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 December 31, 2014

 

¨

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
organization)		Identification No.)

 

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 1934during 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 14, 2015 was 29,700,689.

 

 

CHINA YCT INTERNATIONAL GROUP, INC.

 

FORM 10-Q

 

December 31, 2014

 

TABLE OF CONTENTS

 

				Page
PART I - FINANCIAL INFORMATION
Item 1:		Financial Statements		4
Item 2:		Management's Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3:		Quantitative and Qualitative Disclosures About Market Risk		21
Item 4:		Controls and Procedures		21
PART II - OTHER INFORMATION
Item 1:		Legal Proceedings		22
Item 1A:		Risk Factors		22
Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3:		Defaults Upon Senior Securities		22
Item 4:		Removed and Reserved		22
Item 5:		Other Information		23
Item 6:		Exhibits		23

  

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2014 AND 2013

(UNAUDITED)

 

Table of Contents

 

	Page
Consolidated Balance Sheets as of December 31 (Unaudited) and March 31, 2014	4
Consolidated Statements of Income for the three and nine months ended December 31, 2014 and 2013 (Unaudited)	5
Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended December 31, 2014 and March  31, 2014	6
Consolidated Statements of Cash Flows for the three and nine months ended December 31, 2014 and 2013 (Unaudited)	7
Notes to Consolidated Financial Statement	8-15

 

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

 

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

 

						UNIT: USD$
		December 31, 2014				March 31, 2014
Assets
Current assets:
Cash and cash equivalent		$	24,195,345			$	18,624,644
Accounts receivable			-				42,049
Prepaid lease - short term			361,684				359,738
Inventory			2,200,432				1,592,703
Total current assets			26,757,461				20,619,134
Prepaid lease - long term			932,984				1,197,768
Development cost of acer truncatum bunge planting			16,859,574				15,333,951
Plant, property, equipment, and leasehold improvement, net			13,060,313				13,384,995
Construction in progress			-				-
Intangible assets, net			15,788,168				16,684,032
Total assets			73,398,500				67,219,880
Liabilities and Stockholders’ Equity (Deficit)
Liabilities:
Current liabilities:
Tax payable			883,969				816,579
Other payable			8,371				29,551
Total current liabilities			892,340				846,130
Total liabilities			892,340				846,131
Stockholders’ Equity
Preferred stock, par value $500.00 per share; 45 shares authorized and issued at December 31, 2014 and March 31, 2014			22,500				22,500
Common stock, par value $0.001 per share;  500,000,000 and 100,000,000 shares authorized, 29,700,689 and 29,663,023 shares issued and outstanding at December 31, 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			61,468,326				55,676,059
Accumulated other comprehensive income			4,946,722				4,636,928
Total stockholders’ equity			72,506,160				66,373,749
Total liabilities and stockholders’ equity		$	73,398,500			$	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								FOR THE NINE MONTHS ENDED
		December 31, 2014				December 31, 2013				December 31, 2014				December 31, 2013
Sales Revenue		$	9,511,534			$	8,276,400			$	26,365,663			$	24,633,947
Cost of Goods Sold			4,826,870				3,639,944				13,397,445				11,314,805
Gross Profit			4,684,664				4,636,456				12,968,218				13,319,142
Selling Expenses			1,309,858				856,021				2,496,500				1,946,148
G&A Expense			1,024,914				894,674				2,287,081				2,026,062
R&D Expenses			87,949				60,634				566,050				708,158
Total expense			2,422,721				1,811,329				5,349,631				4,680,368
Income from operation			2,261,943				2,825,127				7,618,587				8,638,774
Interest income (Expense)			19,542				20,764				72,031				49,496
Profit before tax			2,281,485				2,845,891				7,690,618				8,688,270
Income tax			615,188				649,154				1,898,351				2,130,015
Net income			1,666,297				2,196,737				5,792,267				6,558,255
Other comprehensive income
Foreign currency translation adjustment			387,442				537,410				309,794				1,453,667
Comprehensive income		$	2,053,739			$	2,734,147			$	6,102,061			$	8,011,922
Basic and diluted income per common share
Basic and Diluted			0.06				0.07				0.20				0.22
Weighted average number of common shares outstanding
Basic and Diluted			29,700,690				29,663,023				29,690,953				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 paid-in capital				Statutory Reserve				Accumulated OCI				Retained Earnings				Total
		Shares				Amount				Shares				Amount
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 three months																															1,909,251				1,909,251
Issuance of common shares 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				29,700,689			$	29,701			$	4,210,407			$	1,828,504			$	4,631,173			$	57,585,310			$	68,307,595
Net income for the three months																															2,216,720				2,216,720
Foreign currency translation adjustment																											(71,893	)							(71,893	)
Balance - September 30, 2014			45			$	22,500				29,700,689			$	29,701			$	4,210,407			$	1,828,504			$	4,559,280			$	59,802,029			$	70,452,421
Net income for the three months																															1,666,297				1,666,297
Foreign currency translation adjustment																											387,442								387,442
Balance - December 31, 2014			45			$	22,500				29,700,689			$	29,701			$	4,210,407			$	1,828,504			$	4,946,722			$	61,468,326			$	72,506,160

