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EXCEL - IDEA: XBRL DOCUMENT - China YCT International Group, Inc.Financial_Report.xls
EX-32 - EXHIBIT 32 - China YCT International Group, Inc.v315376_ex32.htm
EX-31.1 - EXHIBIT 31.1 - China YCT International Group, Inc.v315376_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - China YCT International Group, Inc.v315376_ex31-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

 

Amendment No. 1

 

x         QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

                             For the quarterly period ended December 31, 2011

 

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

 

                 For the transition period from ______________ to _____________

 

Commission file number: 0-53600

 

CHINA YCT INTERNATIONAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 65-2954561
(State or other jurisdiction of incorporation or (IRS Employer Identification No.)
organization)  
   
c/o Shandong Spring Pharmaceutical Co., Ltd Economic  
Development Zone.  
Gucheng Road Sishui County Shandong Province PR China 273200
(Address of principal executive offices) (Zip Code)

 

Issuer's telephone number: 406-282-3188

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x     No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £                          Accelerated filer £

Non-accelerated filer £ (Do not check if a smaller reporting company)  Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨      No x

 

The number of shares outstanding of the issuer’s common stock on February 7, 2012 was 73,830,610.

 

 
 

 

EXPLANATORY NOTE – AMENDMENT

 

The Form 10QA is being amended to restate our previously issued financial statements for the nine months ended December 31, 2011. On February 28, 2011, we acquired a United States patent which was accounted for as an acquisition of an asset. However, we recognized the contingent considerations that would be accounted for under the acquisition of a business. Therefore, we overstated the fair value of the patent. We restated our financial statements to correct this error. The changes in the financial statements at December 31, 2011 include, but are not limited to, a decrease in the amount recorded for net intangible assets by $19, 154,089, a decrease in the amount recorded as a contingent liability by $17.306.775, a reduction in the amortization attributed to the patent of $479,747, an increase in amount recorded as an other expense by $3,319,135, and an accumulative reduction of $1,954,822 in retained earnings. We have also provided additional explanation as to (i) the intended purposes of the patent, (ii) the lack of accounts receivable as of December 31, 2011, (iii) the lack of effectiveness of our internal controls and procedures at December 31, 2011 and (iv) additional disclosure regarding the tax treatment of the acquisition of the patent.

 

 
 

 

CHINA YCT INTERNATIONAL GROUP, INC.

FORM 10-Q/A

 QUARTERLY PERIOD ENDED DECEMBER 31, 2011

 

INDEX

TABLE OF CONTENTS

 

        Page
           
    PART I - FINANCIAL INFORMATION      
           
Item 1:   Financial Statements   3  
           
Item 2:   Management's Discussion and Analysis of Financial Condition and Results of Operations   19  
           
Item 3:   Quantitative and Qualitative Disclosures About Market Risk   28  
           
Item 4:   Controls and Procedures   29  
           
    PART II - OTHER INFORMATION      
           
Item 1:   Legal Proceedings   29  
           
Item 1A:   Risk Factors   29  
           
Item 2:   Unregistered Sales of Equity Securities and Use of Proceeds   29  
           
Item 3:   Defaults Upon Senior Securities   29  
           
Item 4:   Removed and Reserved   30  
           
Item 5:   Other Information   30  
           
Item 6:   Exhibits   30  

 

2
 

 

Item 1. Financial Statement

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 2011 AND 2010 (UNAUDITED)

 

Table of Contents

 

  Page
   
Consolidated Balance Sheets as of December 31, 2011 (Unaudited) and March 31, 2011 4
   
Consolidated Statements of Income for the three months and nine months ended December 31, 2011 and 2010 (Unaudited) 5
   
Consolidated Statement of Stockholders’ Equity as of December 31, 2011 (Unaudited) and March 31, 2011 6
   
Consolidated Statements of Cash Flows for the nine months Ended December 31, 2011 and 2010 (Unaudited) 7
   
Notes to Consolidated Financial Statement (Unaudited) 8-18

 

3
 

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

 

          UNIT: USD$  
    December 31, 2011     March 31, 2011  
    (Unaudited)     (Audited)  
Assets                
Current assets:                
Cash and cash equivalent   $ 18,443,850     $ 6,046,804  
Prepaid accounts     67,627       15,602,258  
Inventory     2,483,981       59,183  
Other receivable from related parties     -       -  
Total current assets     20,995,458       21,708,245  
Plant, property and equipment, net     9,784,841       9,629,558  
Construction in progress     219,752       211,189  
Intangible assets, net     *51,407,574 *40,560,015
Total assets     82,407,625       72,109,007  
                 
Liabilities and Stockholders’ Equity (Deficit)                
Liabilities:                
Current liabilities:                
Accounts payable     -       -  
Tax payable     *1,435,266     *1,683,944
Other payable     *4,519,903     229,561  
Derivative liability     3,319,135       *0
Total current liabilities     9,274,304       1,913,505  
                 
Stockholders’ Equity                
Preferred stock, par value $500.00 per share; 45 shares authorized and issued at December 31, 2011 and March 31, 2011     22,500       22,500  
Common stock, par value $0.001 per share; 1,000,000,000 shares authorized at December 31, 2011 and March 31, 2011; 73,780,610 and 73,731,361 shares issued at December 31, 2011 and March 31, 2011, respectively     73,780       73,758  
Additional paid-in capital     36,879,643       36,868,554  
Statutory reserve     956,633       956,633  
Retained earnings     *32,300,436     *30,232,764
Accumulated other comprehensive income     *2,900,329     2,041,293  
Total stockholders’ equity     73,133,321       70,195,502  
Total liabilities and stockholders’ equity   $ 82,407,625     $ 72,109,007  

 

 *: restated.

The accompanying notes are an integral part of the consolidated financial statements.

 

4
 

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

                      UNIT: USD$  
    FOR THE THREE MONTHS     FOR THE NINE MONTHS  
    ENDED     ENDED  
    December 31,     December 31,     December 31,     December 31,  
    2011     2010     2011     2010  
                         
Sales Revenue   $ 10,112,489     $ 9,886,824     $ 26,477,760     $ 21,301,142  
Cost of Goods Sold     4,712,730       4,613,157       11,894,299       10,788,613  
Gross Profit     5,399,758       5,273,667       14,583,461       10,512,529  
                                 
Selling Expenses     713,694       843,458       2,505,249       1,776,853  
G&A Expense     *1,570,674     352,096       *4,028,897     855,011  
R&D Expenses     183,693       111,221       577,514       233,210  
Total expense     2,468,061       1,306,775       7,111,660       2,865,074  
Income from operation     2,931,698       3,966,892       7,471,801       7,647,455  
Interest income (Expense)     65,818       18,273       209,953       18,273  
Other income (Expense)     *(3,319,135 )     580,211       *(3,319,135 )     580,211  
Profit before tax     (321,619 )     4,565,376       4,362,619       8,245,939  
Income tax     *1,112,777     1,141,919       *2,283,837     2,085,719  
                                 
Net income     (1,434,396 )     3,423,457       2,078,782       6,160,220  
Other comprehensive income                                
Foreign currency translation adjustment     *(1,724 )     510,647       *847,925     2,199,600  
Comprehensive income   $ (1,436,120 )   $ 3,934,104     $ 2,926,707     $ 8,359,820  
                                 
Basic and diluted income per common share                                
Basic and Diluted     *0.00     0.12       *0.03     0.21  
                                 
Weighted average number of common shares outstanding                                
Basic and Diluted     73,780,610       29,473,902       73,780,610       29,473,902  

 

  *: restated.

The accompanying notes are an integral part of the consolidated financial statements.

