YEW BIO-PHARM GROUP, INC. The following discussion of our consolidated results of operations and cash flows for the six months endedJune 30, 2020 and 2019, and consolidated financial conditions as ofJune 30, 2020 andDecember 31, 2019 should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this document. Overview
We are a major grower and seller of yew trees and manufacturer of products made from yew trees, 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 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 three months endedJune 30, 2020 and 2019, revenues from the PRC segment accounted for approximately 99.999% and 99.320% of consolidated revenue, respectively; revenues fromUSA segment accounted for approximately 0.001% and 0.680% of consolidated revenue, respectively. For the six months endedJune 30, 2020 and 2019, revenues from the PRC segment accounted for approximately 99.81% and 99.51% of consolidated revenue, respectively; revenues fromUSA segment accounted for approximately 0.19% and 0.49% of consolidated revenue, respectively. The Company's revenues were mostly generated by HDS and 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 ofJune 30, 2020 , the Company had$1,668,509 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 atJune 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 4, 2014 , HDS established a new subsidiary,Harbin Yew Food Co. LTD. ("HYF"), to develop and cultivate wood ear mushroom drink. As ofJune 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 Commerce Holding Inc. (MC), to sales the Company's yew products in American market. MC had limited operation activities for the six months endedJune 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 six months endedJune 30, 2020 and 2019. The Company recognized operating lease liabilities of approximately$350,000 upon adoption, with corresponding ROU assets on its balance sheet atJanuary 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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Revenues - third parties $ 159,709 $ 9,782,457 $ 181,498 $ 9,815,938
Revenues - related parties 9,402,448 2,782,765 11,409,841 14,263,288
Total revenues 9,562,157 12,565,222 11,591,339 24,079,226Cost of revenues - third parties 341,204 9,829,839 382,570 9,856,507 Cost of revenues - related parties 7,935,570 2,089,325 9,481,131 12,418,132 Total cost of revenues 8,276,774 11,919,164 9,863,701 22,274,639 Gross profit 1,285,383 646,058 1,727,638 1,804,587 Operating expenses 428,883 (490,143 ) 713,750 123,112 Income from operations 856,500 1,136,201 1,013,888 1,681,475 Other (expenses) income (118,933 ) 330,103 (124,909 ) 183,477 Net income before income taxes 737,567 1,466,304
888,979 1,864,952
Income taxes - (29,881 ) - (51,487 )
Net income 737,567 1,436,423 888,979 1,813,465
Other comprehensive income (loss):
Foreign currency translation adjustment 102,289 (976,156 )
(713,755 ) 48,728
Comprehensive income (loss) $ 839,856 $ 460,267 $ 175,224 $ 1,862,193 Three and Six Months Ended
Revenues For the three months endedJune 30, 2020 , we had total revenues of$9,562,157 , as compared to$12,565,222 for the three months endedJune 30, 2019 , a decrease of$3,003,065 or 23.90%. The decrease in total revenue was attributable to the decrease in revenues of extracts, partially offset by increase in revenues
of TCM raw materials. For the six months endedJune 30, 2020 , we had total revenues of$11,591,339 , as compared to$24,079,226 , for the six months endedJune 30, 2019 , a decrease of$12,487,887 or 51.86%. The decrease in total revenue was attributable to the decrease in revenues of extracts. 29
Total revenue is summarized as follows:
Three Months Ended
June 30, Increase Percentage
2020 2019 (Decrease) Change
TCM raw materials $ 5,076,245 $ 2,825,347 $ 2,250,898 79.67 %
Handicrafts - 3,823 (3,823 ) (100.00 )%
Extracts 4,326,203 9,690,744 (5,364,541 ) (55.36 )
Others 159,709 45,308 114,401 252.50 %
Total $ 9,562,157 $ 12,565,222 $ (3,003,065 ) (23.90 )%
Six Months Ended
June 30, Increase Percentage
2020 2019 (Decrease) Change
TCM raw materials $ 7,083,638 $ 6,988,782 $ 94,856 1.36 %
Handicrafts - 6,118 (6,118 ) (100.00 )%
Extracts 4,326,203 16,965,250 (12,639,047 ) (74.50 )
Others 181,498 119,076 62,422 52.42 %
Total $ 11,591,339 $ 24,079,226 $ (12,487,887 ) (51.86 )%
For the three months ended June 30, 2020 compared to June 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.