 

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

 

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW

 

						UNIT: USD$
		NINE MONTHS ENDED
		December 31, 2014				December 31, 2013
Cash Flows From Operating Activities:
Net income		$	5,792,267			$	6,558,255
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,460,809				1,236,897
Issue of common shares as compensation			30,350				-
Changes in operating assets and liabilities:
Prepaid accounts			16,027				-
Inventory		$	(607,729	)			(994,239	)
Prepaid land lease			264,784				(1,476,160	)
Accounts receivable			42,049				135,238
Taxes payable			67,391				(333,236	)
Accrued expenses and other payables		$	(21,183	)			(358,419	)
Net cash provided by (used in) operating activities			7,044,765				4,768,336
Cash flows from investing activities:
Addition to plant and equipment		$	(43,693	)			(4,400,491	)
Development cost of acer truncatum bunge planting		$	(1,525,623	)			(14,003,182	)
Reduction of construction in progress			-				220,874
Prepayment/(deposit) to Jining Tianruitong for purchase of patents			-				-
Net cash provided by (used in) investing activities		$	(1,569,316	)		$	(18,182,799	)
Effect of exchange rate changes on cash and cash equivalents			95,252				439,891
Net increase (decrease) in cash and cash equivalents			5,570,701				(12,974,572	)
Cash and cash equivalents at beginning of period			18,624,644				29,924,188
Cash and cash equivalents at ending of period			24,195,345				16,949,616
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest		$	40,265			$	-
Income taxes		$	1,828,974			$	1,976,747
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 the new food, healthcare and medicine product based on the acer truncatum bunge. The Company is 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 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 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 December 31, 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 to write down the inventory to 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:

 

 

Building		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 2,000Mu (1Mu is equal to approximately 666.67 square meters). 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, 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. Per 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. Per 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 depreciate expenses were recognized as of December 31, 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 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 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 did not recognize any deferred tax amount at December 31, 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 amount of $219,117 and $205,101 as of December 31, 2014 and March 31, 2014, respectively.

 

Research and development

 

Research and development costs relate 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 are depreciated over their estimated useful lives.

 

The research and development expense for the three months ended December 31, 2014 and 2013 was $87,949 and $60,634, respectively.

 

The research and development expense for the nine months ended December 31, 2014 and 2013 was $566,050 and $708,158, 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.

 

The Company incurred advertising costs of $668,166 and $321,669 for the three months ended December 31, 2014 and 2013, respectively.

 

The Company incurred advertising costs of $680,269 and $321,669 for the nine months ended December 31, 2014 and 2013, 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). 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 December 31, 2014 and 2013, the Company incurred $364,110 and $296,892 mailing and handling costs, respectively.