 

5
 

 

CHINA YCT INTERNATIONAL GROUP, INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)

 

                               UNIT: USD$ 
CHINA YCT                                 
INTERNATIONAL  Preferred Stock           Additional                 
GROUP, INC.  Series A   Common shares   paid in   Statutory   Accumulated   Retained     
   Shares   Amount   Shares   Amount   Capital   Reserve   OCI   Earnings   Total 
                                     
Balance - March 31, 2011   45   $22,500    73,758,388   $73,758   $36,868,554   $956,633   $2,041,293   $*30,232,764  $70,195,502 
Issuance of common shares to independent directors             22,222    22    11,089                   11,111 
Net income for the year                                      *1,236,152   1,236,152 
Foreign currency translation adjustment                                 *417,275        417,275 
                                              
Balance - June 30, 2011   45   $22,500    73,780,610   $73,780   $36,879,643   $956,633   $2,458,568   $31,457,805   $71,848,929 
Net income for the year                                      *2,277,026   2,277,026 
Foreign currency translation adjustment                                 *443,485        443,485 
                                              
Balance - September 30, 2011   45   $22,500    73,780,610   $73,780   $36,879,643   $956,633   $2,902,053   $33,734,832   $74,569,441 
Net income for the year                                      *(1,434,396)   (1,434,396)
Foreign currency translation adjustment                                 *(1,724)        (1,724)
                                              
Balance - December 31, 2011   45   $22,500    73,780,610   $73,780   $36,879,643   $956,633   $2,900,329   $32,300,436   $73,133,321 

 

 *: restated.

The accompanying notes are an integral part of the consolidated financial statements.

 

6
 

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW

(Unaudited)

 

       UNIT: USD$ 
   NINE MONTH ENDED 
   December 31, 2011   December 31, 2010 
Cash Flows From Operating Activities:          
Net income   2,078,782   $6,160,220 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   *3,693,018   463,077 
Issue of common shares as compensation   -    19,760 
Changes in operating assets and liabilities:          
Inventory   (2,424,798)   197,645 
Advance to suppliers          
Other receivable from related parties          
Accounts payable   -    (2,299,928)
Customer deposit          
Taxes payable   *(248,678)   278,575 
Accrued expenses and other payables   *7,620,588   43,005 
           
Net cash provided by (used in) operating activities   10,718,912    4,862,354 
           
Cash flows from investing activities:          
Addition to plant and equipment   (14,704,423)   (563,183)
Loan repaid from (provided to) related party        - 
Prepayment/deposit to Jining Tianruitong for purchasing of drug patents   15,534,631    (15,354,102)
           
Net cash provided by (used in) investing activities   830,208    (15,917,285)
           
  Effect of exchange rate changes on cash and cash equivalents   *847,926   1,046,836 
           
Net increase (decrease) in cash and cash equivalents   12,397,046    (10,008,095)
           
Cash and cash equivalents at beginning of period   6,046,804    11,911,933 
           
Cash and cash equivalents at ending of period   18,443,850   $1,903,839 
           
Supplemental disclosures of cash flow information:          
Cash paid during the periods for:          
Interest   -    - 
Income taxes   2,178,687   $2,144,058 

 

 *: restated.

The accompanying notes are an integral part of the consolidated financial statements.

 

7
 

 

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

 

China YCT International Group, Inc. (“China YCT”) was incorporated in the State of Florida, in the United States (the “US”) in January 1989, and reincorporated in the State of Delaware on April 4, 2007.   China YCT principally operates through directly owned subsidiaries: Landway Nano Bio-Tech, Inc. (100% owned), incorporated in Delaware,, and Shandong Spring Pharmaceutical Co., Ltd. (“Shandong Spring”), (100% owned), incorporated in the People’s Republic of China (“PRC”). China YCT International Group, Inc. and its subsidiaries are collectively referred to as the “Company.”

 

China YCT, through its wholly owned subsidiary, Shandong Spring, is engaged in the business of developing, manufacturing and selling its own medicine from gingko extract, and other dietary supplement products in the PRC.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

 

Principles of consolidation

 

The consolidated financial statements include the financial statements of China YCT, Landway Nano and its wholly owned subsidiary, Shandong Spring. All inter-company transactions and balances are eliminated in consolidation.

 

Use of estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include: the valuation of inventory, and estimated useful lives and impairment of property and equipment and intangible assets.

 

Cash and cash equivalents

 

For purposes of the statement of cash flow, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

Inventory

 

Inventory is primarily composed of raw materials and packing materials for manufacturing, work in process, and finished goods. Inventories are valued at the lower of cost or market with cost determined on a weighted average basis. Management compares the cost of inventory with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost.

 

Property and equipment

 

Property and equipment are stated at cost. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and locations for its intended use. Depreciation is calculated using the straight-line method over the following useful lives:

 

Buildings 30-35 years
   
Machinery, equipment and automobiles 7-15 years
   
Furniture and fixtures 7-10 years

 

Expenditures for maintenance and repairs are charged to expense as incurred. Additions, renewals and betterments are capitalized.

 

8
 

 

Intangible Assets

 

(i) Land Use Rights:

 

All land in the PRC is owned by the government and cannot be sold to any individual or company.  However, the government may grant a “land use right” to occupy, develop and use land. The Company records land use rights obtained as intangible assets at cost, which is amortized evenly over the grant period of 50 years.

 

(ii) Patent:

 

In March 2010, the Company purchased one patent from Shandong YCT Corp. The patent is the Company’s exclusive right to use an aglycone type and purification method of biotransformation in the gingko product manufacturing process for a period of 20 years from the patent application date. The patent was recorded at cost when purchased, and is being amortized over the shorter of its remaining legal life, 16.5 years, or its useful life, on a straight-line basis.

 

On February 28, 2011, the Company acquired U.S. patent No. 6,475,531 B1 titled “Safe Botanical Drug for Treatment and Prevention of Influenza and Increasing Immune Function” through a purchase agreement with L.Y. Research Corp., a New Jersey Corporation.

 

According to the purchase agreement between the Company and L.Y. Research Corp., the Company acquired the patent from L.Y. Hong Kong Biotech Limited (LYHK), L.Y. Research Corp’s wholly owned subsidiary incorporated in Hong Kong, China, in exchange for 44,254,952 shares of common stock at the acquisition date. In addition, 11,063,968 shares of common stock will be issued to the seller upon the occurrence of the quotation of the Company’s common stock on the OTCQB or OTCBB; and 20,546,711 shares will be issued to the seller upon the receipt by the Company of a minimum of $20,000,000 in gross proceeds from a debt or equity financing, or a series of debt and/or equity financings (the “Financing”); or upon the quotation of its common stock on NASDAQ or a major stock exchange located outside of the United States (collectively, “Events”). The consideration of $32,748,665 at inception was calculated by multiplying 44,254,952 shares of common stock by the Company’s quoted stock price of $0.74 per share on February 28, 2011. It is being amortized over the shorter of its remaining legal life, 9.9 years, or its useful life, on a straight-line basis. An additional consideration of $2,765,992 was calculated by multiplying 11,063,968 common stock shares by the Company’s quoted price of $0.25 per share on September 9, 2011 when the Company’s stock was successfully listed on the OTCQB and the L.Y. Research Corp was entitled to the 11,063,968 shares of the common stock.

 

In October 2011, two patents were transferred to the Company based on a purchase agreement signed with Jining Tianruitong Technology development Company, Limited on October 26, 2010; which are “Treatment to ischemic encephalopathy and its preparation method” (ZL200510045001.9) and “Chinese herbal medicine compound to treat renal insufficiency and its preparation” (ZL200710013301.8). The patents were recorded at cost when purchased, and are being amortized over the shorter of the remaining legal lives, 13.75 years and 14.95 years, respectively; or their useful lives, on a straight-line basis.

 

Revenue recognition

 

The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104, included in the Codification as ASC 605, Revenue Recognition . Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.

 

Unearned revenue

 

Revenue from the sale of goods or services is recognized at the time that goods are delivered or services are rendered. Receipts in advance for goods to be delivered or services to be rendered in a subsequent period are carried forward as unearned revenue.

 

Impairment of long-lived assets

 

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. An impairment loss, measured based on the fair value of the asset, is recognized if expected future undiscounted cash flows are less than the carrying amount of the assets.

 

Income taxes

 

The Company accounts for income tax under the asset and liability method as stipulated by Accounting Standards Codification (“ASC”) 740 formerly Statement of Financial Accounting Standards (”SFAS”) No. 109, “ Accounting for Income Taxes ”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns.  Deferred Income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities.  Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company did not recognize any deferred tax amount at December 31, 2011 as well as March 31, 2011.

