UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2014

 

o	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     o

 

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 o No     x

 

The number of shares outstanding of the issuer’s common stock on August 7, 2014 was 29,700,690.

 

 

CHINA YCT INTERNATIONAL GROUP, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED June 30, 2014

 

INDEX

TABLE OF CONTENTS

 

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

 

  

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2014 AND 2013

 

Table of Contents

 

	Page
Consolidated Balance Sheets as of June 30, 2014 and March 31, 2014	F-1
Consolidated Statements of Income for the three months ended June 30, 2014 and 2013	F-2
Condensed Consolidated Statements of Stockholders' Equity for the three months ended June 30, 2014 and 2013	F-3
Consolidated Statements of Cash Flows for the three months ended June 30, 2014 and 2013	F-4
Notes to Consolidated Financial Statements	F-5-F-10

 

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

  

						UNIT: USD$
		June 30, 2014				March 31, 2014
Assets
Current assets:
Cash and cash equivalent		$	20,484,189			$	18,624,644
Accounts receivable			-				42,049
Prepaid lease - short term			359,698				359,738
Inventory			1,457,100				1,592,703
Total current assets			22,300,987				20,619,134
Prepaid lease - long term			1,107,707				1,197,768
Development cost of acer truncatum bunge planting			15,931,478				15,333,951
Plant, property, equipment, and leasehold improvement, net			13,238,296				13,384,995
Construction in progress			-				-
Intangible assets, net			16,355,234				16,684,032
Total assets			68,933,702				67,219,880
Liabilities and Stockholders’ Equity (Deficit)
Liabilities:
Current liabilities:
Tax payable			617,784				816,579
Other payable			8,325				29,552
Total current liabilities			626,109				846,131
Total liabilities			626,109				846,131
Stockholders’ Equity
Preferred stock, par value $500.00 per share; 45 shares authorized and issued at September 30, 2013 and March 31, 2012			22,500				22,500
Common stock, par value $0.001 per share; 500,000,000 and 100,000,000 shares authorized, 29,700,690 and 29,663,023 shares issued and outstanding at June 30, 2014 and March 31, 2014, respectively			29,701				29,663
Additional paid-in capital			4,210,407				4,180,095
Statutory reserve			1,828,504				1,828,504
Retained earnings			57,585,308				55,676,059
Accumulated other comprehensive income			4,631,173				4,636,928
Total stockholders’ equity			68,307,593				66,373,749
Total liabilities and stockholders’ equity		$	68,933,702			$	67,219,880

 

The accompanying notes are an integral part of these financial statements.

 

 

CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 

UNIT: USD$ 

		FOR THE THREE MONTHS ENDED
		June 30, 2014				June 30, 2013
Sales Revenue		$	8,179,972			$	8,220,587
Cost of Goods Sold			4,238,770				3,976,310
Gross Profit			3,941,202				4,244,277
Selling Expenses			566,878				543,686
G&A Expense			701,580				579,908
R&D Expenses			251,265				587,259
Total expense			1,519,723				1,710,853
Income from operation			2,421,479				2,533,424
Interest income (Expense)			32,026				28,732
Profit before tax			2,453,505				2,562,156
Income tax			544,256				640,539
Net income			1,909,249				1,921,617
Foreign currency translation adjustment			(5,755	)			609,083
Comprehensive income		$	1,903,494			$	2,530,700
Basic and diluted income per common share
Basic and Diluted			0.06				0.06
Weighted average number of common shares outstanding
Basic and Diluted			29,671,265				29,663,023

 

The accompanying notes are an integral part of these financial statements.

 

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 UNIT: USD$

		Preferred Stock Series A								Common shares								Additional				Statutory				Accumulated				Retained
		Shares				Amount				Shares				Amount				paid-in capital				Reserve				OCI				Earnings				Total
Balance - March 31, 2013			45			$	22,500				29,663,023			$	29,663			$	4,180,095			$	956,633			$	3,794,929			$	48,426,955			$	57,410,775
Net income for the year																															1,921,617				1,921,617
Foreign currency translation adjustment																											609,083								609,083
Balance - June 30, 2013			45			$	22,500				29,663,023			$	29,663			$	4,180,095			$	956,633			$	4,404,012			$	50,348,572			$	59,941,475
Balance - March 31, 2014			45			$	22,500				29,663,023			$	29,663			$	4,180,095			$	1,828,504			$	4,636,928			$	55,676,059			$	66,373,749
Net income for the year																															1,909,249				1,939,599
Common stock issued for services rendered											37,666			$	38			$	30,312																30,350
Foreign currency translation adjustment																											(5,755	)							(5,755	)
Balance - June 30, 2014			45			$	22,500				29,700,690			$	29,701			$	4,210,407			$	1,828,504			$	4,631,173			$	57,585,308			$	68,307,593

 

The accompanying notes are an integral part of these financial statements.