 

For the nine months ended December 31, 2014 and 2013, the Company incurred $1,017,062 and $914,478 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 nil shares common stock equivalents available for dilution purposes as of December 31, 2014 and 2013, respectively.

 

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 environment 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. The risks include political, economic and legal, 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, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.

 

As of December 31, 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 the RMB and the accounts related to 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 $387,442 and $537,410 for the three months ended December 31, 2014 and 2013, and $309,794 and $1,453,667 for the nine months ended December 31, 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:

 

		December 31,  2014				March 31, 2014				December 31, 2013
Quarter End RMB Exchange Rate (RMB/USD$)			6.1190				6.1787				6.0969
Quarterly Average RMB Exchange Rate (RMB/USD$)			6.1362				6.2053				6.1302

 

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 (refer to 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 (refer to 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 as of December 31, 2014 were as follows:

 

Prepaid leases		Short-term				Long-term
Shiqiao Village – 2000Mu			326,851				817,127
Zhongce No. 4 Village – 200Mu			32,685				103,503
Total prepaid land lease			359,536				920,630
Shandong YCT - Automobile			2,149				12,354
Total prepaid lease			361,684				932,984

 

The prepaid lease is amortized based on straight-line method. The lease expenses for the three months ended December 31, 2014 and 2013 were $90,771 and $81,563, respectively.

 

The lease expenses for the nine months ended December 31, 2014 and 2013 were $270,503 and $162,630, 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 and nine months ended December 31, 2014 and 2013. The components of inventories were as follows:

 

		As of
		December 31, 2014				March 31, 2014
Raw materials		$	946,936			$	874,455
Work-in-progress			414,386				370,271
Finished goods			839,110				347,977
Total Inventories		$	2,200,432			$	1,592,703

 

NOTE 5 – PLANT, PROPERTY AND EQUIPMENT, NET

 

The components of property and equipment were as follows:

 

		As of
		December 31, 2014				March 31, 2014
Machinery & Equipment		$	1,500,981			$	1,461,346
Furniture & Fixture			193,764				192,721
Leasehold Improvements			1,307,403				1,300,369
Building			12,633,967				12,554,094
Subtotal			15,636,115				15,508,530
Less: Accumulated Depreciation			(2,575,802	)			(2,123,536	)
Total plant, property and equipment, net		$	13,060,313			$	13,384,995

 

The depreciation expense for the three months ended December 31, 2014 and 2013 was $161,063 and $334,508, respectively.

 

The depreciation expense for the nine months ended December 31, 2014 and 2013 was $452,267 and $675,465, 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 and nine months ended December 31, 2014, the Company mainly sells products to individual retail customers through ten major distributors.

 

For the three and nine months ended December 31, 2014, the Company mainly purchased all materials from four major vendors.

 

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:

 

				As of
		Amortization Period		December 31, 2014				As of March 31, 2014
Land use right		50 years			1,658,441			$	1,649,517
Less: Accumulated amortization					(274,367	)			(248,148	)
Land use right, net					1,384,074				1,401,369
Patent 1		16.5 years			7,517,568				7,477,122
Patent (non-US No. ZL200510045001.9)		13.75 years			10,132,375				10,077,860
Patent (non-US No. ZL200710013301.8)		14.95 years			1,634,254				1,625,461
Less: Accumulated amortization					(4,880,103	)			(3,897,780	)
Patents, net				$	14,404,094			$	15,282,662

 

The amortization expense of land use right for the three months ended December 31, 2014 and 2013 was $9,741 and $10,326, respectively.  The amortization expense of patents for the three months ended December 31, 2014 and 2013 was $345,240 and $353,717, respectively.

 

The amortization expense of land use right for the nine months ended December 31, 2014 and 2013 was $26,219 and $31,104, respectively.  The amortization expense of patents for the nine months ended December 31, 2014 and 2013 was $982,323 and $871,285, respectively.