 

9
 

 

China YCT International, Inc. is a holding company of Shandong Spring Pharmaceutical Co., Ltd and does not have any operating activities. Although the contract of the acquisition of the US patent was executed by the holding company, in substance, the patent was acquired and is used by the Company’s operating entity in China. For the same reason, the amortization of the patent was a deduction to the Chinese operating entity’s tax liability. Therefore, the Company does not incur any United States income tax liabilities.

 

The expense associated with the recognition of a contingent obligation under ASC 480-10-25-8, is not tax deductible in China. Per ASC 740-10-25-3A, “An excess of the amount for financial reporting over the tax basis of an investment in a foreign subsidiary or a foreign corporate joint venture that is essentially permanent in duration. ” Therefore, the tax difference in the amount of $829,784 ($3,319,135 x 25% tax rate) caused by expense recognized at our book but not in the Chinese tax return at December 31, 2011 will be a permanent difference.

 

10
 

 

Value-added tax

 

Sales revenue represents the invoiced value of goods, net of a Value-Added Tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 4% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.

 

The Company recorded net VAT Payable in amount of $310,431 and $489,962 as of December 31, 2011 and March 31, 2011.

 

Research and development

 

Research and development costs are related primarily to the Company’s developing its intellectual property. Research and development costs are expensed as incurred. The costs of material and equipment that are acquired or constructed for research and development activities and have alternative future uses are classified as plant and equipment and depreciated over their estimated useful lives.

 

The research and development expense for the three months ended December 31, 2011 and 2010 was $183,693 and $111,221, respectively.

 

The research and development expense for the nine months ended December 31, 2011 and 2010 was $577,514 and $233,210, respectively.

 

Advertising costs

 

Advertising costs for newspaper and television are expensed as incurred.  

 

The Company incurred advertising costs of $157,721 and $0 for the three months ended December 31, 2011 and 2010, respectively.

 

The Company incurred advertising costs of $390,452 and $169 for the nine months ended December 31, 2011 and 2010, respectively.

 

Mailing and handling costs

 

The Company accounts for mailing and handling fees in accordance with the FASB ASC 605-45 ( Emerging Issues Task Force ( EITF ) Issue No . 00-10 , Accounting for Shipping and Handling Fees and Costs ). T he Company includes shipping and handling fees billed to customers in net revenues. Amounts incurred by the Company for freight are included in cost of goods sold.

 

For the three months ended December 31, 2011 and 2010, the Company incurred $1,475 and $429,498 mailing and handling costs, respectively.

 

For the nine months ended December 31, 2011 and 2010, the Company incurred $662,629 and $890,233 mailing and handling costs, respectively.

 

Stock Based Compensation

 

The Company measures compensation expense for its non-employee stock-based compensation under FASB ASC 718. The fair value of the stock issued is used to measure the transaction, as this is more reliable than the fair value of the services received. Fair value is measured as the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense.

 

Net income (loss) per share (“EPS”)

 

Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, forward contracts, warrants to purchase common stock, contingently issuable shares, common stock options and warrants and their equivalents using the treasury stock method) were exercised or converted into common stock.

 

There are 31,610,679 and nil common stock equivalents available for dilution purposes as of December 31, 2011 and 2010, respectively.

 

11
 

 

Risks and uncertainties

 

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Fair Value of Financial Instruments

 

For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.

 

As of December 31, 2011, the Company did not identify any financial instruments that are required to be presented on the balance sheet at fair value other than those whose carrying amounts approximate fair value due to their short maturities.

 

Foreign currency translation

 

The accounts of the Company’s Chinese subsidiary are maintained in the RMB and the accounts of the U.S. parent company are maintained in the USD. The accounts of the Chinese subsidiary were translated into USD in accordance with Accounting Standards Codification (“ASC”) Topic 830 “Foreign Currency Matters,” with the RMB as the functional currency for the Chinese subsidiary. According to Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates and statement of income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statements of income.

 

Translation adjustments resulting from this process amounted to $2,889,218 and $2,199,600 as of December 31, 2011 and 2010, respectively.

 

The following exchange rates were adopted to translate the amounts from RMB into United States dollars (“USD$”) for the respective periods:

 

   Dec 31, 2011   Mar 31, 2010   Dec 31, 2010 
Three Months End RMB Exchange Rate (RMB/USD$)   6.3009    6.5564    6.6227 
Average Period RMB Exchange Rate (RMB/USD$)   6.3403    6.7111    6.7762 

 

Recent accounting pronouncements

 

In June 2011, FASB issued an amendment to the FASB Codification Topic 220 – Presentation of Comprehensive Income. The objective of this Update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted, and the amendments do not require any transition disclosures. The Company decided to adopt the amendment for the year starting with June 1, 2012. The Company does not expect the adoption of this pronouncement to have a significant impact on tis financial condition or results of operations.

 

12
 

 

In May 2011, FASB issued an amendment to FASB Codification Topic 820 - Fair Value Measurement. The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity's shareholders' equity in the financial statements. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Nonpublic entities may apply the amendments in this Update early, but no earlier than for interim periods beginning after December 15, 2011. The Company does not expect any significant impact in tis financial statements when it is adopted for the year starting from June 1, 2012. The Company does not expect the adoption of this pronouncement to have a significant impact on tis financial condition or results of operations.

 

In April 2011, FASB issued an amendment to FASB Codification Topic 310 – Receivables: A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendment requires that, in evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both exist: (1) the restructuring constitutes a concession. (2) The debtor is experiencing financial difficulties. The amendments to Topic 310 clarify the guidance on a creditor's evaluation of whether it has granted a concession as well as on a creditor's evaluation of whether a debtor is experiencing financial difficulties. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor's guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. As entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies-Loss Contingencies. An entity should disclose the information required by paragraphs 310-10-50-33 through 50-34, which was deferred by Accounting Standards Update No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. For nonpublic entities, the amendments in this Update are effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. Early adoption is permitted for public and nonpublic entities. A nonpublic entity may early adopt the amendments for any interim period of the fiscal year of adoption. A nonpublic entity that elects early adoption should apply the provisions of this Update retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The Company decides to adopt the amendment for the year starting from June 1, 2012, and the Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.

 

NOTE 3 – PREPAID ACCOUNTS

 

The prepaid account in amount of $67,627 is a cash payment to Jining Tianruitong Technology Development Limited Company. On October 26, 2010, Shandong Spring Pharmaceutical signed an agreement to purchase three patents relating to Chinese herbal formulas from Jining Tianruitong Technology Development Limited Company for $15,557,318. Pursuit to this agreement, the Company made an advance payment of $15,557,318 in October 2010. Subsequently, this purchase agreement was amended and restated on March 14, 2011. According to the amended terms, $10,050,910 of the total purchase price is returned to the Company by the owner of the patents because certain governmental approvals for the transfer patents were not completed and the patents are being purchased as a group. As of December 31, 2011, only $67,627 remains in the prepaid account. The rest of the prepayment has been returned.

 

NOTE 4 - INVENTORY

 

Inventory consists of finished goods, work-in-process, and raw materials. No allowance for inventory was made for the nine months ended December 31, 2011 and 2010.

The components of inventories as of December 31, 2011, and March 31, 2011 were as follows:

 

   Period Ended 
   Dec 31, 2011   Mar 31, 2011 
Raw materials  $869,101   $8,699 
Work-in-progress   539,529    27,225 
Finished goods  $1,075,351   $23,259 
           
Total Inventories  $2,483,981   $59,183 

 

13
 

 

NOTE 5 - PLANT, PROPERTY AND EQUIPMENT, NET

 

The components of property and equipment as of December 31, 2011 and March 31, 2011 were as follows:

 

   Period Ended, 
   December 31,   March 31, 
   2011   2011 
Machinery & Equipment  $537,897   $516,935 
Furniture & Fixture   164,364    96,156 
Building   10,098,970    9,685,212 
Subtotal   10,801,231    10,298,303 
Less: Accumulated Depreciation   (1,016,390)   (668,745)
Total plant, property and equipment, net  $9,784,841   $9,629,558 

 

The depreciation expense for the three months ended December 31, 2011 and 2010 was $27,885 and 24,066, respectively.

