business entities. The adoption of the guidance didn't have a material impact on its consolidated financial statements. InJune 2016 , the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses". The standard, including subsequently issued amendments (ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11), requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. For public business entities that meet the definition of anUS Securities and Exchange(SEC) filer, excluding entities eligible to be smaller reporting companies as defined by theSEC , this ASU is effective for fiscal years beginning afterDecember 15, 2019 , and interim periods within those fiscal years, and requires the modified retrospective approach. For all other entities, the amendments are effective for fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements. Currency exchange rates Our reporting 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. 32 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. 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:
Years Ended
December 31,
2019 2018
Revenues $ 27,883,649 $ 37,596,942
Cost of revenues 27,109,518 26,872,694
Gross profit 774,131 10,724,248
Operating expenses (237,388 ) 10,005,651
Income (loss) from operations 1,011,519 718,597
Other expenses (14,799 ) (547,855 )
Income Tax (11,214 ) (1,493,183 )
Net income (loss) 985,506 (1,322,441 )Other comprehensive income (loss): Foreign currency translation adjustment (544,809 ) (2,352,663 ) Comprehensive income (loss)
$ 440,697 $ (3,675,104 ) 33
Year Ended
Revenues
For the year endedDecember 31, 2019 , we had total revenues of$27,883,649 , as compared to$37,596,942 for the year endedDecember 31, 2018 , a decrease of$9,713,293 or 25.84%. The decrease in total revenue was attributable to the decrease in revenues from TCM raw materials and yew candles, partially offset by increase in revenues from sales of extracts.
Total revenue is summarized as follows:
Years Ended
December 31, Increase Percentage
2019 2018 (Decrease) Change
TCM raw materials
(54.42 )% Handicrafts 155,132 19,707 135,425 687.19 % Yew candles - 6,796,817 (6,796,817 ) (100.00 )% Extracts 16,662,404 6,869,966 9,792,438 142.54 % Others 360,386 422,512 (62,126 ) (14.70 )% Total$ 27,883,649 $ 37,596,942 $ (9,713,293 ) (25.84 )% For the year endedDecember 31, 2019 compared toDecember 31, 2018 , the decrease in revenue of TCM raw material was mainly attributable to the decrease in demand from our related parties, Yew Pharmaceutical andHDS Development . The decrease in revenue of Yew candles was mainly attributable to the decrease in market demand. The increase in revenue of extracts was mainly attributable to the increase in demand of pine needle extract, complex taxus cuspidate extract, and composite northeast yew extract. Cost of Revenues For the year endedDecember 31, 2019 , cost of revenues amounted to$27,109,518 as compared to$26,872,694 for the year endedDecember 31, 2018 , an increase of$236,824 or 0.88%. For the year endedDecember 31, 2019 , cost of revenues accounted for 97.22% of total revenues compared to 71.48% of total revenues for the year endedDecember 31, 2018 .
Cost of revenues by product categories is as follows:
Years Ended
December 31, Increase Percentage
2019 2018 (Decrease) Change
TCM raw materials $ 9,962,940 $ 12,449,587 $ (2,486,647 ) (19.97 )%
Handicrafts 88,162 24,430 63,732 260.88 %
Yew candles - 6,754,633 (6,754,633 ) (100.00 )%
Extracts 16,624,332 6,416,974 10,207,358 159.07 %
Others 434,084 1,227,070 (792,986 ) (64.62 )%
Total $ 27,109,518 $ 26,872,694 $ 236,824 0.88 %
The increase in our cost of revenues for the year ended December 31, 2019 as
compared to the year ended December 31, 2018 was primarily a result of the
increase in costs of revenue in extracts, partially offset by decreases in TCM
raw materials and yew candles.