For the six months ended June 30, 2020 compared to June 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.
Cost of Revenues
For the three months ended June 30, 2020 , cost of revenues amounted to
$8,276,774 as compared to $11,919,164 for the three months ended June 30, 2019 ,
a decrease of $3,642,390 or 30.56%. For the three months ended June 30, 2020 ,
cost of revenues accounted for 86.56% of total revenues compared to 94.86% of
total revenues for the three months ended June 30, 2019 .
For the six months ended June 30, 2020 , cost of revenues amounted to $9,863,701
as compared to $22,274,639 for the six months ended June 30, 2019 , a decrease of
$12,410,938 or 55.72%. For the six months ended June 30, 2020 , cost of revenues
accounted for 85.10% of total revenues compared to 92.51% of total revenues for
the six months ended June 30, 2019 .
Cost of revenues by product categories is as follows:
Three Months Ended
June 30, Increase Percentage
2020 2019 (Decrease) Change
TCM raw materials $ 3,873,423 $ 2,126,883 $ 1,746,540 82.12 %
Handicrafts - 3,778 (3,778 ) (100.00 )%
Extracts 3,849,876 9,652,672 (5,802,796 ) (60.12 )
Others 553,475 135,831 417,644 307.47 %
Total $ 8,276,774 $ 11,919,164 $ (3,642,390 ) (30.56 )%
30
Six Months Ended
June 30, Increase Percentage
2020 2019 (Decrease) Change
TCM raw materials $ 5,569,307 $ 5,144,317 $ 424,990 8.26 %
Handicrafts - 975 (975 ) (100.00 )%
Extracts 3,849,876 16,926,486 (13,076,610 ) (77.26 )
Others 444,518 202,861 241,657 119.12 %
Total $ 9,863,701 $ 22,274,639 $ (12,410,938 ) (55.72 )%
The decrease in our cost of revenues for the three and six months ended June 30,
2020 as compared to the three months and six months ended June 30, 2019 was in
line with the increase in revenue.
Gross Profit
For the three months ended June 30, 2020 , gross profit was $1,285,383 as
compared to $646,058 for the three months ended June 30, 2019 , representing
gross profit margins of 13.44% and 5.14%, respectively. For the six months ended
June 30, 2020 , gross profit was $1,727,638 as compared to $1,804,587 for the six
months ended June 30, 2019 , representing gross profit margins of 14.90% and
7.49%, respectively. Gross profit margins by categories are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(Decrease) (Decrease)
2020 2019 Increase 2020 2019 Increase
TCM raw materials 23.70 % 24.72 % (1.02 )% 21.38 % 26.39 % (5.01 )%
Handicrafts - % 1.18 % - % - % 84.06 % - %
Extracts 11.01 % 0.39 % 10.62 % 11.01 % 0.23 % 10.78 %
Others (246.55 )% (199.80 )% (46.75 )% (114.92 )% (70.36 )% (74.56 )%
Total 13.44 % 5.14 % 8.30 % 14.90 % 7.49 % 7.41 %
The increase in our overall gross profit margin for the three and six month
ended
Operating Expenses For the three months endedJune 30, 2020 , operating expenses amounted to$428,883 , as compared to$(490,143) for the three months endedJune 30, 2019 , an increase of$919,026 or 187.50%. The increase was mainly due to the bad debt recovery occurred during the three months endedJune 30, 2019 , no such event occurred during the three months endedJune 30, 2020 . For the six months endedJune 30, 2020 , operating expenses amounted to$713,750 as compared to$123,112 for the six months endedJune 30, 2019 , an increase of$590,638 or 479.76%. The increase was mainly due to the bad debt recovery occurred during the six months endedJune 30, 2019 , no such event occurred during the six months endedJune 30, 2020 . 31 Income from Operations For the three months endedJune 30, 2020 , income from operations was$856,500 , as compared to income from operations of$1,136,201 for the three months endedJune 30, 2019 , a decrease of$279,701 , or 24.62%. The decrease was primarily attributable to the increase of bad debt expenses and long-term inventory reserve after offset by the increase in gross profit from TCM raw materials
and extracts. For the six months endedJune 30, 2020 , income from operations was$1,013,888 , as compared to income from operations of$1,681,475 for the six months endedJune 30, 2019 , a decrease of$667,587 , or 39.70%. The decrease was primarily attributable to the increase of bad debt expenses and long-term inventory reserve after offset by the increase in gross profit from TCM raw materials
and extracts. Other (Expense) Income
For the three months endedJune 30, 2020 , total other expense was$118,933 as compared to total other expense of$330,103 for the three months endedJune 30, 2019 . The decrease was primarily attributable to the increase of interest expense and the decrease of exchange gain.
