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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

 

For the fiscal year ended: March 31, 2016 or

 

☐       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

(Exact name of registrant as specified in its charter)

 

 

Issuer's telephone number: 406-282-3188

Securities Registered Pursuant to Section 12(b) of the Act: None

Common Stock, $.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 406 of the Securities Act.   Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 ☒ 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 ☒ No ☐

 

Indicate by check mark disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___

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. (Check One)

 

Large accelerated filer ☐     Accelerated filer ☐     Non-accelerated filer ☐     Small reporting company ☒

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

As of September 30, 2015, the aggregate market value of the shares of the registrant's common stock held by non-affiliates (based upon close sale price of such shares as reported on the OTCQB Marketplace), was $11,464,161.46.

 

The number of shares outstanding of the issuer's common stock, as of June 20, 2016 was 29,764,168.

CHINA YCT INTERNATIONAL GROUP, INC.

FORM 10K

For the Fiscal Year Ended March 31, 2016

 

TABLE OF CONTENTS

 

 

PART I

 

 

This Report contains certain forward-looking statements regarding China YCT International Group, Inc., its business and its financial prospects. These statements represent Management's present intentions and its present belief regarding the Company's future. Nevertheless, there are numerous risks and uncertainties that could cause our actual results to differ from the results suggested in this Report. A number of those risks are set forth in the section of this report titled "Risk Factors".

Because these and other risks may cause China YCT International Group's actual results to differ from those anticipated by Management, the reader should not place undue reliance on any forward-looking statements that appear in this Report. Readers should also take note that China YCT International Group will not necessarily make any public announcement of changes affecting these forward-looking statements, which should be considered accurate on this date only.

 

ITEM 1.   BUSINESS

 

The Structure of our Business

 

China YCT International Group ("CYIG" or "the Company") principally operates through two of its wholly-owned subsidiary, Landway Nano Bio-Tech Group, Inc. ("Landway Nano"), incorporated in Delaware, and Shandong Spring Pharmaceutical Co., Ltd. ("Shandong Spring Pharmaceutical"), a corporation organized in the People's Republic of China (the "PRC"). Shandong Spring Pharmaceutical is engaged in the business of developing, manufacturing and selling its own medicine made primarily from ginseng extract, development of the acer truncatum bunge planting bases, and distributing health care supplement products manufactured by another company in the PRC.

 

From January 2006 until January 2007 management of Shandong Spring Pharmaceutical was engaged in developing the company's manufacturing facility and distribution network. In January 2007, Shandong Spring Pharmaceutical commenced revenue-producing activities, specifically distributing products manufactured by Shandong Yong Chun Tang Bioengineering Co., Ltd. ("Shandong YCT").

Shandong Spring Pharmaceutical was originally organized as a subsidiary of Shandong YCT for the purpose of focusing on advanced technology related to the use of gingko as an aide to health. Shandong YCT later transferred ownership of Shandong Spring Pharmaceutical to its equity-holders. Shandong Spring Pharmaceutical served solely as a distributor for Shandong YCT through the end of its fiscal year on March 31, 2009, pursuant to a distribution agreement that fixed the resale profit that would be earned by Shandong Spring Pharmaceutical. On February 26, 2015, we renewed the Purchase and Sale Contract with Shandong YCT for a term of two years ending on February 28, 2017.  Pursuant to the renewed agreement, the Company can purchase 10 products from Shandong YCT at fixed prices with products selected according to their sales and profits. Mr. Yan Tinghe, our founder and Chief Executive Officer, was the principal shareholder of Shandong YCT until he sold all of his shares of Shandong YCT to an unrelated party on Dec 16, 2009.

 

In March 2010, the Company purchased a patent from Shandong YCT for US$6.74 million, which enabled the Company to manufacture and distribute medicine products for cardio cerebral vascular disease, cosmetics, and healthcare products. The patent acquired from Shandong YCT was independently assessed at a fair value of USD11.14 million by Beijing Beifang Yashi Asset Evaluation Company based on the current income value method. The purchase price for the patent was negotiated between the Company and Shandong YCT based on the assessed value and purchased by the Company at a discount. The patent is for an aglycone type and purification method of biotransformation in herbal product manufacturing process to extracting herbal flavonoid more extensively, and has a legal life of 16.5 years.