 

The depreciation expense for the nine months ended December 31, 2011 and 2010 was $155,283 and $100,992, respectively.

 

NOTE 6 – CONSTRUCTION IN PROGRESS

 

Construction in progress represents direct costs of construction or acquisition and design fees incurred for the Company’s new plant and equipment. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is made until construction is completed and put into use.

 

NOTE 7 - MAJOR CUSTOMER AND VENDOR

 

The Company currently sells two types of products: non-medical and medical products. Under the current sales model, the Company markets and sells non-medical products through distribution agents, and sells medical products through a certified medicine sales agent. According to the contracts with the agents, the Company does not make any credit sales; therefore, does not carry any accounts receivable balance.

 

For the three months ended December 31, 2011, the purchases from the two major vendors were $4,189,376, representing 86% of the Company’s total purchases for the quarter.

 

For the nine months ended December 31, 2011, the purchases from the two major vendors was $9,743,034, representing 81% of the Company’s total purchased for the period. For the nine months ended December 31, 2010, the purchase from the one major vendor, Shandong YCT was $6,272,395, representing 62% of the Company’s total purchases in the nine months.

 

   For the nine months ended 
   December 31, 2011 
Name of vendor  Amount   % 
Shandong Kangyuan  $5,506,197    46%
Shandong YCT   4,236,837    35%
Purchase from two largest suppliers  $9,743,034    81%

 

NOTE 8 - INTANGIBLE ASSETS, NET

 

The intangible assets of the Company consist of land use right and purchased patents.

 

Net land use right and purchased patent were as follows:

 

14
 

 

    Amortization     As of,  
    Period     Dec 31, 2011     Mar 31, 2011  
Land use right     50 years     $ 1,547,801     $ 1,547,801  
Less: Accumulated amortization             (169,677 )     (139,821 )
Land use right, net             1,378,124       1,407,980  
Patent 1     16.5 years       7,016,045       7,016,045  
Less: Accumulated amortization for Patent 1             (824,076 )     (337,476 )
Patent 1, net             6,191,969       6,678,569  
Patents (non-US No. ZL200510045001.9)     13.75 years       9,839,864       -  
Less: Accumulated amortization for Patent (non-US No. ZL200510045001.9)             (178,906 )     -  
Patent (non-US No. ZL200510045001.9), net             9,660,958       -  
Patents (non-US No. ZL200710013301.8)     14.95 years       1,587,075       -  
Less: Accumulated amortization for Patent (non-US No. ZL200710013301.8)             (26,600 )     -  
Patent (non-US No. ZL200710013301.8), net             1,560,475       -  
Patent (U.S. No. 6,475,531 B1)     9.9 years       35,514,657       32,748,665  
Less: Accumulated amortization for Patent (U.S. No. 6,475,531 B1)             (2,898,608 )     (275,199 )
Patent (U.S. No. 6,475,531 B1), net             32,616,049       32,473,466  
Intangible assets, net           $ 51,407,575     $ 40,560,015  

 

On October 1, 2011, two patents were transferred to the Company. The book value for patent – “Treatment to ischemic encephalopathy and its preparation method” (ZL 200510045001.9) is amounted to $9,839,864; and the book value for patent – “Chinese herbal medicine compound to treat renal insufficiency and its preparation” (ZL 200710013301.8) is amounted to $1,587,075.

 

The amortization expense of land use right for the three months ended December 31, 2011 and 2010 was $9,439 and $18,433, respectively. The amortization expense of patents for the three months ended December 31, 2011 and 2010 was $1,419,727 and $176,513, respectively.

 

The amortization expense of land use right for the nine months ended December 31, 2011 and 2010 was $29,856 and $26,573, respectively. The amortization expense of patents for the nine months ended December 31, 2011 and 2010 was $3,315,517 and $261,331, respectively.

 

15
 

 

NOTE 9 - TAX PAYABLE

 

Tax payable at December 31, 2011 and March 31, 2011 were as follows:

 

    As of  
    December 31, 2011     March 31, 2011  
             
Corporate Income Tax   $ 1,099,997     $ 1,190,436  
Value-Added Tax     310,431       489,962  
Other Tax & Fees     24,838       3,546  
                 
Total Tax Payable   $ 1,435,266     $ 1,683,944  

 

NOTE 10 - INCOME TAXES

 

Shandong Spring Pharmaceutical Co., Ltd is subject to the Enterprise income tax (“EIT”) at a statutory rate of 25%.

 

The expense associated with the recognition of a contingent obligation under ASC 480-10-25-8, is not tax deductible in China. Per ASC 740-10-25-3A, “An excess of the amount for financial reporting over the tax basis of an investment in a foreign subsidiary or a foreign corporate joint venture that is essentially permanent in duration. ” Therefore, the tax difference in the amount of $829,784 ($3,319,135 x 25% tax rate) caused by expense recognized at our book but not in the Chinese tax return at December 31, 2011 will be a permanent difference.

 

For the three months ended December 31, 2011 and 2010, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $1,112,777 and $1,141,919, respectively.

 

For the nine months ended December 31, 2011 and 2010, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $2,283,837 and $2,085,719, respectively.

 

NOTE 11 – OTHER LIABILITY

 

On February 28, 2011, the Company entered into a purchase agreement with L.Y. Research Corp., a New Jersey corporation (“LY Research”), which purchase agreement was amended and restated on August 15, 2011 and amended on October 21, 2011 (the “Purchase Agreement).   Pursuant to the terms of the Purchase Agreement, the Company acquired a patent (the “LY Patent”) from L.Y. (HK) Biotech Limited, a wholly owned company by L.Y. Research Corp., in exchange for 44,254,952 shares of the Company’s common stock at inception date. In addition, there will be two contingent considerations of total 31,610,544 shares to be issued upon the occurrences of some pre-determined events. The first contingent consideration of 11,063,968 shares should be issued upon the Company’s stock being listed on OTCBB or OTCQB.

 

Because the obligation to issue additional shares to LY Research Cop is upon the occurrence of certain predetermined events, the liability is recognized when the contingencies are resolved. On September 9, 2011, LY Research Corp became entitled to the issuance of 11,063,968 shares of common stock upon the occurrence of the quotation of the Company’s common stock on the OTCQB.   Therefore, the liability to issue 11,063,968 shares of common stocks should be recorded for the quarter ended September 30, 2011 and forward.

 

The amount of the liability is calculated by multiplying the 11,063,968 shares of stocks by the quoted average stock price on September 9, 2011. The stock price per share on September 9, 2011 was $0.25. The calculation of the liability to issue 11,063,968 shares of the common stocks is as followed:

 

Other Liability $2,765,992 = 11,063,968 shares x $0.25

 

We recognized $2,765,992 as an “Other Liability” with an offsetting debit to record addition in the US patent, for the quarter ended September 30, 2011 and forward.

  

16
 

 

NOTE 12 – DERIVATIVE LIABILITY

 

On February 28, 2011, the Company entered into a purchase agreement with L.Y. Research Corp., a New Jersey corporation (“LY Research”); and the purchase agreement was amended and restated on August 15, 2011 (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, the Company acquired a patent (the “LY Patent”) from L.Y. (HK) Biotech Limited, a wholly owned company by L.Y. Research corp., in exchange for 44,254,952 shares of common stock at the acquisition date. In addition, 11,063,968 shares of common stock will be issued to the seller upon the occurrence of the quotation of the Company’s common stock on the OTCQB or OTCBB; and 20,546,711 shares will be issued to the seller upon the receipt by the Company of a minimum of $20,000,000 in gross proceeds from a debt or equity financing, or a series of debt and/or equity financings (the “Financing”); or upon the quotation of its common stock on NASDAQ or a major stock exchange located outside of the United States (collectively, “Events”). On September 9, 2011, the Company’s stock became quoted at OTCQB, therefore, 11,063,968 shares of common stock became issuable on September 9, 2011.