 

NOTE 9 - TAX PAYABLE

 

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

 

		As of
		December 31, 2014				March 31, 2013
Corporate Income Tax		$	616,917			$	567,227
Value-Added Tax			219,117				205,101
Other Tax & Fees			47,935				44,251
Total Tax Payable		$	883,969			$	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 December 31, 2014 and 2013, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $615,188 and $649,154, respectively.

 

For the nine months ended December 31, 2014 and 2013, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $1,898,351 and $2,130,015, respectively.

 

NOTE 11 - STOCKHOLDERS’ EQUITY

 

Stock Issued to Independent Directors

  

The total amount of the compensation in the form of issuing shares of common stocks for services rendered was nil for the three months ended December 31, 2014 and 2013, respectively.

 

The total amount of the compensation in the form of issuing shares of common stocks for services rendered was $30,350 and nil for the nine months ended December 31, 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 December 31, 2014 and March 31, 2014, the Company appropriated $1,828,504 to the statutory reserve, respectively.

 

 

NOTE 12 – FUTURE MINIMUM LEASE PAYMENTS

 

As of December 31, 2014, future minimum lease payments under the operating lease pursuant to the Farmland Leasing Agreement were as follows:

 

Fiscal year ended March 31		Operating Leases
2015			89,884
2016			359,536
2017			359,536
2018			359,536
2019			359,536
2020 and thereafter			8,740,535
Total minimum lease payments		$	10,268,563

 

The farmland lease payments for the first five years have been made in advance; and therefore, resulted in prepaid lease payments as of December 31, 2014 (refer to Note 3 – OPERATING LEASES). The actual future minimum lease payments are $8,988,397, after reduction of the prepaid amounts of $1,280,166.

 

NOTE 13 – SUBSEQUENT EVENTS

 

There have been no subsequent events after December 31, 2014.

 

 

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 developing, manufacturing, and selling its own medicine made primarily from gingko extract, development of 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 December 31, 2014 and 2013 respectively

 

The following table sets forth information from our statements of operations for the three months ended December 31, 2014 and 2013, in dollars:

 

		Three Months Ended
		December 31								$				%
		2014				2013				Change				Change
Revenues			9,511,534				8,276,400				1,235,134				14.9	%
Cost of Sales			(4,826,870	)			(3,639,944	)			(1,186,926	)			32.6	%
Gross Profit			4,684,664				4,636,456				48,208				1.0	%
Operating Expenses			(2,422,721	)			(1,811,329	)			(611,392	)			33.8	%
Operating Income			2,261,943				2,825,127				(563,184	)			-19.9	%
Interest Income, net			19,542				20,764				(1,222	)			-5.9	%
Income Tax Provision			(615,188	)			(649,154	)			33,966				-5.2	%
Net Income			1,666,297				2,196,737				(530,440	)			-24.1	%
Comprehensive Income (Loss)			2,053,739				2,734,147				(680,408	)			-24.9	%

 

Sales Revenue (Net)

 

During the three months ended December 31, 2014, we had net sales of $9,511,534, as compared with net sales of $8,276,400 for the same period in 2013, an increase of $1,235,134, or 14.9%, mainly from increased revenue from Huoliyuan Capsules.

 

Since September 2009, we started to engage in the production and distribution of our own non-prescription drug, Huoliyuan Capsule, which is patented in China, 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 channels of Huoliyuan Capsule. Since July 2010, the Company changed from being solely 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 72.5% of our revenue for the three months ended December 31, 2014, compared to 68.3% for the three months ended December 31, 2013. In this quarter, we added new packaging (1*1) in addition to the existing packaging (1*2), which boosted revenue for Huoliyuan Capsule sales.