 

On October 26, 2010, Shandong Spring Pharmaceutical signed an agreement to purchase three patents relating to Chinese herbal formulas from Jining Tianruitong Technology Development Limited Company for $15,557,318. We received an independent assessment of the value of the patents, which substantiated the purchase price. Approval from the State Intellectual Property Office of the PRC is required for the transfer of the patent. We obtained governmental approvals for the transfer of the two patents in October 2011, which were transferred to the Company. Due to the failure of obtaining governmental approval for the third patent, the Company amended the agreement in January 2013 to reflect the two acquired patents with a final cost of $11,459,260. The acquisition of the third patent was cancelled with the outstanding payment settled. The two patents 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), with legal lives of approximately 14 years and 15 years, respectively.

 

The Development of Acer Truncatum Bunge Planting Base

On March 22, 2011, the Chinese Ministry of Health officially approved acer truncatum bunge seed oil, along with peony seed oil as a new food resource (No. 9 Announcement issued in 2011). Subsequently, in December 2011, the Chinese National Development and Reform Commission, jointly with the Ministry of Industry and Information Technology, issued the Twelfth Five-year Development Plan of Food Industry, whereby "the nutrition and health food manufacturing industry" was listed for the first time in the national development plan as a focused developing area. In July 2013, the Company initiated an investment plan (the "Plan") to take advantage of the national policy. Accordingly, the Company planned to use its own capital reserves to develop and cultivate its own planting base for acer truncatum bunge. The development of the project will take five years with a total investment of approximately RMB302 million (approximately USD49.3 million).  As of March 31, 2016, the Company has invested approximately $42.2 million in the development of acer truncatum bunge planting base.  

 

The Company entered into four Farmland Leasing Agreements for the development of the acer truncatum bunge planting bases. On June 20, 2013, the Company entered into a Farmland Leasing Agreement with Shiqiao Village for 2,000Mu of 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 155) 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 USD1,547,700). On March 1, 2014, the Company entered into a second Farmland Leasing Agreement with Zhongce No.4 Village for the lease of 200Mu of farmland for 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 154,770) for each five-year period in advance. The first lease payment was for the rents for the first five years in the amount of RMB1,000,000 (approximately USD154,770). On January 7, 2015, the Company entered into a third Farmland Leasing Agreement with Shandong Wanziyuan Tourism Development Co. to lease 2,000Mu of farmland for the development of the acer truncatum bunge planting bases. The lease term is from January 15, 2015 to December 31, 2029. The lease payment is RMB1,000 (approximately USD 155) per Mu annually and should be paid every five years in advance. The first lease payment was for the rent of the first five years in the amount of RMB10,000,000 (approximately USD1,547,700).

 

On July 2, 2015, the Company entered into a fourth Farmland Leasing Agreement with a Zhongce Shen Village for the lease of 2,000Mu farmland to the development of the acer truncatum bunge planting bases. The lease term is from July 2, 2015 to July 2, 2029. The lease payment is RMB1, 000 (approximately USD 155) per Mu annually and is paid every five years in advance. The first lease payment was for the rents of the first five years in the amount of RMB10,000,000 (approximately USD1,547,700), which was paid on July 3, 2015.

As of March 31, 2014, the Company completed Phase I of the Plan, which included development of the 2,200Mu of farmland and planting of 2,948,000 acer truncatum bunges trees. The Company has made a five-year advanced payment in the amount of $1,788,007 for the 30-year term farmland leases and $1,300,369 for acquisition of an irrigation system. In addition, on August 10, 2013, the Company purchased a nursery for $15,333,951. As of March 31, 2015, the Company completed the Phase II of the Plan, which it expanded its development for another 2,000Mu. As of March 31, 2015, the Company has planted 4200mu or 4,948,000 trees of acer truncatum bunge.  As of March 31, 2016, the Company has planted 6200Mu of farmland or 7,616,000 trees of acer truncatum bunge.  These trees are expected to be in production in the fourth quarter of the calendar year 2017 along with the construction of an ecological, scientific, and industrial park and related supporting facilities from 2015 to 2018.

The profits from our health and medical products are adequate to fund our ongoing operations. In order to fully implement its business plan, however, Shandong Spring Pharmaceutical will require a capital infusion to mainly finance the production of seed oil from acer truncaum bunge.   The estimated funding requirement is about $5 million.