 

On October 21, 2011, the Purchase Agreement was further amended to state that if either of the Events should not occur within one year from October 21, 2011; the shares issued pursuant to the Purchase Agreement shall be returned to the Company and the LY Patent shall be returned to LY Research and the Purchase Agreement, as amended, shall be cancelled and of no further force or effect. Because the Company is required to acquire the issued shares by returning the US patent if the predetermined financing event is not met, the term meets the definition under the ASC 480-10-25-8, “Obligations to Repurchase Issuer’s Equity Shares by Transferring Assets”. Per ASC 480-10-25-8, the obligation to repurchase an issuer’s own shares by transferring asset should be recognized as a liability at inception.

 

In addition, because the acquisition is not a certain future event as of October 21, 2011 and December 31, 2011, the Company considers the contingent obligation to repurchase its own shares as a written put option. Per ASC 480-10-30-7, all financial instruments, recognized under the guidance in Section 480-10-25, other than certain physically settled forward purchase contracts, shall be measured initially at fair value.

 

The fair value of the obligation on October 21, 2011 should be the market price of the shares that the company is obligated to repurchase if the financing is failing and weighted by the probability of the Company failing to meet the financing target of $20,000,000 or achieving the listing on NASDAQ or a major foreign stock exchange. On October 21, 2011, the company had issued and was obligated to issue 55,318,920 common shares to Dr. Liu. Therefore, the number of potential shares we would need to repurchase was 55,318,920 on October 21, 2011 and December 31, 2011

 

Determination of the market price of the shares:

 

Per ASC 820-10-20 “Readily Determinable Fair Value”, “ The fair value of an equity security is readily determinable if sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by Pink Sheets LLC. Restricted stock meets that definition if the restriction terminates within one year. ” Because the sales price of the company’s common stock shares was currently available in the over-the-counter market, the fair value of the company’s stock is readily determinable and is the sales price of the stock on October 21, 2011. Because the company’s common stock was not traded on October 21, 2011 and December 31, 2011, the closest quotations were the prices on October 23, 2011, which was $0.40/per share and December 22, 2011, which was $0.40/per share as well. Therefore, the fair values per share for both dates were $0.40.

 

Determination of the probability of the Company failing to meet the predetermined event:

 

The Company determined that on October 21, 2011 and December 31, 2011, the chance that the final contingency would not be met, thereby triggering our obligation to repurchase those shares, was around 15%. Thus, the probability weighting that we assigned to the final contingency not being met and thereby triggering our obligation to repurchase those shares was 15% for both dates.

 

Our estimate of the probability of the financial contingency not being met by October 21, 2011 and December 31, 2011 was based on the following considerations:

 

· In early September 2011, our Director of the Company’s Investment Division came to the United States to meet with the placement agent that we had been working with since late 2010. Our placement agent advised us that they believed that they could complete the financing for $20 million based on the due diligence that had been done by the placement agent since 2010, subject to certain conditions, including, but not limited to, satisfactory completion of its due diligence on the Company’s recent operations, reaching agreement with the Company on the Company’s valuation in light of current market conditions.

 

· Although there could be no assurance of completion of the financing, the placement agent and the Company were renewed their engagement agreement on October 21, 2011. During the period from October 21, 2011 to December 31, 2011, we discussed plans to engage an advisor to develop a business plan and to engage an investment relations company. We thought that these efforts would contribute to a successful completion of the financing, although the offering is being done on a best efforts basis.

 

17
 

 

· Our placement agent recommenced its due diligence in November 2011. Prior to December 31, 2011, the placement agent had not advised us of any new conditions which would lead us to believe that the likelihood that the placement agent could complete the financing by October 2012 had changed between October 21, 2011 and December 31, 2011. .

 

We believed that we had a well-developed business model and our operations continued to be profitable during in the global economic downturn and have continued to be profitable . In addition, our financing target was only $20 million, which we determined with the placement agent to be the appropriate amount for the financing based on the Company’s capital requirements and the potential investors which the placement agent expected to approach.

 

Therefore, as of December 31, 2012, we were confident that we would be able to attract investors and achieve the $20,000,000 financing target and we used a probability of 15% for failing to achieve the financing target by October 2012. During the period from October 21, 2011 to December 31, 2011, there were no events that decreased the probability of failing to reach the financing target. In this circumstance, we used the same probability of failing to achieve the financing as of October 21, 2011 and December 31, 2011.

 

Calculation of the derivative liability as of October 21, 2011 and December 31, 2011:

 

The fair value of the derivative obligation at October 21, 2011 and December 31, 2011 is calculated as followed:

 

$3,319,135 = 55,318,920 x $0.40/per share x 15%

 

18
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Result of Operations.

 

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K. This discussion contains forward-looking statements. These forward-looking statements are based on information available at the time the statements are made and/or management’s belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein and in other filings made by the company with the Securities and Exchange Commission. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date this Form 10-Q is filed with the Securities and Exchange Commission.

 

Overview

 

China YCT International Group, Inc. (“CYIG”) was incorporated in the State of Florida in January 1989, and reincorporated in the State of Delaware on April 4, 2007. China YCT principally operates through two of its wholly-owned subsidiaries: Landway Nano Bio-Tech, Inc., incorporated in Delaware, and Shandong Spring Pharmaceutical Co., Ltd. (“Shandong Spring”), incorporated in the People’s Republic of China (the “PRC”). China YCT International Group, Inc. and its subsidiaries are collectively referred to as the “Company” or CYIG. CYIG, through its wholly-owned subsidiary, Shandong Spring, is engaged in the business of developing, manufacturing and marketing gingko and distributing other dietary supplement products in the PRC.

 

Recent Events

 

On October 21, 2011, the Company entered into an Amendment Agreement with L.Y. Research to amend the purchase agreement, dated as of February 28, 2011, and amended and restated as of August 15, 2011 (the “Purchase Agreement”) with respect to the acquisition of U.S. Patent #6,475,531B titled “Safe Botanical Drug for Treatment and Prevention of Influenza and Increasing Immune Function” (the “LY Patent”).

 

The Amendment Agreement added the following terms:

 

(1) In the event that the Company cannot, within one year from October 21, 2011, either (i) raise a minimum of $20M in gross proceeds from a debt or equity financing, or a series of debt and/or equity financings, or (ii) list its common stock on NASDAQ or a major foreign stock exchange, then the shares issued pursuant to the Purchase Agreement shall be returned to the Company and the LY Patent shall be returned to LY Research and the Purchase Agreement, as amended, shall be cancelled and of no further force or effect; and
   
(2) LY Research agrees that it waives its right to (i) vote the shares and (ii) receive any dividends or other distributions from the Company until the earlier of (a) completion of the financing or (b) the listing of the shares of common stock of the Company on NASDAQ or a major foreign stock exchange.

 

Pursuant to the Purchase Agreement, on February 28, 2011, the Company acquired U.S. Patent #6,475,531B from L.Y. Hong Kong Biotech Limited (LYHK), L.Y. Research’s wholly-owned subsidiary incorporated in Hong Kong, China.  This patent will be used for research and development activities. The Company acquired this patent in order to obtain the approval for production of herbal drug from US FDA and China SFDA.

 

The LY Patent has not been used for the production of health care products and is not related to our current line of health care products (mainly the gingko products). We will use the LY Patent to apply for the IND (Investigational New Drug) of PBLG. After the clinical research and trials (Step 1, 2, 3) and qualified by the Chinese FDA, we intend to make application of new medicine to the Chinese FDA. Add health care product. Concurrently with such development, we intend to manufacture and market a health care product based on the patent that will not require FDA approval. We estimate that the commercialization of the patent to offer drugs that require FDA approval will not occur for three to four years and will require additional capital. The commercialization of the patent to offer health care products that do not require FDA approval will take one to two years. In each case, we anticipate that we will need to construct manufacturing facilities. The commercialization of the LY Patent will also require us to obtain additional financing, of which there can be no assurance.