 

 

We entered into a purchase and sale contract with Shandong Yong Chun Tang (“Shandong YCT”) on December 26, 2006 (the “Purchase and Sale Contract”), 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 March 31, 2015. Pursuant to the renewed contract, we can purchase 10 types of health care supplement products from Shandong YCT on a fixed price, which were selected according to their sales volume and profit margin. For the three months ended December 31, 2014, 27.5% of our revenue was from the sale of the health care supplement products, compared to 31.7% in the three months ended December 31, 2013.

 

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

 

		Three months ended
Sales from:		December  31, 2014				December 31,  2013				Change in $				Variance
Drugs			6,894,771				5,653,724				1,241,046				22.0	%
Health care supplements			2,616,764				2,622,675				(5,912	)			-0.2	%
Total			9,511,534				8,276,400				1,235,135				14.9	%

 

Cost of Sales

 

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 December 31, 2014, we had cost of sales of $4,826,870 as compared with cost of sales of $3,639,944 during the same period in 2013, an increase of approximately $1,186,926, or 32.6%. The increase was primarily due to market price changes of raw materials used to produce our own product, Huoliyuan. The percentage of the costs of sales to total revenues increased to 50.7% from 44.0% as compared to the same quarter of the previous year.

 

Gross Profit

 

As a result of the changes in sales and costs, gross profit during the three months ended December 31, 2014 was $4,684,664, a slight increase of $48,208 or 1.0% as compared to the same period in the previous year. Our gross margin decreased to 49.3% during the three months ended December 31, 2014 from 56.0% during the three months ended December 31, 2013 due to increased market prices of raw materials.  

 

The following table sets forth a breakdown of our gross profits of different products during the three months ended December 31, 2014 and 2013:

 

		Three months ended
Gross Profit:		December 31, 2014				December 31, 2013				Change in $				Variance
Drugs			3,306,620				3,250,613				56,007				1.7	%
Health care supplements			1,378,045				1,385,843				(7,798	)			-0.6	%
Total			4,684,664				4,636,456				48,209				1.0	%

 

Research and Development Expenses

 

Research and development expenses were $87,949 during the three months ended December 31, 2014 compared with $60,634 during the three months ended December 31, 2013, an increase of $27,315 or 45.0%. 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 December 31, 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 the Shandong Herbal Medicine Research Institute.

 

Selling Expenses

 

Our selling expenses increased by $453,837 or 53.0% to $1,309,858 for the three months ended December 31, 2014, from $856,021 for the same period of 2013. The increase was mainly due to the additional advertisement expenses in this quarter. We spent $668,166 to order 100,000 desk calendars and 100,000 hanging calendars for marketing purpose in light of the New Year. As a percentage of sales, selling expenses increased to 13.8% for the three months ended December 31, 2014 from 10.3% for the same period in 2013.

 

 

General and Administrative Expenses

 

Our general and administrative expenses were $1,024,914 during the three months ended December 31, 2014, compared with $894,674 during the three months ended December 31, 2013, an increase of $130,240 or approximately 14.6%. The increase was mainly due to additional amortization of prepaid lease based on agreement signed into effect since March 1, 2014.

 

Interest Income (Expense), Net

 

For the three months ended December 31, 2014, the interest income was $19,542, compared to $20,764 for the three months ended December 31, 2013, a slight decrease of $1,222 or 5.9%. The decrease was mainly due to interest rate change as Bank of China reduced its benchmark one-year deposit rate on November 23, 2014.

 

Income Tax

 

Income tax was $615,188 during the three months ended December 31, 2014, as compared to $649,154 for the same period of 2013, a decrease of $33,966 or approximately 5.2%. The decrease was primarily due to the decreased taxable income during the three months ended December 31, 2014.

 

Net Income

 

As a result of the above factors, we had a net income of $1,666,297 during the three months ended December 31, 2014, compared with a net income of $2,196,737 during the three months ended December 31, 2013.