The Market for Major Products

 

The Company's own product, Huoliyuan Capsule, is the only herbal medicine of its type  made in the form of a capsule among all peer products.  Most peer products come in the form of tablets. After the 2014 crisis in China regarding the quality failure in capsule materials, the market demand for Huoliyuan capsule has been stabilized.

Our Ginkgo Herbal Tea is health food approved by Ministry of Health (WeiShiJianZi 1999 No. 0529). We have established our unique distribution system with hundreds of franchised stores. While sales of other ginkgo products are sluggish due to their single formulas and plain manner of distribution, some competitors lost their market share after a few years. The Company expects that there will be a growth market for the health herbal teas from the growing senior population in China while the market is becoming more competitive.

Traditional Chinese medicine recommends consumption of gingko tea to improve circulation and pulmonary function. Although scientific testing of the health benefits traditionally attributed to gingko has been inconclusive to date, there remains a widespread belief in the benefits of a regimen of gingko consumption. In particular, the potential use of gingko to alleviate symptoms of Alzheimer's disease has attracted attention. Various research articles, including an article published by the Shandong Traditional Chinese Medical University in 2010, has reported research results on the use of gingko to alleviate symptoms of Alzheimer's disease. The flavonoid aglycone, a compound derived from the gingko plant, is widely used in pharmaceutical formulations as well as in food and cosmetic products. The flavonoid aglycone is listed as a dual food/drug product by the Ministry of Health of China. Our cosmetic flavonoid aglycone product, YCT Ginkgo Freckle Cream has received Cosmetic Product Certificate issued by the Ministry of Health of China.

 

Research and Development: Our Products

 

Our goal is to utilize advanced biological technology to isolate and extract the beneficial compounds in plants that have traditionally been known to have medicinal benefits We also focus our research on the seed selection and planting technologies for greater yield of leaves and seeds from the plants as well as the most efficient method to isolate and extract nervonic acid from seed oil. We have a staff of 27 employees engaged in research and development of new technologies and resulting products. 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. We entered into a written R&D Cooperation Agreement with Nanjing Forestry University, pursuant to which we will invest on a national herbal R&D center with Nanjing Forestry University and have the right of first refusal on the transfer and use of Nanjing Forestry University's herbal related technologies. We also entered into an R&D Cooperation Agreement with Shandong University on April 26, 2011, which is effective until April 25, 2014. Pursuant to the agreement with Shandong University, we invested RMB 300,000 (approximately USD 45,000) in R&D projects and will be the co-owner of the resulting technologies. We were also committed to make further investments equal to 10% of our profits arising from Shandong University's technologies.

 

During the fiscal year ended March 31, 2016, we spent $724,287 in research and development. Our R&D expenses were primarily used for acquiring and testing raw material, and also the ordinary maintenance expense for our research equipment.

 

Huoliyuan Capsule

In January 2007, the Company purchased from Beijing Boya Research Institution, Ltd., a patent for RMB400,000 (approximately USD$58,000) for the Huoliyuan Capsule. In 2010, the Company started to manufacture and distribute our new product, Huoliyuan Capsule. During the year ended March 31, 2016, the Company produced approximately 4.07 million boxes of (1*3 pack), 3.72 million boxes of (1*2 pack), and 2.58 million boxes of (1*1pack) of Huoliyuan Capsule.  

Huoliyuan Capsule is approved by the State Food and Drug Administration (the "SFDA") of China. The Huoliyuan capsule is manufactured according to the traditional Chinese medicine concepts. The main ingredients of Huoliyuan are: Panax Ginseng Leaves Extract, Radix Astragali, Radix Ophiopogonis, Schisandra Chinensis and Monkshood; all are traditional Chinese herbal medicines. Huoliyuan capsule is formulated for slow release and used for daily use. The therapeutic effect of Huoliyuan was tested by independent analysts, the Jining Institute for Drug Control in 2003. The test primarily consists of a Character Test, Identification Test, Water Index, Load Difference, Disintegration Time and Microbial Limit. The test concluded that Houliyuan was beneficial for the human cardiovascular system and as an aid in the treatment of chronic hepatitis, diabetes, insomnia, memory loss, menopause syndrome, and other maladies.