 

19
 

 

Conducting clinical studies in China via Shandong Spring will save substantial R&D expenses compared to conducting such studies in the United States. According to the August 18, 2007 issue of World Journal, the average cost of the research and development for a new chemical drug is $980 million US dollars, of which 70 % will be used for clinical studies, and the average time of developing a new drug was 14.2 years in 2007.  CYIG could not afford such cost. In 2004, US FDA released Guidance for industry Botanical drug products. According to this guidance, presentation of the prior use of the herbal drugs in foreign countries will help the approval of the application for the production permit. Following the guidance, CYIG intends to prepare and submit a report of the historical use of Ban Lan Gen (“BLG”), an herbal anti-biotic, used to cool and clear skin irritations and reduce fevers and sore throats, or pure Ban Lan Gen (“PBLG”) in China to the US FDA, which we expect will accelerate the process of FDA approval. In the future, CYIG hopes to raise more capital for the research and development of the drug through offerings of debt or equity, but there can be no assurance such offerings will be successful. Simultaneously, CYIG will conduct the clinical studies following the standards of the US FDA in China, where the cost of conducting clinical trials is lower than in the United States. The conduct of clinical studies in foreign countries following the standards of the US FDA is permitted by the US FDA, and we believe that obtaining approval for an herbal drug from the FDA is easier than the approval of a chemical drug. In addition, CYIG would submit an application to China’s SFDA for the drug as an over the counter drug, which is permitted for sale in China.

 

Comparing Three Months Ended December 31, 2011 and 2010:

 

The following table sets forth information from our statements of operations for the three months ended December 31, 2011 and 2010, in U.S. dollars:

 

    Three Months Ended                    
    December 31,     $     %        
    2011     2010     Change     Change     Notes  
Revenues     10,112,489       9,886,824       225,665       2.3 %        
                                         
Cost of Sales     (4,712,730 )     (4,613,157 )     (99,573 )     2.2 %        
                                         
Gross Profit     5,399,758       5,273,667       126,091       2.4 %        
                                         
Operating Expenses     (2,468,061 )     (1,306,775 )     (1,161,286 )     88.9 %     (1 )
                                         
Operating Income     2,931,698       3,966,892       (1,035,194 )     (26.1 )%        
                                         
Interest Income, net     65,818       18,273       47,545       260.2 %        
                                         
Other Income     (3,319,135 )     580,211       (3,899,346 )     (672.1 )%        
                                         
Income Tax Provision     (1,112,777 )     (1,141,919 )     (29,142 )     (2.6 )%        
                                         
Net Income     (1,434,396 )     3,423,457       (4,857,853 )     (141.9 )%        
                                         
Comprehensive Income (Loss)     (1,436,120 )     3,934,104       (5,370,224 )     (136.5 )%        

 

 

 

(1) The 87.9% increase of operating expense was primarily the increase in amortization expense associated with the newly acquired US Patent (U.S. No. 6,475,531 B1).  For the three months ended December 31, 2011, the amortization expense for the US Patent No. 6,475,531 B1 alone was $935,561.

 

Net sales

 

During the three months ended December 31, 2011, we had net sales of $10,112,489, which is consistence with the net sales of 9,886,824 for the same period in 2010, with a slight increase of $225,665, or 2.3%.  Since late last fiscal year, we have made great effort on marketing and developing new customers for our self-produced drug – Huoliyuan Capsule.  As a result, we obtained new customers and expanded our sales of Huoliyuan Capsules.

 

Product Mix

 

The following table presents the breakdown of revenues by product mix:

 

20
 

 

Cost of Sales and Gross Margin

 

During the three months ended December 31, 2011, we had cost of sales of $4,712,730, as compared with cost of sales of $4,613,157 during the same period in 2010, an increase of approximately $99,573, or 2.3%, reflecting an increase in net sales. The gross profit rose to $5,399,758 for the three months ended December 31, 2011, or a 2.4% increase compared with $5,373,667 during the same period in 2010.     Our gross margin increased to 53.4% during the three months ended December 31, 2011, which remained consistence from 53.3% during the three months ended December 31,   2010.   The percentage of our cost of sales over the sales for the Health care supplements decreased slightly to 45.8% for the three months ended December 31, 2011 from 46.3% for the same period in 2010 because we obtained a more favorable sales contract with Shandong YCT since late last fiscal year.  Our cost of sales over the sales for the Huoliyuan Capsules increased slightly to 48.8% for the three months ended December 31, 2011 from 47.1% for the same period in 2010. .

 

Selling Expenses

 

Our selling expenses decreased by $129,764, or 15.4%, to $713,694 for the three months ended December, 2011, from $843,458 for the same period of 2010. As a percentage of sales, selling expenses decreased to 7.1% for the three months ended December 31, 2011 from 8.5% for the same period in 2010. The decrease of selling expenses was primarily due to a decrease in sales commission.

 

General and Administrative Expenses

 

Our general and administrative expenses were $1,570,674 during the three months ended December 31, 2011, compared with $352,096 during the three months ended December 31, 2010, an increase of $1,218,578 or approximately 346.1%. The increase in general and administrative expenses was principally due to the amortization expense accrued for the acquired US Patent (U.S. No. 6,475,531 B1). During the three months ended December 31, 2011, the amortization expense of this patent was $935,517.

 

Research and Development Expenses

 

Research and development expenses were $183,693 during the three months ended December 31, 2011 compared with $111,221 during the three months ended December 31, 2010, an increase of $72,462, or 65.2%, reflecting the increased expenses related to making investments in research and development of new technologies and products that can be utilized to refine and extract the beneficial compounds I plants, primarily gingko.

 

Interest Income (Expense), Net

 

Interest income increased by $47,545 during the three months ended December 31, 2011, compared to the three months ended December 31, 2010. The increase in interest income resulted from increased bank deposit of $16,435,853.   There was no interest expense as we did not borrow money from bank or other parties.

 

Income Tax

 

Income tax was $1,112,777 during the three months ended December 31, 2011, as compared to $1,141,919 for the same period of 2010, a decrease of $29,142, or approximately 2.6%. The decrease was primarily due to the decreased taxable income during the three months ended December 31, 2011.

 

Net Income  

 

   Revenue         
   Three Months Ended December 31,         
   2011           2010   Change in   Change in 
   Amount   %   Amount   %   Amount   % 
                         
Health care supplements   3,398,462    33.6%   5,507,466    55.7%   (2,109,004)   -38.3%
                               
Drugs (Huoliyuan Capsule)   6,192,876    61.2%   4,379,358    44.3%   1,813,518    41.4%
                               
Other (External contract work)   521,151    5.2%   -    0.0%   521,151    100.0%
                               
Total Revenue   10,112,489    100.0%   9,886,824    100.0%   225,665    2.3%

 

21
 

 

During the quarter ended December 31, 2011, the Company also recognized an expense in amount of $3,319,135 for a derivative liability under the ASC 480-10-25-8. This expense was disclosed in the note 11 – Derivative liability.

 

As a result of the above factors, we had a negative net income of $1,434,396 during the three months ended December 31, 2011, compared with a net income of $3,423,457 during the three months ended December 31, 2010.

 

Comprehensive Income

 

As a result of a currency translation adjustment, our comprehensive income was $(1,435,266) during the three months ended December 31, 2011, compared with comprehensive income of $3,934,104 during the three months ended December 31, 2010 due to net loss and exchange rate fluctuations from the translation of our Chinese subsidiary from Chinese RMB, their functional currency, to US dollar, our reporting currency.