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Gross Profit
For the year endedDecember 31, 2019 , gross profit was$774,131 as compared to$10,724,248 for the year endedDecember 31, 2018 , representing gross profit margins of 2.78% and 28.52%, respectively. Gross profit margins by categories are as follows: Years Ended December 31, 2019 2018 Increase TCM raw materials 6.94 % 47.00 % (40.06 )% Handicrafts 43.17 % (23.97 )% 67.14 % Yew candles - % 0.62 % (0.62 )% Extracts 0.23 % 6.59 % (6.36 )% Others (20.45 )% (190.42 )% 169.97 % Total 2.78 % 28.52 % (25.74 )%
The decrease in our overall gross profit margin for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 was primarily attributable to the lower gross margin yields of TCM raw materials and Extracts. The decrease in our gross margin percentage related to the sale of TCM raw materials for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 , was primarily attributable to the fact that conversion rate from Yew tree into yew foliage for the year endedDecember 31, 2019 was lower than it for the year endedDecember 31, 2018 . Operating Expenses For the year endedDecember 31, 2019 , operating expenses amounted to$(237,388) , as compared to$10,005,651 for the year endedDecember 31, 2018 , a decrease
of$10,243,039 or 102.37%. The decrease was mainly due to the fact that the Company had bad debt recovery and stock based compensation in the amount of$1,688,406 and$284,461 , respectively, for the year endedDecember 31, 2019 , compared with bad debt expense and stock based compensation$7,921,979 and$1,067,548 , respectively, for the year endedDecember 31, 2018 Income from Operations For the year endedDecember 31, 2019 , income from operations was$1,011,519 , as compared to income from operations of$718,597 for the year endedDecember 31, 2018 , an increase of$292,922 , or 40.76%. The decrease was primarily attributable to the reasons stated above. Other Expenses
For the year ended
Net Income
As a result of the factors described above, our net income was$985,506 or$0.02 per share (basic and diluted), for the year endedDecember 31, 2019 , as compared to net loss of$1,322,441 or$0.03 per share (basic and diluted, respectively), for the year endedDecember 31, 2018 .
Foreign Currency Translation Adjustment
For the year endedDecember 31, 2019 , we reported an unrealized loss on foreign currency translation of$544,809 , as compared to$2,352,663 for the year endedDecember 31, 2018 . The change reflects the effect of the value of theU.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 and HYF, is 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 or loss resulting from foreign exchange transactions, if any, are included in the consolidated statements of income. Comprehensive Income (Loss)
For the year ended
35
Segment Information
For the year ended December 31, 2019 , we operated in two reportable business
segments. The business of HDS, JSJ and HYF in PRC was managed and reviewed as
PRC segment. The business of YBP, Yew Bio-Pharm (HK), and MC was managed and
reviewed as USA segment.
Information with respect to these reportable business segments for the years
ended
For the year ended For the year ended
December 31, 2019 December 31, 2018
Revenues- Revenues - Revenues- Revenues -
third related third related
parties parties Total parties party Total
Revenues:
PRC $ 9,678,548 $ 17,850,376 $ 27,528,924 $ 40,418 $ 37,165,694 $ 37,206,112
USA 354,725 - 354,725 390,830 - 390,830
Total revenues$ 10,033,273 $ 17,850,376 $ 27,883,649
$ 431,248 $ 37,165,694 $ 37,596,942 During the years endedDecember 31, 2019 and 2018, the revenue from PRC segment was$27,528,924 and$37,206,112 , respectively, decrease of$9,677,188 or 26.01% due to the decrease demand on PRC market. The decrease in PRC segment was mainly due to the decrease in revenue from related parties in the amount of$19,315,318 , offset by the increase in revenue from third parties in the amount of$9,638,130 . During the years endedDecember 31, 2019 and 2018, the revenue fromUSA segment was$354,725 and$390,830 , respectively, decrease of$36,105 or 9.24%. The decrease in USA segment was due to the decrease in revenue from third parties in the amount of$36,105 attributable to ourChina customers' decreased oversea demand.
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. AtDecember 31, 2019 and 2018, we had cash balances of$742,294 and$521,670 , respectively. These funds were primarily located in various financial institutions located inChina . Our primary uses of cash have been for the purchase of yew trees, land use rights and yew forest assets. Additionally, we use cash for employee compensation and working capital. 36 The following table sets forth information as to the principal changes in the components of our working capital fromDecember 31, 2018 toDecember 31, 2019 : December 31, December 31, Percentage Category 2019 2018 Change change Current assets: Cash$ 742,294 $ 521,670 $ 220,624 42.29 %
Accounts receivable 7,692,613 17,167 7,675,446 44,710.47 % Accounts receivable - related parties, net 193,000 4,579,666 (4,386,666 ) (95.79 )% Inventories, net 2,637,389 6,204,954 (3,567,565 ) (57.50 )% Prepaid expenses and other assets 51,140 47,530 3,610 (7.60 )% Prepaid expenses - related parties 5,829 32,318
(26,489 ) 81.96 %
VAT recoverables 349,096 985,831 (636,735 ) (64.59 )%
Current liabilities:
Accounts payable 131,718 268,359 (136,641 ) (50.92 )%Accounts payable - related parties 16,629 - 16,629 - % Payable for acquisition of yew forests 788,741 - 788,741 - % Advance from customer 50,071 145 49,926 34,431.72 % Advance from customer- related party - 21,295 (21,295 ) (100.00 )% Accrued expenses and other payables 150,309 244,043
(93,734 ) (38.41 )%
Taxes payable 116,440 189,617 (73,177 ) (38.59 )%
Due to related parties 633,779 580,016 53,763 9.27 %
Short-term borrowing 8,541,517 5,758,517 2,783,000 48.33 %
Current maturities of operating lease
liabilities 52,104 - 52,104 - %
Working capital:
Total current assets $ 11,671,361 $ 12,389,136 $ (717,775 ) (5.79 )%Total current liabilities 10,481,308 7,061,992
3,419,316 48.42 %
Working capital $ 1,190,053 $ 5,327,144 $ (4,137,091 ) (77.66 )%
Our working capital decreased by
? a decrease in accounts receivable - related parties of
? a decrease in inventory, net of
? an increase in short-term borrowing of
partially offset by:
? an increase in accounts receivable, net of
37
For the year ended December 31, 2019 , net cash flow provided by operating
activities was $11,953,657 , as compared to $32,466,961 for the year ended
December 31, 2018 , a decrease of $20,513,304 . 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 year ended
? net income of approximately
items, such as stock-based compensation of
amortization of land use rights and yew forest assets of
amortization of intangible assets of 13,666, bad debt recovery of
inventory write-down of
$7,643,574 ; and
the receipt of cash from operations from changes in operating assets and
liabilities, such as a decrease in accounts receivable-related parties of
partially offset by:
? the use of cash from changes in operating assets and liabilities, such as an
increase in accounts receivable of$7,741,823 .
For the year ended
? net loss of approximately
items, such as depreciation of approximately
rights and yew forest assets of
inventory write-down of
$10,286,709 and stock-based compensation of$1,067,548 ; and the receipt of cash from operations from changes in operating assets and liabilities, such as a decrease in accounts receivable of$9,703,757 , accounts receivable-related parties of$8,807,450 and an increase in taxes payable of$1,386,784 . partially offset by:
? the use of cash from changes in operating assets and liabilities, such as an
increase in inventories, net of
decrease in accounts payable of$186,113 . 38 Net cash flow used in investing activities was approximately$15,000,000 for the year endedDecember 31, 2019 . During the year endedDecember 31, 2019 , we have purchase of property and equipment of approximately$26,000 and have made payment in approximately$14,700,000 for purchase of land use right and yew forest assets. Net cash flow used in investing activities was approximately$32,800,000 for the year endedDecember 31, 2018 . During the year endedDecember 31, 2018 , we have purchase of property and equipment of approximately$44,000 and have made payment in approximately$32,755,000 for purchase of land use right and yew forest assets. Net cash flow provided by financing activities was approximately$2,900,000 for the year endedDecember 31, 2019 and consisted of repayment of short-term borrowings of approximately$9,060,000 , and repayments to related party of 30,000, and proceeds of approximately$11,905,000 from bank loan. Net cash flow provided by financing activities was approximately$26,000 for the year endedDecember 31, 2018 and consisted of repayment of short-term borrowings of approximately$9,027,000 , and proceeds of approximately$9,013,000 from bank loan, and proceeds from exercise of stock options of$40,000 . We have historically financed our operations and capital expenditures through cash flows from operations, bank loans and advances from related parties. FromMarch 2008 toSeptember 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 theU.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 ofChina , from time to time, in order to fund our corporate activities in theU.S. ,Zhiguo Wang , our President and CEO, advanced funds to us in theU.S. and we repaid the amounts owed to him in RMB in the PRC. . The majority of our funds are maintained in RMB in bank accounts inChina . 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 fromChina'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 ofChina 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 ofDecember 31, 2019 , andDecember 31, 2018 , approximately$44.6 million and$43.5 million , respectively, of our net assets are located in the PRC. If the foreign exchange control system in the PRC prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to transfer funds deposited within the PRC to fund working capital requirements in theU.S. or pay any dividends in currencies other than the
RMB, to our shareholders.
Contractual Obligations and Off-Balance Sheet Arrangements
We have certain potential commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations and cash flows. The following tables summarize our contractual obligations as ofDecember 31, 2019 , and the effect these obligations are expected to have on our liquidity and cash flows in future periods: Years EndingDecember 31 : Obligations Debt obligations Operating lease Total 2020$ 8,541,517 77,784 8,619,301 2021 78,993 78,993 2022 80,054 80,054 2023 33,321 33,321 2024 29,059 29,059 Thereafter 235,929 235,929 Total$ 8,541,517 535,140 9,076,657
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder's equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
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