Property and Facilities

 

We completed a new manufacturing facility during the fiscal year ended March 31, 2012, which is mainly used to facilitate the full production of huoliyuan capsule. Because we have installed two more packing machines, the annual production capacity of the Huoliyuan Capsule manufacturing factory is 15 million boxes per year; sales of which reached 71.47% of our total annual sales in the fiscal year ended March 31, 2015. Our new factory includes a powder injection production line and cleaning and purifying equipment. The factory also includes a pin powder workshop, and a solid manufacturing workshop. Huoliyuan is manufactured in a dedicated workshop, and the second workshop will be used as our research facility. The Company has no immediate plan to build more workshops or factories.

 

Shandong Spring Pharmaceutical operates on a property of approximately 56,894 square meters (14.06 acres) that the Company has a land use right over the property. Besides housing our executive offices, the property is home to a manufacturing facility measuring 17,200 square meters and a research facility measuring 3,000 square meters.

Starting from June 2013, the Company started development of its own acer trunkatum bunge planting bases. The Company signed four separate lease agreements for the leasing of 6200Mu of farmland for a term of 30 years and 14 years, respectively. As of March 31, 2016, the Company has completed planting of 7,616,000trees with production expected in the fourth quarter of the calendar year 2017.

 

Certifications

The manufacturing facility developed by Shandong Spring Pharmaceutical has received GMP (good manufacturing practices) certification granted by the Chinese government. GMP is the only certified manufacturing standard certificate that is authorized by the Chinese government. Only companies that pass GMP standards and obtain the certificate that is issued by Chinese government are able to manufacture medicine and related products. The company has also achieved ISO9000 certification for its management processes.  The Company received QS cetification for Ace Truncatum Bunge Seed Oi granted by the state Food and Drug Administration  on February 13, 2015.

 

The farm operated by Shandong Spring Pharmaceutical is operated in a manner consistent with the requirements for organic certification set up by the Organic Foods Development Center. The health products manufactured have been certified as "green" by the Chinese Ministry of Agriculture in 2006, which reflects the Company's dedication to organic agricultural methods.

 

Marketing

We distribute products of Shandong YCT pursuant to a Purchase and Sale Contract executed on December 26, 2006. The contract set forth the wholesale prices at which we purchase products from Shandong YCT. On February 26, 2015, we renewed the Purchase and Sale Contract with Shandong YCT, for a term of two years. Pursuant to the renewed agreement, we can purchase 10 products from Shandong YCT at fixed prices, which were selected according to their sales volume and profits.

 

Our in-house marketing staff supervises independent primary dealers, who sub-distribute through networks of supermarkets, beauty parlors and other retail sites. This network allows us to accomplish broad geographic distribution with a marketing staff of only eight people, thus keeping our overhead low. On January 7, 2009, we have established a strategic relationship with China National Post Logistics, a subsidiary of China Post that has 31 provincial offices located throughout China to deliver our products to our customers. In the years ended March 31, 2016 and 2015, the Company mainly sold products to individual retail customers through ten major distributors. The Company obtained the direct marketing license on May 22, 2015, which allows the Company to sell the product directly to its customers. The direct sale business commenced in June 2015.

Employees

Shandong Spring Pharmaceutical c employed 313 individuals, each on a full-time basis, as of March 31, 2016, of which, 22 employees are involved in administration; 44 are dedicated to marketing and other functions, and 27 to research and development. The remainder of our employees is involved in manufacturing. We believe that we have a good relationship with our employees .

 

ITEM 1A    RISK FACTORS

 

You should carefully consider the risks described below before buying our common stock. If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.

 

Unexpected factors may hamper our efforts to implement our business plan.

 

Our business plan contemplates that we will become a fully integrated grower, manufacturer and marketer of various herbal products. We commenced manufacture of Huoliyuan Capsules in 2010; and our business shifted from largely distributing health and beauty aids manufactured by Shandong YCT, to manufacturing and marketing Huoliyuan Capsules. In order to fully implement our business plan, we will have to successfully complete the development of an agricultural facility and an industrial facility. The complexity of this undertaking means that we are likely to face many challenges, some of which are not yet foreseeable. Problems may occur with our raw material production and with the roll-out of efficient manufacturing processes. If we are not able to minimize the costs and delays that result, our business plan may fall short of its goals, and the current profitability or our distribution activities may be offset by losses from the herbal business.

The development of acer trunkatum bunge based products may not succeed.