 

Comparing Nine Months Ended December 31, 2011 and 2010:

 

The following table sets forth information from our statements of operations for the nine months ended December 31, 2011 and 2010, in U.S. dollars:

 

    Nine Months Ended              
    December 31,     $     %  
    2011     2010     Change     Change  
Revenues     26,477,760       21,301,142       5,176,618       24.3 %
                                 
Cost of Sales     (11,894,299 )     (10,788,613 )     (1,105,686 )     10.2 %
                                 
Gross Profit     14,583,461       10,512,529       4,070,932       38.7 %
                                 
Operating Expenses     (7,111,660 )     (2,865,074 )     (4,246,586 )     148.2 %
                                 
Operating Income     7,471,801       7,647,455       (175,654 )     (2.3 )%
                                 
Interest Income, net     209,953       18,273       191,680       1049.0 %
                                 
Other Income     (3,319,135 )     580,211       (3,899,346 )     (672.1 )%
                                 
Income Tax Provision     (2,283,837 )     (2,085,719 )     (198,118 )     (9.5 )%
                                 
Net Income     2,078,782       6,160,220       (4,081,438 )     (66.3 )%
                                 
Comprehensive Income (Loss)     2,926,707       8,359,820       (5,433,113 )     (65.0 )%

 

Net sales

 

During the nine months ended December 31, 2011, we had net sales of $26,477,760, as compared with net sales of $21,301,142 during the same period in 2010, an increase of $5,176,618, or 24.3%, due to the 71.1% increase in sales of Huoliyuan Capsules and 17.6% increase in addition of external contract works, offset by 25.7% decrease in sales of Health products.

 

Revenues by product mix

 

The following table presents the breakdown of revenues by product mix:

 

22
 

 

   Revenue         
   Nine Months Ended December 31,         
   2011           2010   Change in   Change in 
   Amount   %   Amount   %   Amount   % 
                         
Health care supplements   9,249,104    34.9%   12,674,554    59.5%   (3,425,450)   -27.0%
                               
Drugs (Huoliyuan Capsule)   15,615,134    59.0%   8,626,588    40.5%   6,988,546    81.0%
                               
Other (External contract work)   1,613,522    6.1%   -    0.0%   1,613,522    100.0%
                               
Total Revenue   26,477,760    100.0%   21,301,142    100.0%   5,176,618    24.3%

 

Cost of Sales and Gross Margin

 

During the nine months ended December 31, 2011, we had cost of sales of $11,894,299, as compared with cost of sales of $10,788,613 during the same period in 2010, an increase of approximately $1,105,686, or 10.2%, reflecting the increase in net sales. The gross profit rose to $14,583,461 for the nine months ended December 31, 2011, or a 38.7% increase compared with $10,512,529 during the same period in 2010. Our gross margin increased to 55.1% during the nine months ended December 31, 2011 from 49.4% during the same period in 2010.       The increase was mainly attributed to the larger sales volume of our self-produced drug and the cost reduction from production cost of Huoliyuan capsules. The percentage of our cost of sales over the sales the Huoliyuan Capsules was down to 46.0% for the nine months ended December 31, 2011 from 51.2% for the same period in 2010 because our production process is more mature and more optimized.  In addition, beginning with the fiscal year of 2011, we obtained new contracts from external customers to process and package their semi-finished products.  Although sales from these products are not a major component of the total sales, the gross margin from these sales were rather high.

 

Selling Expenses

 

Our selling expenses increased by $728,396, or 41.0%, to $2,505,249 for the nine months ended December 31, 2011, from $1,776,853 for the same period of 2010. As a percentage of sales, selling expenses increased from 8.3% for the nine months ended December 31, 2010 to 9.5% for the same period of 2011. The increase of selling expenses was primarily due to an increase in advertising and promotion expenses related to marketing and promotional activities in Huoliyuan Capsule market.

 

General and Administrative Expenses

 

Our general and administrative expenses were $ 4,028,897during the nine months ended December 31, 2011, compared with $855,011 during the nine months ended December 31, 2010, an increase of $ 3,173,886or approximately 371.2%. The increase in general and administrative expenses was principally due to the amortization expense recorded for the acquired US Patent (U.S. No. 6,475,531 B1). During the nine months ended December 31, 2011, the amortization expense of this patent was $ 2,898,608.

 

Research and Development Expenses

 

Research and development expenses were $577,514 during the nine months ended December 31, 2011 compared with $233,210 during the same period in 2010, an increase of $344,304, or 147.6%, reflecting the increased expenses related to making investments in research and development of new technologies and products that can be utilized to refine and extract the beneficial components from plants, primarily gingko.

 

The influenza patent acquired in February 2011 is for an herbal medication called Pure Ban Lan Gen (“PBLG”). No expenses were incurred for research and development during the period ended December 31, 2011. The influenza patent has not been used for the production of health care products and is not related to our current line of health care products (mainly the gingko products). We acquired this patent in order to achieve the following two purposes:

 

(1) Drug - This patent will be used for research and development activities for a drug with a clinical study. The clinical study will be conducted in China. We will use the Influenza patent to apply for the IND (Investigational New Drug) of PBLG. After the clinical research and trials (Step 1, 2, 3) and qualified by the Chinese FDA, we intend to make application of new medicine to the Chinese FDA. We intend to start the research and development activities of the drug after we obtain additional financing. Assuming successful completion of the clinical study, we will then use the patent to get approval for production of the herbal drug from China’s SFDA. Once we get approval from China’s SFDA, we will use the patent to obtain the approval for production of the herbal drug from the United States’ FDA as well. We estimate that the commercialization of the patent to offer drugs that require FDA approval will not occur for three to four years and will require additional capital.

 

23
 

 

(2) Health Product - We also plan to sell the PBLG as a health product directly in China and the United States market. As a health product, sales of PBLG do not need any additional research and development or approval from China’s FDA and the United States’ FDA. The commercialization of the patent to offer health care products that do not require FDA approval will take one to two years. In each case, we anticipate that we will need to construct manufacturing facilities

 

Interest Income

 

Interest income increased by $191,680 for the nine months ended December 31, 2011. The increase in interest income resulted from increased bank deposit of $16,435,853.

 

Income Tax

Income tax was $ 2,283,837during the nine months ended December 31, 2011, as compared to $2,085,719 for the same period of 2010, an increase of $198,118, or approximately 9.5%. The increase was primarily due to the higher taxable income during the nine months ended December 31, 2011.

 

24
 

 

Net Income

 

As a result of the factors described above, we generated net income of $2,078,782 during the nine months ended December 31, 2011, as compared with net income of $6,160,220 during the same period in 2010.

 

The amortization of the acquired LY Patent has material impact on the Company’s net income. To assist the assessment of such impact to the Company’s net income and Earnings Per Share (EPS), the following pro forma consolidated statement of operations is provided as supplemental information. The pro forma consolidated statement of operations excludes the amortization expense of the acquired LY Patent from the G&A expense as if the acquisition and amortization of the patent did not occur.

 

Comprehensive Income

 

As a result of a currency translation adjustment, our comprehensive income was $2,926,707during the nine months ended December 31, 2011, compared with $8,359,820 during the nine months ended December 31, 2010, which is mainly attributable to the lower net income and exchange rate fluctuations from translating our Chinese subsidiaries from Chinese RMB, their functional currency, to US dollar, our reporting currency.

 

25
 

 

Liquidity and Capital Resources

 

Summary consolidated balance sheet data: (in US$, except for percentages)

 

    As of                    
    December 31,
2011
    March 31,
2011
    Changes in     Changes in        
    (Unaudited)     (Audited)     Amount     %     Note  
Cash and cash equivalent     18,443,850       6,046,804       12,397,046       205 %        
Prepaid accounts     67,627       15,602,258       (15,534,631 )     -100 %     (1 )
Inventory     2,483,981       59,183       2,424,798       4097 %     (2 )
Plant, property and equipment, net     9,784,841       9,629,558       155,283       2 %        
Construction in progress     219,752       211,189       8,563       4 %        
Intangible assets, net     51,407,574       40,560,015       10,847,559       26.7 %     (3 )
Total assets     82,407,625       72,109,007       10,298,618       14.3 %        
Accounts payable     -       -       -       -          
Tax payable     1,435,266       1,683,944       -(248,678     (14.8 )%     (4 )
Other payable     7,839,038       229,561       7,609,477       3314.8 %     (5 )
Total current liabilities     9,274,304       1,913,505       7,360,799       384 %        
      0       0       -       0 %        
Total liabilities     9,274,304       1,913,505       6,997,402       384 %        
Total equity     73,133,321       70,195,502       2,937,819       4.2 %        

 

(1) In the nine months ended December 31, 2011, the decrease in prepaid accounts of $15,534,631 was mainly as a result of refund from Jining Tianruitong Technology Development Limited Company. In addition, the prepaid amount was decreased for the transferring of the patents.
   