 

 

CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW

 

UNIT: USD$ 

		THREE MONTHS ENDED
		June 30, 2014				June 30, 2013
Cash Flows From Operating Activities:
Net income		$	1,909,249			$	1,921,617
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			471,363				335,123
Common stock issued for services rendered			30,350				-
Changes in operating assets and liabilities:
Inventory			135,603				(1,842,166	)
Prepaid land lease			90,061				-
Accounts receivable			42,049				135,238
Taxes payable			(198,795	)			(462,146	)
Accrued expenses and other payables			(21,228	)			(358,530	)
Net cash provided by (used in) operating activities			2,458,652				(270,864	)
Cash flows from investing activities:
Addition to plant and equipment			-				(3,029,360	)
Development cost of acer truncatum bunge planting			(597,527	)			-
Reduction of construction in progress			-				220,874
Prepayment/(deposit) to Jining Tianruitong for purchase of patents			-				-
Net cash provided by (used in) investing activities			(597,527	)			(2,808,486	)
Effect of exchange rate changes on cash and cash equivalents			(1,580	)			325,678
Net increase (decrease) in cash and cash equivalents			1,859,545				(2,753,671	)
Cash and cash equivalents at beginning of period			18,624,644				29,924,188
Cash and cash equivalents at ending of period			20,484,189			$	27,170,517
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest		$	88			$	128
Income taxes		$	185,713			$	1,651,089
Non-cash financing activities:
Stock issued for services		$	30,350				-

 

The accompanying notes are an integral part of these financial statements.

 

 

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

 

China YCT International Group, Inc. (“China YCT”) was incorporated in the State of Florida, in the United States of America (the “USA”) in January 1989, and reincorporated in the State of Delaware on April 4, 2007.   China YCT, through its 100% owned subsidiary Landway Nano Bio-Tech, Inc. (“Landway Nano”), incorporated in Delaware, owns 100% of Shandong Spring Pharmaceutical Co., Ltd. (“Shandong Spring”), incorporated in the People’s Republic of China (“PRC”). China YCT International Group, Inc. and its subsidiaries are collectively referred to as the “Company”. Shandong Spring is engaged in the business of developing, manufacturing, and selling its own medicine made primarily from gingko extract, research and development of new food, healthcare and medicine product based on the acer truncatum bunge, now actively developing the acer truncatum bunge planting bases, and distributing health care supplement products manufactured by another company 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 may differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include: the valuation of inventory, the estimated useful lives and impairment of property, equipment, and intangible assets.

 

Cash and cash equivalents

 

For the 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.

 

Accounts receivable

 

The Company recognizes as accounts receivable any products shipped where payments have not been rendered. As of March 31, 2014, the Company considered all its accounts receivable to be collectable and no provision for doubtful accounts had been made in the consolidated financial statements. There were no accounts receivable as of June 30, 2014.

 

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. Leasehold improvements are stated at cost and amortized over the shorter of the useful life of the assets or the length of the lease in accordance to ASC 840-10-35-6. Depreciation and amortization are 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
Leasehold improvements	30 years

 

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

 

 

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” for occupying, developing and using 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)

Patents:

 

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.

 

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.

 

Development costs of acer truncatum bunge planting

 

The Company has started development of the acer truncatum bunge planting bases and completed planting of 2,200Mu (1Mu is equal to approximately 666.67 square meters) as of the three months ended June 30, 2014. The agricultural product (e.g., seeds, oil extract, etc.) derived from the planting is intended to be the supply for an integrated usage including edible oil, protein, medicine and health care, tannin extract, industrial chemicals, nectar source, nervonic acid, and specialty lumber, as well as for landscaping and conservation of soil and water.

 

The Company accounts for the development costs of the planting in accordance to ASC Codification 905. Pursuant to ASC 905-360-25-3, limited-life land development costs and direct and indirect development costs of orchards, groves, vineyards, and intermediate-life plants shall be capitalized during the development period. Pursuant to ASC 905-360-35-7, costs capitalized during the development period under paragraph 905-360-25-3 shall be depreciated over the estimated useful life of the land development or that of the tree, vine, or plant. The planting is currently in the development stage with production expected in 2015; therefore, no depreciation expenses were recognized as of June 30, 2014.