The Company is devoting substantial resources to the development of products based on acer trunkatum bunge and estimates that the development of the project will take five years with a total investment of approximately RMB302 million (approximately USD49.3 million). As of March 31, 2016, the Company has invested approximately $42.2 million in the development of products based on acer trunkatum bunge.  (The Company does not have a plan to lease more farmland and purchase additional acer trunkatum bunge planting in the following year.  However there can be no assurance that such product development will be successful and while we intend to finance the development of the products from internally generated capital, there is no assurance that our other operations will generate sufficient capital to finance such development or, if insufficient, if alternate financing will be available.

 

Three suppliers account for most of our purchases.

 

Before September 2009, the exclusive business activity of Shandong Spring Pharmaceutical was the distribution of products manufactured by its formerly affiliate company Shandong YCT. The Company purchased the majority of its products from Shandong YCT and sold them to end customers through its major distributors. Since late 2009, the Shandong YCT was no longer a related party to the Company and the Company has also started to be the manufacturer, marketing, and distributor of its own product, Huoliyuan capsule in addition to be the distributor of Shandong YCT.  For the year ended March 31, 2016, the amount purchased from Shandong YCT was amounted to RMB 54.8 million (approximately $8.7 million), and the purchase from the five major vendors (including Shandong YCT) was RMB 146.1 million (approximately $23.1 million), representing 92% of the Company's annual total purchases. In the event we lose the five major vendors including Shandong YCT or their business suffer adverse developments, our financial condition will be materially and adversely affected.

 

We may need to raise capital to fund establishment of our acer truckatum bunge bisiness

 

We have establishedour own acer trunkatum bunge planting base to conduct research and development of medical and health care products. We estimate that we will be unable to achieve profitable operations unless we invest approximately additional $5million in equipment used for production of acer trunkatum bunge oil. We have funded $42.2 million to date from operations and expect to fund the balance from operations.   However, if we are unable to fund the balance from operations, we may need to obtain capital from another source or delay operation of the business. . We cannot determine, therefore, the terms on which we will be able to raise the necessary funds. It is possible that we will be required to dilute the value of our current shareholders' equity in order to obtain the funds. If, however, we are unable to raise the necessary funds, our growth will be limited, as will our ability to compete effectively.

 

We are subject to the risk of natural disasters.

 

We intend to produce the greater portion of our raw materials. In particular, we intend to produce our own acer trunkatum bunge acer trunkatum bunge are generally very adaptable, strong crops but can be damaged by harsh weather, by disease, and by pests. If our crops are destroyed by drought, flood, storm, blight, or the other woes of farming, we will not be able to meet the demands of our manufacturing facility, which will then become inefficient and unprofitable. In addition, if we are unable to produce sufficient products to meet demand, our distribution network is likely to atrophy. This could have a long- term negative effect on our ability to grow our business, in addition to the near-term loss of income.

 

If we lost control of our distribution network, our business would fail.

 

We depend on our distribution network for the success of our business. Competitors may seek to pull our distribution network away from us. In addition, if dominant members of our distribution network become dissatisfied with their relationship with Shandong Spring Pharmaceutical, a concerted effort by the distribution network could force us to accept less favorable financial terms from the distribution network. Any one of these possibilities, if realized, would have an adverse effect on our business.

 

Increased government regulation of our production and/or marketing operations could diminish our profits

 

At present, there is no significant government regulation of the health claims that participants in our industry make regarding their products. In addition, there is only limited government regulation of the conditions under which we will manufacture our products. Other developed countries, such as the United States and in particular, members of the European Community, have far more extensive regulation of the operations of nutraceuticals and plant-based cosmetics, including strict limitations on the health-related claims that can be made without scientifically-tested evidence. It is likely, therefore, that China will increase its regulation of our activities in the future. To the extent that new regulations require us to conduct a regimen of scientific tests of the efficacy of our products, the expense of such testing would reduce our profitability. In addition, to the extent that the health benefits of some of our products could not be fully supported by scientific evidence, our sales might be reduced.

 

Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.

 

Our future success depends on our ability to attract and retain highly skilled agronomists, biologists, chemists, industrial technicians, production supervisors, and marketing personnel. In general, qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand. In a specialized scientific field, such as ours, the demand for qualified individuals is even greater. If we are unable to successfully attract or retain the personnel we need to succeed, we will be unable to implement our business plan.