(2) The increase in inventory of $2,424,798 was mainly due to the increased production of Huoliyuan Capsules which increased raw materials, work-in-progress, and finished goods at December 31, 2011.

 

(3) The increasing in intangible assets of $10,847,559 was due to the two patents transferred in based on the purchase agreement signed in October 2010. In addition, $2,765,992 consideration was added to the value of the US patent.  The addition to the intangible assets was partially offset by the recognition of amortization cost for the patents.
   
(4) The decrease in tax payable of $248,678 was primarily due to the decreased taxable income during the nine months ended December 31, 2011 as a result of the significant amortization expense for the acquired US patent.
   
(5) The increasing in other payables of $6,987,210 was mostly the remaining balance for the two patents purchased, and the accrued liabilities for the derivative obligation and obligation to issue additional 11M common stock shares. .

 

The Company does not have any accounts receivable balance at December 31, 2011, due to the sales model of our product mix. The Company currently sells two types of products: non-medical and medical products. Neither product’s sales are associated with any accounts receivable balance.

 

Under the current sales model, the Company markets and sells non-medical products through distribution agents.  All customers are dealt with through the Company's distribution agents. When a customer places an order, the order is entered into the Company's ordering system and confirmed by designated distributors. The distributor collects payment from the customer before the order is confirmed. The confirmed order is reviewed by the Company’s sales department and the products are shipped directly to the customer from the Company. According to the sales agreements between the Company and its distributors, the Company is guaranteed to receive the full payment from distributors for all the products shipped to customers within one month from delivery. The Company reconciles its sales to the distributors' records and recognizes revenue at the end of each month. In the meantime, the same amount of cash associated with the Company’s sales of non-medical products is transferred to the Company's bank account from the distributors. Therefore, there is no accounts receivable balance associated with the Company’s non-medical product sales at the end of each quarter.

 

26
 

 

For the sales of medical products, the Company makes sales through a certified medicine sales agent. According to the contract with the agent, the Company collects cash before shipping the medical products to the agent. Since there are no credit sales, there is no accounts receivable balance associated with the Company’s medical product sales at quarter end.

 

As of December 31, 2011, we had $18,443,850 in cash and cash equivalents, compared to $6,046,804, as of March 31, 2011. There was an increase in cash and cash equivalents of $12,397,046. The net increase in cash and cash equivalents between December 31, 2011 and March 31, 2011 was mainly due to a refund of our previous payment for acquisition of three patents from Jining Tianruitong Technology Development Limited Company.  On October 26, 2010, we signed an agreement to purchase three patents relating to Chinese herbal formulas from Jining Tianruitong Technology Development Limited Company for $15.6M. Pursuit to this agreement, we made an advance payment of $15,600,000 in October 2010, and the agreement’s effectiveness was conditioned on the patents’ registration for transfer of title with the Chinese Patent Office. Subsequently, this purchase agreement was amended and restated on March 14, 2011.  According to the amended agreement, $10,100,000 of the total purchase price was returned to us from Jining Tianruitong Technology Development Limited Company because certain governmental approvals were not completed for the transfer of patents, which should be purchased as a group. Under the amended agreement,   the balance of the purchase price was to be paid in three equal annual installments in October 2011, 2012 and 2013. We are applying for the governmental approvals for the transfer of the remaining patents and expect to complete the transfer in the fourth quarter of the fiscal year ending March 31, 2012.  Two of the patents had been transferred to the Company in October 2011.

 

In order to fully implement our business plan, however, we will require capital contributions in excess of our current working capital and the surplus capital, which we believe will be generated from operations. Bringing our manufacturing facility to an operating level that should make the manufacturing operation profitable to produce our current products is estimated to require an additional $10 million. In order to develop the Influenza Patent and offer a drug that would require Chinese FDA approval and a health care product that would not require such approval, we estimate that we will require an additional $20 million. Therefore, to fully implement our business plan, including development of a facility to utilize our proprietary method of extracting flavones from ginkgo by using enzyme technology, we estimate that we will need a total of $40 million. We expect to seek equity and debt financing to obtain the funds. At present, we have no commitment or understanding from any source for additional debt or equity capital and there can be no assurance that the funds will be available on acceptable terms.

 

Operations

 

For the nine months ended December 31, 2011, cash provided by operations was $10,718,912, an increase of 120.4% compared to cash provided by operations of $4,862,354 for the same period in 2010. The primary reason for the change was due to the recognized amortization expense associated with the US patent and the increased other payables.

 

Investments

 

Cash provided by investing activities was $830,208 for the nine months ended December 31, 2011 as compared to cash used in investing activities of $15,917,285 for the same period in 2010. The increase was mainly due to the net of the refund of $15.5M from Jining Tianruitong Technology Development Limited Company and investment in acquisition of two patents during the nine months ended December 31, 2011.

 

Financing

 

There were no financing activities for the nine months ended December 31, 2011.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial condition or results of operations.

 

Critical Accounting Policies

 

This section should be read together with the Summary of Significant Accounting Policies included as Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2011 and 10-Qs filed with the SEC.

 

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among other things, assets and liabilities, contingent liabilities and revenues and expenses. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since our financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from our expectations. This is especially true with some accounting policies that require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our audited and unaudited consolidated financial statements because they involve the greatest reliance on our management’s judgment.

 

27
 

 

Principles of consolidation

 

The consolidated financial statements for the nine months ended December 31, 2011 and 2010 include the accounts of China YCT International Group, Inc and Shandong Spring Pharmaceutical Company. Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).  All significant inter-company balances and transactions are eliminated in consolidation.

 

Revenue recognition

 

Our revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104, included in the Codification as ASC 605,   Revenue Recognition . Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.

 

Inventories

 

Inventory is primarily composed of raw materials and packing materials for manufacturing, work in process, and finished goods. Inventories are valued at the lower of cost or market with cost determined on a weighted average basis. Management compares the cost of inventory with the market value and an allowance is made to write down the inventory to market value, if lower than cost.

 

Stock Based Compensation

 

The Company measures compensation expense for its non-employee stock-based compensation under FASB ASC 718.  The fair value of the stock issued is used to measure the transaction, as this is more reliable than the fair value of the services received. Fair value is measured as the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense.

 

Recent Accounting Pronouncements

 

In June 2011, FASB issued an amendment to the FASB Codification Topic 220 – Presentation of Comprehensive Income.  The objective of this Update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.

 

In May 2011, FASB issued an amendment to FASB Codification Topic 820 - Fair Value Measurement. The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity's shareholders' equity in the financial statements. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs.

 

In April 2011, FASB issued an amendment to FASB Codification Topic 310 – Receivables: A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendment requires that, in evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both exist: (1) the restructuring constitutes a concession. (2) The debtor is experiencing financial difficulties. The amendments to Topic 310 clarify the guidance on a creditor's evaluation of whether it has granted a concession as well as on a creditor's evaluation of whether a debtor is experiencing financial difficulties. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor's guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

A smaller reporting company is not required to provide the information required by this Item.

 

28
 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures .24

 

The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has reassessed their previous conclusions that their disclosure controls and procedures were effective at December 31, 2011. Management considered the restatements of financial statements are indicative of a material weakness in internal control over financial reporting, therefore, concluded that, as of December 31, 2011, such controls and procedures were not effective.

 

Changes in internal controls.

 

The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the quarter of December 31, 2011, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no material pending legal proceedings to which the Company is a party.

 

Item 1A. Risk Factors

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults Upon Senior Securities.

 

None

 

 

29
 

 

Item 4. Removed and Reserved

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer

 

XBRL Exhibit

101.INS XBRL Instance Document.

101.SCH XBRL Taxonomy Extension Schema Document.

101.CALXBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB XBRL Taxonomy Extension Label Linkbase Document.

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CHINA YCT INTERNATIONAL GROUP, LTD.  

 

Date: June 11, 2012  
/s/ Yan Tinghe  
Yan Tinghe Chief Executive Officer  
(Principal Executive Officer)  

 

/s/ Li Chuanmin  
Li Chuanmin Chief Financial Officer  
(Principal Financial Officer  

 

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