 

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 on 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 and evaluates the net carrying value of its long-lived assets at least annually, or upon the occurrence of other events or changes in circumstances that indicate that the related carrying amounts may not be recoverable. Per ASC 360-10-35-21, a long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Per ASC 360-10-35-17, an impairment loss shall be recognized only if the carrying amount of the long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group).

 

 

Income taxes

 

The Company accounts for income tax under the asset and liability method as stipulated by 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 didn’t recognize any deferred tax amount at June 30, 2014 and March 31, 2014.

  

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 US income tax liabilities.

 

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 17% 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 the amount of $134,305 and $205,101 as of June 30, 2014 and March 31, 2014, respectively.

 

Research and development

 

Research and development costs are related primarily to the Company’s development of 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 June 30, 2014 and 2013 was $251,265 and $587,259, respectively.

 

Advertising costs

 

Advertising costs for newspaper and television are expensed as incurred in accordance to the ASC 720-35 “Advertising Costs”. Pursuant to ASC 720-35-25-5, costs of communication advertising are not incurred until the item or service has been received and shall not be reported as expenses before the item or service has been received, except as discussed in paragraph 340-20-25-2.

Advertising costs for newspaper and television are expensed as incurred.  The Company incurred advertising costs of nil for the three months ended June 30, 2014 and 2013, respectively.

 

Mailing and handling costs

 

The Company accounts for mailing and handling fees in accordance with the FASB Accounting Standards Codification (“ASC”) 605-45 (Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs). The 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 June 30, 2014 and 2013, the Company incurred $316,017 and $305,619 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 were nil shares common stock equivalents available for dilution purposes as of June 30, 2014 and March 31, 2014.

 

 

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 June 30, 2014, 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 RMB and the accounts of the U.S. parent company are maintained in 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 $(5,755) and $609,083 for the three months ended June 30, 2014 and 2013, respectively.

 

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

 

		June 30, 2014				June 30, 2013
Year End RMB Exchange Rate (RMB/USD$)			6.1528				6.1787
Average Period RMB Exchange Rate (RMB/USD$)			6.1581				6.2053

 

Recent accounting pronouncements

  

The Company’s management has evaluated all the recently issued accounting pronouncements through the filing date of these consolidated financial statements and does not believe that they will have a material effect on the Company’s consolidated financial position and results of operations.

 

NOTE 3 – OPERATING LEASES

 

On October 1, 2011, the Company entered into an agreement with Shandong YCT for the lease of one automobile. The lease term is from October 1, 2011 to September 30, 2021. The total lease payment of RMB131,468 (approximately USD21,370) was paid in full at lease signing and amortized over the life of the lease.

 

On June 20, 2013, the Company entered into a Farmland Leasing Agreement with Shiqiao Village for the lease of 2,000Mu farmland for the development of the acer truncatum bunge planting bases. The lease term is from July 1, 2013 to June 30, 2043. The lease payment is about RMB1, 000(approximately USD 163) per Mu annually and payable for five years of rents in advance. The first lease payment was for the rents of the first five years in the amount of RMB10,000,000 (approximately USD1,625,461), which were made within 15 working days from the signing of the Lease. (See NOTE 12 - FUTURE MINIMUM LEASE PAYMENTS)

 

On March 1, 2014, the Company entered into a Farmland Leasing Agreement with Zhongce No.4 Village for the lease of 200Mu farmland to the development of the acer truncatum bunge planting bases. The lease term is from March 1, 2014 to February 28, 2044. The lease payment is RMB1,000,000 (approximately USD 162,546) for each five-year period in advance. The first lease payment was for the rents of the first five years in the amount of RMB1,000,000 (approximately USD162,546), which were made within 10 working days from the signing of the Lease. (See NOTE 12 - FUTURE MINIMUM LEASE PAYMENTS)

 

 

 

The Company accounts for the lease agreement as an operating lease in accordance to ASC 840-10-25-37, which requires, if land is the sole item of property leased and either the transfer-of-ownership criterion in paragraph 840-10-25-1(a) or the bargain-purchase-option criterion in paragraph 840-10-25-1(b) is met, the lessee shall account for the lease as a capital lease. Otherwise, the lessee shall account for the lease as an operating lease. Per ASC 840-2-25-1, rent shall be charged to expense by lessees over the lease term as it becomes payable.