 

Other Comprehensive Income

 

As a result of the currency translation adjustment, we had other comprehensive income of $387,442 during the quarter ended December 31, 2014, compared with $537,410 during the quarter ended December 31, 2013 due to exchange rate fluctuations from Chinese RMB, the functional currency used in our Chinese subsidiary, to US dollar, our reporting currency.

 

Results of Operations – for the Nine Months ended December 31, 2014 and 2013:

 

The following table sets forth information from our statements of operations for the nine months ended December 31, 2014 and 2013, in dollars:

 

		Nine Months Ended
		December 31								$				%
		2014				2013				Change				Change
Revenues			26,365,663				24,633,947				1,731,716				7.0	%
Cost of Sales			(13,397,445	)			(11,314,805	)			(2,082,640	)			18.4	%
Gross Profit			12,968,218				13,319,142				(350,924	)			-2.6	%
Operating Expenses			(5,349,631	)			(4,680,368	)			(669,263	)			14.3	%
Operating Income			7,618,587				8,638,774				(1,020,187	)			-11.8	%
Interest Income, net			72,031				49,496				22,535				45.5	%
Income Tax Provision			(1,898,351	)			(2,130,015	)			231,664				-10.9	%
Net Income			5,792,267				6,558,255				(765,988	)			-11.7	%
Comprehensive Income (Loss)			6,102,061				8,011,922				(1,909,861	)			-23.8	%

 

Sales Revenue (Net)

 

During the nine months ended December 31, 2014, we had net sales of $26,365,663, as compared with net sales of $24,633,947 during the same period in 2013, an increase of $1,731,716 or 7.0%. 

 

For the nine months ended December 31, 2014, the Huoliyuan Capsule products accounted for 70.0% of our revenue, compared to 67.4% for the nine months ended December 31, 2013. In this quarter, we added new packaging (1*1) for Huoliyuan Capsule in addition to the existing packaging (1*2), which boosted its sales revenue. Our revenue from the sale of the 10 products distributed for Shandong YCT accounted for 30.0% of the sales for the nine months ended December 31, 2014, compared to 32.6% for the same period of 2013.

 

 

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

 

		Nine months ended
Sales from:		December 31, 2014				December 31, 2013				Change in $				Variance
Drugs			18,448,805				16,595,676				1,853,130				11.2	%
Health care supplements			7,916,858				8,038,271				(121,413	)			-1.5	%
Total			26,365,663				24,633,947				1,731,716				7.0	%

 

Cost of Sales and Gross Margin

 

During the nine months ended December 31, 2014, we had cost of sales of $13,397,445, as compared with cost of sales of $11,314,805 during the same period in 2013, an increase of $2,082,640 or 18.4%, reflecting the increase in sales and increased raw material costs.

 

The gross profit was $12,968,218 for the nine months ended December 31, 2014, which was decreased from the same period in 2013. Our gross margin decreased to 49.2% during the nine months ended December 31, 2014 from 54.1% during the nine months ended December 31, 2013. The decrease was due to raised cost of sales, offset by sales increase.

 

Selling Expenses

 

Our selling expenses increased by $550,352, or 28.3%, to $2,496,500 for the nine months ended December 31, 2014, from $1,946,148 for the same period of 2013. The increase was mainly due to the additional advertisement expenses in 2014. We spent $668,166 to order 100,000 desk calendars and 100,000 hanging calendars for marketing purpose in light of the New Year. As a percentage of sales, selling expenses increased slightly from 7.9% for the nine months ended December 31, 2013 to 9.5% for the same period of 2014.

 

General and Administrative Expenses

 

Our general and administrative expenses were $2,287,081 during the nine months ended December 31, 2014, compared with $2,026,062 during the nine months ended December 31, 2013, an increase of $261,019 or approximately 18.5%. The increase was due to additional amortization of prepaid lease based on the agreement signed into effect since March 1, 2014.