For the six months ended
Net Income As a result of the factors described above, our net income was$737,567 or$0.01 (basic and diluted), for the three months endedJune 30, 2020 , as compared to net income of$1,436,423 or$0.03 (basic and diluted), for the three months endedJune 30, 2019 . As a result of the factors described above, our net income was$888,979 or$0.02 (basic and diluted), for the six months endedJune 30, 2020 , as compared to net income of$1,813,465 or$0.03 (basic and diluted), for the six months endedJune 30, 2019 .
Foreign Currency Translation Adjustment
For the three months endedJune 30, 2020 , we reported an unrealized gain on foreign currency translation of$102,289 , as compared to an unrealized loss of$976,156 for the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , we reported an unrealized loss on foreign currency translation of$713,755 , as compared to an unrealized gain of$48,728 for the six months endedJune 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 endedJune 30, 2020 , comprehensive income of$839,856 was derived from the sum of our net income of$737,567 with foreign currency translation gain of$102,289 . For the three months endedJune 30, 2019 , comprehensive income of$460,267 was derived from the sum of our net income of$1,436,423 with foreign currency translation loss of$976,156 . For the six months endedJune 30, 2020 , comprehensive income of$175,224 was derived from the sum of our net income of$888,979 with foreign currency translation loss of$713,976755 . For the six months endedJune 30, 2019 , comprehensive income of$1,862,193 was derived from the sum of our net income of$1,813,465 with foreign currency translation gain of$48,728 . Segment Information For the three and six months endedJune 30, 2020 as compared to the three and six months endedJune 30, 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. 32
Information with respect to these reportable business segments for the three
months ended
For the three months For the three months
June 30, 2020 June 30, 2019
Revenues- Revenues - Revenues- Revenues -
third related third related
parties party Total parties party Total
Revenues:
PRC $ 159,655 $ 9,402,448 $ 9,562,103 $ 9,696,743 $ 2,782,765 $ 12,479,508
USA 54 - 54 85,714 - 85,714
Total revenues $ 159,709 $ 9,402,448 $ 9,562,157 $ 9,782,457 $ 2,782,765 $ 12,565,222 Information with respect to these reportable business segments for the six
months ended
For the six months For the six months
June 30, 2020 June 30, 2019
Revenues- Revenues - Revenues- Revenues -
third related third related
parties party Total parties party Total
Revenues:
PRC $ 159,655 $ 11,409,841 $ 11,569,496 $ 9,696,891 $ 14,263,288 $ 23,960,179
USA 21,843 - 21,843 119,047 - 119,047
Total revenues$ 181,498 $ 11,409,841 $ 11,591,339
$ 9,815,938 $ 14,263,288 $ 24,079,226
During the three months endedJune 30, 2020 and 2019, the revenue from PRC segment was$9,562,103 and$12,479,508 , respectively, decrease of$2,917,405 or 23.38% 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$9,537,088 , offset by the increase in revenue from related parties in the amount of 6,619,683.