 

The components of prepaid lease were as follows:

 

Prepaid leases		As of June 30, 2014
		Short-term				Long-term
Shiqiao Village – 2000Mu		$	325,055			$	975,166
Zhongce No. 4 Village – 200Mu			32,506				119,187
Total prepaid land lease			357,561				1,094,353
Shandong YCT - Automobile			2,137				13,355
Total prepaid lease		$	359,698			$	1,107,707

 

The prepaid lease is amortized based on straight-line method. The lease expenses for the three months ended June 30, 2014 and 2013 were $89,841 and $0, respectively.

 

NOTE 4 - INVENTORY

 

Inventory consists of finished goods, work-in-process, and raw materials. No allowance for inventory was made for the three months ended June 30, 2014 and 2013.

 

The components of inventories were as follows:

 

		As of
		June 30, 2014				March 31, 2014
Raw materials		$	931,215			$	874,455
Work-in-progress			474,651				370,271
Finished goods			51,234				347,977
Total Inventories		$	1,457,100			$	1,592,703

 

NOTE 5 – PLANT, PROPERTY, AND EQUIPMENT, NET

 

The components of property and equipment were as follows:

 

		As of
		June 30, 2014				March 31, 2014
Machinery & Equipment		$	1,461,181			$	1,461,346
Furniture & Fixture			192,699				192,721
Building			1,300,221				12,554,094
Leasehold Improvements			12,552,666				1,300,369
Subtotal			15,506,767				15,508,530
Less: Accumulated Depreciation & Amortization			(2,268,470	)			(2,123,536	)
Total plant, property and equipment, net		$	13,238,296			$	13,384,995

 

The depreciation expense for the three months ended June 30, 2014 and 2013 was $144,935 and $118,240, 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

 

In the three months ended June 30, 2014, the Company mainly sold products to individual retail customers through nine major distributors.

 

The Company purchases its products from Shandong Yong Chun Tang (“Shandong YCT”) according to the contract signed on December 26, 2006 between the Company and Shandong YCT. On February 19, 2010, the Company renewed the Purchase and Sale Contract with Shandong YCT for a term of five years ending on February 28, 2015. For the three months ended June 30, 2014 and 2013, the purchases from the four major vendors, including Shandong YCT, represented 90% and 93% of the Company’s annual total purchase, respectively.

 

 

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 patents were as follows:

 

		Amortization		As of
		Period		June 30, 2014				March 31, 2014
Land use right		50 years			1,649,329			$	1,649,517
Less: Accumulated amortization					(256,367	)			(248,148	)
Land use right, net					1,392,963				1,401,369
Patent 1		16.5 years			7,476,271				7,477,122
Patent (non-US No. ZL200510045001.9)		13.75 years			10,076,713				10,077,860
Patent (non-US No. ZL200710013301.8)		14.95 years			1,625,276				1,625,461
Less: Accumulated amortization					(4,215,989	)			(3,897,780	)
Patents, net				$	14,962,271			$	15,282,662

 

The amortization expense of land use right for the three months ended June 30, 2014 and 2013 was $8,219 and $13,191, respectively.

 

The amortization expense of patent for the three months ended June 30, 2014 and 2013 was $318,209 and $734,169, respectively.

 

NOTE 9 - TAX PAYABLE

 

Tax payable at June 30, 2014 and March 31, 2014 were as follows:

 

		As of
		June 30, 2014				March 31, 2014
Corporate Income Tax		$	467,981			$	567,227
Value-Added Tax			134,305				205,101
Other Tax & Fees			15,498				44,251
Total Tax Payable		$	617,784			$	816,579

 

NOTE 10 - INCOME TAXES

 

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

 

For the three months ended June 30, 2014 and 2013, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $544,256 and $640,539, respectively.

 

NOTE 11 - STOCKHOLDERS’ EQUITY

 

Stock Issued for Services

  

The total amount of the compensation in the form of issuing shares of common stock for services rendered was $30,350 and nil for the three months ended June 30, 2014 and 2013, respectively.

   

Statutory Reserve

 

Subsidiaries incorporated in China are required to make appropriations to reserve funds, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (“PRC GAAP”).  Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum, and any contributions are not to exceed 50% of the respective companies’ registered capital.

 

As of June 30, 2014 and March 31, 2014, the Company appropriated $1,828,504 to the statutory reserve, respectively.