 

Research and Development Expenses

 

Research and development expenses were $566,050 during the nine months ended December 31, 2014 compared with $708,158 during the nine months ended December 31, 2013, a decrease of $142,108, or 20.1%. In prior year, we had increased expenses related to investments in future new technologies and products that can be utilized to refine and extract the beneficial components from plants, primarily gingko.

 

Interest Income

 

Interest income was $72,031 for the nine months ended December 31, 2014, increased by $22,535 or 45.5%, compared to $49,496 for the nine months ended December 31, 2013. The increase reflected the increased cash balance.

 

Income Tax

 

Income tax was $1,898,351 during the nine months ended December 31, 2014, as compared to $2,130,015 for the same period of 2013, a decrease of $231,664, or approximately 10.9%. The decrease was primarily due to the decreased taxable income during the nine months ended December 31, 2014.

 

Net Income

 

As a result of the factors described above, we generated net income of $5,792,267 during the nine months ended December 31, 2014, as compared with net income of $ 6,558,255 during the nine months ended December 31, 2013.

 

Other Comprehensive Income

 

As a result of a currency translation adjustment, other comprehensive income was $309,794 during the nine months ended December 31, 2014, compared with $1,453,667 during the nine months ended December 31, 2013; which is mainly attributable to the exchange rate fluctuations from Chinese RMB, the functional currency used in our Chinese subsidiary, to US dollar, our reporting currency.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity were primarily generated from our operations. As of December 31, 2014, we had $25,865,121 in working capital, an increase of $6,092,117 or 31% as compared to $19,773,003 in working capital at March 31, 2014. The increase was mainly due to increase in cash and cash equivalent, and inventory.

 

 

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. Our operations produced positive cash flow of $5,570,701 during the nine months ended December 31, 2014 due to an increase in cash and cash equivalent. We did not have accounts receivable outstanding as of December 31, 2014. We expect our marketing activities to continue to help generate positive 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 period as indicated:

 

		Nine months ended
		December 31, 2014				December 31, 2013				Change in $				%
Net cash provided by operating activities		$	7,044,765			$	4,768,336				2,276,429				47.7	%
Net cash provided by(used in) investing activities		$	(1,569,316	)		$	(18,182,799	)			16,613,483				-91.4	%
Net cash provided by financing activities		$	-			$	-				-				0.0	%
Effect of exchange rate change on cash and cash equivalents		$	95,252			$	439,891				(344,639	)			-78.3	%
Net increase in cash and cash equivalents		$	5,570,701			$	(12,974,572	)			18,545,273				-142.9	%
Cash and cash equivalents, beginning balance		$	18,624,644			$	29,924,188				(11,299,544	)			-37.8	%
Cash and cash equivalents, ending balance		$	24,195,345			$	16,949,616				7,245,729				42.7	%

 

 

Operating Activities

 

For the nine months ended December 31, 2014, net cash provided by operating activities was $7,044,765, compared to $4,768,336 for the same period in 2013. We made prepaid land lease in the amount of $1,545,218 for the nine months ended December 31, 2013. There was no lease payment for the nine months ended December 31, 2014.

 

Investing Activities

 

Net cash used in investing activities was $1,569,316 for the nine months ended December 31, 2014 as compared to $18,182,799 for the nine months ended December 31, 2013. We made investment to construct our own acer truncatum bunge planting base and planted 6,670,000 trees during the nine months ended December 31, 2013.

 

Financing Activities

 

There were no financing activities for the nine months ended December 31, 2014 and 2013.

 

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, 2014 and 10-Q for the period ended December 31, 2014 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.

 

 

Principles of consolidation

 

The consolidated financial statements for the nine months ended December 31, 2014 and 2013 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

 

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. 

 

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, 2014, 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

Section 1350 Certification of Chief Executive Officer and 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: February 17, 2015

 

/s/ Yan Tinghe

Yan Tinghe Chief Executive Officer (Principal Executive Officer)

/s/ Li Chuanmin

Li Chuanmin Chief Financial Officer (Principal Financial Officer)