During the three months endedJune 30, 2020 and 2019, the revenue fromUSA segment was$54 and$85,714 , respectively, decrease of$85,660 or 99.94%. The decrease in USA segment was due to the decrease in revenue from third parties in the amount of$85,660 attributable to ourChina customers' decreased oversea demand. During the six months endedJune 30, 2020 and 2019, the revenue from PRC segment was$11,569,496 and$23,960,179 , respectively, decrease of$12,390,683 or 51.71% 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$9,537,236 , and the decrease in revenue from related parties in the amount
of 2,853,447. During the six months endedJune 30, 2020 and 2019, the revenue fromUSA segment was$21,843 and$119,047 , respectively, decrease of$97,204 or 81.65%. The decrease in USA segment was due to the decrease in revenue from third parties in the amount of$97,204 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. AtJune 30, 2020 andDecember 31, 2019 , we had cash balances of$1,668,509 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 from
June 30, December 31, Percentage
Category 2020 2019 Change change
Current assets:
Cash $ 1,668,509 $ 742,294 $ 926,215 124.78 %
Accounts receivable 4,168,478 7,692,613 (3,524,135 ) (45.81 )%
Accounts receivable - related parties,
net 4,320,000 193,000 4,127,000 2,138.34 %
Inventories, net 1,819,551 2,637,389 (817,838 ) (31.01 )%
Prepaid expenses - related parties - 5,829 (5,829 ) (100.00 )%
Prepaid expenses and other assets 222,982 51,140 171,842 336.02 %
VAT recoverable 751,865 349,096 402,769 115.37 %
Current liabilities:
Accounts payable for acquisition of yew
forests and others 1,324,718 920,459 404,259 43.92 %
Accounts payable for acquisition of yew
forests and others - related parties 420,103 16,629 403,474 2426.32 %
Advances from customers 407,208 50,071 357,137 713.26 %
Advances from customers - related
parties 110,349 - 110,349 100.00 %
Accrued expenses and other payables 403,015 266,749
136,266 33.81 %
Taxes payable 115,264 116,440 (1,176 ) (1.01 )%
Due to related parties 630,724 633,779 (3,055 ) (0.48 )%
Short-term borrowings 8,487,119 8,541,517 (54,398 ) (0.64 )%Operating lease liabilities, current 59,799 52,104 7,695 14.77 % Working capital: Total current assets$ 12,951,385 $ 11,671,361 $ 1,280,024 10.97 % Total current liabilities 11,843,035 10,481,308
1,363,483 13.01 %
Working capital $ 1,108,350 $ 1,190,053 $ (81,703 ) (6.87 )%
34
Our working capital decreased by $81,703 to $1,108,350 at June 30, 2020 , from
working capital of $1,190,053 at December 31, 2019 . This decrease in working
capital is primarily attributable to:
? a decrease in accounts receivable of $3,524,135
? an increase in accounts payable for acquisition of yew forests and
others of $404,259
? an increase in accounts payable for acquisition of yew forests and
others - related parties of $403,474
? an increase in advances from customers of $357,137
? a decrease in inventories of $817,838
partially offset by:
? an increase in accounts receivable - related parties of $4,127,000
? an increase in cash of $926,215
? an increase in VAT recoverable of $402,769 For the six months endedJune 30, 2020 , net cash flow provided by operating activities was$6,434,367 , as compared to net cash flow provided by operating activities of$3,690,827 for the six months endedJune 30, 2019 , an increase of$2,743,540 . 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 six months ended
? net income of approximately $889,000 adjusted for the add-back of
non-cash items, such as inventory additional reserves ofapproximately
$370,000 , sale of yew forest assets as inventory of
approximately
4,330,000, amortization of land use rights and yew forest assets of
approximately $1,272,000 and bad debt expense of approximately
$197,000 ; and
? Changes in operating assets and liabilities, such as a decrease in
accounts receivable of approximately $3,430,000 , an increase in
accounts receivable-related parties of approximately $4,348,000 , and a
decrease in inventories of approximately $828,000
35
For the six months ended
? net income of approximately
items, such as inventory write-down of approximately
forest assets as inventory of approximately 3,814,000, amortization of land
use rights and yew forest assets of approximately
recovery of approximately
? Changes in operating assets and liabilities, such as an increase in accounts
receivable of approximately
receivable-related parties of approximately
inventories of approximately
customers-related party of approximately $2,777,000 .
Net cash flow used in investing activities was approximately$5,466,000 for the six months endedJune 30, 2020 . During the six months endedJune 30, 2020 , we have made payment in approximately$5,427,000 for purchase of yew forest assets, and made payment for purchase of property and equipment$39,000 . Net cash flow used in investing activities was approximately$6,438,000 for the six months endedJune 30, 2019 . During the six months endedJune 30, 2019 , we have made payment in approximately$6,297,000 for purchase of yew forest assets, and made prepayments for purchases of yew forest assets of approximately$133,000 . Net cash flow provided by financing activities was approximately$71,000 for the six months endedJune 30, 2020 and consisted of proceeds of$5,300,000 from banks, and offset by repayments of approximately$5,230,000 . Net cash flow provided by financing activities was approximately$2,414,000 for the six months endedJune 30, 2019 and consisted of proceeds of$5,234,000 from banks, and offset by repayments of approximately$2,850,000 . 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. 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 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 ofJune 30, 2020 andDecember 31, 2019 , approximately$45.6 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 theU.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© Edgar Online, source