 

NOTE 12 – FUTURE MINIMUM LEASE PAYMENTS

 

As of June 30, 2014, future minimum lease payments under the operating lease pursuant to the two Farmland Leasing Agreements were as follows:

 

Fiscal year ended March 31,		Shiqiao Village				Zhongce No.4 Village				Total Operating Leases
2015		$	243,791			$	24,379			$	268,171
2016			325,055				32,506				357,561
2017			325,055				32,506				357,561
2018			325,055				32,506				357,561
2019			325,055				32,506				357,561
2020 and thereafter			7,882,590				809,929				8,692,519
Total minimum lease payments		$	9,426,603			$	964,331			$	10,390,934
Less: prepaid lease			1,300,221				151,692				1,451,914
Actual future minimum lease payments			8,126,381				812,638				8,939,020

 

The farmland lease payments for the first five years have been made in advance; and therefore, resulted in prepaid lease payments as of June 30, 2014 (refer to Note 3). The actual future minimum lease payments are $8,939,020, after reduction of the prepaid amounts of $1,451,914.

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

 

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. (“China YCT”) 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. ("Landway Nano”), 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”. China YCT, through its wholly-owned subsidiary, Shandong Spring, is engaged in the business of (i) developing, manufacturing, and selling its own medicine made primarily from gingko extract, (ii) researching and developing new food, healthcare and medicine products based on the acer truncatum bunge, and (iii) actively developing the acer truncatum bunge planting bases and distributing health care supplement products manufactured by another company in the PRC.

 

Results of Operations – Three Months ended June 30, 2014and June 30, 2013

 

The following table sets forth information from our statements of operations for the three months ended June 30, 2014 and 2013, in dollars:

 

		Three Months Ended
		June 30								$				%
		2014				2013				Change				Change
Revenues			8,179,972				8,220,587				(40,616	)			-0.5	%
Cost of Sales			(4,238,770	)			(3,976,310	)			(262,460	)			6.6	%
Gross Profit			3,941,202				4,244,277				(303,075	)			-7.1	%
Operating Expenses			(1,519,723	)			(1,710,853	)			191,130				-11.2	%
Operating Income			2,421,479				2,533,424				(111,945	)			-4.4	%
Interest Income, net			32,026				28,732				3,294				11.5	%
Income Tax Provision			(544,256	)			(640,539	)			96,283				-15.0	%
Net Income			1,909,249				1,921,617				(12,368	)			-0.6	%
Comprehensive Income (Loss)			1,903,494				2,530,700				(627,206	)			-24.8	%

  

Net Sales

 

During the three months ended June 30, 2014, we realized $8,179,972 of sales revenue, a slight decrease of 0.5% or $40,616 as compared to $8,220,587 for the same period in 2013.

 

We entered into a Purchase & Sale Contract with Shandong Yong Chun Tang (“Shandong YCT”) on December 26, 2006, which sets forth the wholesale price that we pay to Shandong YCT for distributing their products. On February 9, 2010, we renewed the Purchase and Sale Contract with Shandong YCT for a term of five years ending on February 28, 2015. Pursuant to the renewed contract, we can purchase 10 products from Shandong YCT on a fixed price, which were selected according to the sales volume and profit margin. For the three months ended June 30, 2014, 32.3% of our revenues were from the sale of the ten types of health care supplement products, compared to 33.6% in the three months ended June 30, 2013.

 

 

Since September 2009, we started to engage in the production and distribution of our own patented drug, Huoliyuan Capsule, and developed distribution channels for the drug. Our sales have increased since September 2009 as a result of the establishment of our manufacturing and distribution of Huoliyuan Capsule. Starting from July 2010, the Company changed from being a distributor of Shandong YCT to both a manufacturer and distributor of our own products, the Huoliyuan Capsules. As a result, we obtained new customers and expanded our sales of Huoliyuan Capsules. The Huoliyuan Capsule product accounted for 67.7% of our revenue for the three months ended June 30, 2014, compared to 66.4% for the three months ended June 30, 2013.

 

The following table sets forth a sales breakdown comparison by product for the periods under review:

 

		Three months ended
Sales from:		June 30, 2014				June 30, 2013				Change in $				Variance
Health care supplements			2,639,717				2,766,193				(126,476	)			-4.6	%
Drugs			5,540,255				5,454,394				85,860				1.6	%
Total			8,179,972				8,220,587				(40,616	)			-0.5	%

 

Cost of Goods Sold

 

Our costs of revenue were comprised primarily of the cost of finished goods we purchased from Shandong YCT, the manufacturing cost of Huoliyuan Capsules, and the raw materials we purchased from third party vendors. During the three months ended June 30, 2014, our cost of goods sold totaled $4,238,770, representing a decrease of $262,460 or 6.6% as compared to $3,976,310 during the same period of 2013. The percentages of the costs of goods sold to total revenues increased to 51.8% from 48.4%, as compared to the same quarter of the previous year due to increased raw material price.

 

Gross Profit

 

As a result of decreased sales revenue and cost of goods sold, gross profit during the three months ended June 30, 2014 was $3,941,202, a decrease of 7.1% or $303,075 as compared to the same period in the previous year.

 

The following table sets forth a breakdown of our gross profits of different products during the three months ended June 30, 2014 and 2013:

 

		Three months ended
Gross Profit:		June 30, 2014				June 30, 2013				Change in $				Variance
Health care supplements			1,373,560				1,466,372				(92,811	)			-6.3	%
Drugs			2,567,641				2,777,906				(210,264	)			-7.6	%
Total			3,941,202				4,244,277				(303,075	)			-7.1	%

 

Research and Development Expenses

 

Our R&D expenses during the three months ended June 30, 2014 and 2013 were $251,265 and $587,259, respectively. Our long-term goal is to utilize advanced biological technology to refine and extract the beneficial compounds in plants that have traditionally been known to have medicinal benefits, primarily gingko. As of June 30, 2014, we have 27 employees working on R&D. In addition we maintain close ties to the research staffs at Tsinghua University, China Agriculture University, Shandong Herbal Medicine University, and Shandong Herbal Medicine Research Institute.

 

Selling Expenses

 

Our selling expenses increased slightly by $23,191 or 4.3% to $566,878 for the three months ended June 30, 2014, from $543,686 for the same period of 2013. As a percentage of sales, selling expenses also increased slightly to 6.9% for the three months ended June 30, 2014 from 6.6% for the same period in 2013.

 

General and Administrative Expenses

 

Our general and administrative expenses were $701,580 during the three months ended June 30, 2014, compared with $579,908 during the three months ended June 30, 2013, an increase of $121,672 or approximately 21.0%. The increase was due to increased professional fees and other taxes.

 

Net Income

 

During the three months ended June 30, 2014, we realized net income of $1,909,249, representing a 0.6% or $12,368 increase as compared to $1,921,617 during the three months ended June 30, 2013.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity were primarily generated from our operations. As of June 30, 2014, Shandong Spring Pharmaceutical had $21,674,878 in working capital, an increase of $1,901,875 or 10% as compared to $19,773,003 in working capital as of March 31, 2014. The increase was mainly due to an increase in cash and cash equivalent.

 

Based on our current operating plan, we believe that existing cash and cash equivalents balances, and the funds to be generated by operations will be sufficient to meet our working capital and capital requirements for our current operations for at least the next 12 months. We expect our marketing activities to help generate positive cash flow.  The operations of our own manufacturing since fiscal year 2010 have put some pressure on our cash flow. We may be required to seek additional capital and reduce certain spending as needed on an on-going basis. There can be no assurance that any additional financing will be available on acceptable terms.

 

 

The following table sets forth a summary of our cash flows for the periods as indicated:

 

		Three months ended
		June 30, 2014				June 30, 2013
Net cash provided by operating activities		$	2,458,652			$	(270,864	)
Net cash provided by(used in) investing activities		$	(597,527	)		$	(2,808,486	)
Net cash provided by financing activities		$	-			$	-
Effect of exchange rate change on cash and cash equivalents		$	(1,580	)		$	325,678
Net increase in cash and cash equivalents		$	1,859,545			$	(2,753,671	)
Cash and cash equivalents, beginning balance		$	18,624,644			$	29,924,188
Cash and cash equivalents, ending balance		$	20,484,189			$	27,170,517

 

Operating Activities

 

Net cash provided by operating activities was $2,458,652 for the three month period ended June 30, 2014, an increase of 1,007.7% or $2,729,516 from the $270,864 net cash used for the three month period ended June 30, 2013. The increase was mainly attributable to the difference in inventory fluctuation.

 

Investing Activities

 

During the three months ended June 30, 2014, our net cash used by investing activities was $597,527, as compared to $2,808,486 during the same period ended June 30, 2013. The change was primarily due to the addition of plant and equipment for 2013.

 

Financing Activities

 

No net cash was provided or used by financing activities over the three months ended June 30, 2014 and 2013.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

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 evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were 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 ended December 31, 2013, 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

 

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: August 14, 2014

 

/s/ Yan Tinghe
Yan Tinghe Chief Executive Officer
(Principal Executive Officer)
/s/ Li Chuanmin
Li Chuanmin Chief Financial Officer
(Principal Financial Officer)