We may have difficulty establishing adequate management and financial controls in China.

The People's Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with. We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected for a United States public company. If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.

 

Our success depends on collaborative partner, licensees and other third parties over whom we have limited control.

 

Due to the complexity of the process of developing pharmaceuticals, our core business depends on arrangements with pharmaceutical institutes, corporate and academic collaborators, licensors, licensees and others for the research, development, clinical testing, technology rights, manufacturing, marketing and commercialization of our products. Our license agreements could obligate the parties to diligently bring potential products to market, make milestone payments and royalties that, in some instances, could be substantial, and incur the costs of filing and prosecuting patent applications. There are no assurances that we will be able to establish or maintain collaborations that are important to our business on favorable terms, or at all.

 

A number of risks arise from the Company's dependence on collaborative agreements with third parties. Product development and commercialization efforts could be adversely affected if any collaborative partner:

 

 

Our collaborative partners could pursue other technologies or develop alternative products that could compete with the products we are developing.

 

If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price to decrease substantially.

 

We have committed limited personnel and resources to the development of the external reporting and compliance obligations that would be required for a public company. Recently, we have taken measures to address and improve our financial reporting and compliance capabilities and we are in the process of instituting changes to satisfy our obligations in connection with joining a public company, when and as such requirements become applicable to us. Prior to taking these measures, we did not believe we had the resources and capabilities to do so. We plan to obtain additional financial and accounting resources to support and enhance our ability to meet the requirements of being a public company. We will need to continue to improve our financial and managerial controls, reporting systems and procedures, and documentation thereof. If our financial and managerial controls, reporting systems or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our common stock to decrease substantially. We have implemented, or plan to implement, the measures described below under the supervision and guidance of our management to remediate the above control deficiencies and to strengthen our internal controls over financial reporting. Key elements of the remediation effort include, but are not limited to, the following initiatives, which have been implemented, or are in the process of implementation, as of the date of filing of this Annual Report:

 

 

If our financial and managerial controls, reporting systems or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our common stock to decrease substantially.

The profitability of our products will depend in part on our ability to protect proprietary rights and operate without infringing the proprietary rights of others.

 

The profitability of our products will depend in part on our ability to obtain and maintain manufacturing rights and preserve trade secrets, and the period our intellectual property remains protected. We must also operate without infringing the proprietary rights of third parties and without third parties circumventing its rights. The patent positions of pharmaceutical and biotechnology enterprises, including us, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. The biotechnology patent situation outside the U.S. is uncertain, is currently undergoing review and revision in many countries, and may not protect the Company's intellectual property rights to the same extent as the laws of the U.S. Because patent applications are maintained in secrecy in some cases, we cannot be certain that it or its licensors are the first creators of inventions described in our pending patent applications or patents or the first to file patent applications for such inventions.

Other companies may independently develop similar products and design around any patented products we develop. We cannot assure that:

 

 

There are no assurances that we will be able to meaningfully protect our trade secrets. We cannot assure that any of our existing confidentiality agreements with employees, consultants, advisors or collaborators will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Collaborators, advisors or consultants may dispute the ownership of proprietary rights to our products, for example, by asserting that they developed the product independently.

 

We may not be able to obtain the regulatory approvals or clearances that are necessary to commercialize the products.

 

The PRC imposes significant statutory and regulatory obligations upon the manufacture and sale of pharmaceutical products. It typically has a lengthy approval process in which it examines pre-clinical and clinical data and the facilities in which the product is manufactured. Regulatory submissions must meet complex criteria to demonstrate the safety and efficacy of the ultimate products. Addressing these criteria requires considerable data collection, verification and analysis. We may spend time and money preparing regulatory submissions or applications without assurances as to whether they will be approved on a timely basis or at all.

 

Governmental and regulatory authorities may approve a product candidate for fewer indications or narrower circumstances than requested or may conditionally approve the performance of post-marketing studies for a product candidate. Even if a product receives regulatory approval and clearance, it may later exhibit adverse side effects that limit or prevent its widespread use or that force us to withdraw the product from the market.

 

Any marketed product and its manufacturer will continue to be subject to strict regulation after approval. Results of post-marketing programs may limit or expand the further marketing of products. Unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market and possible civil actions.

 

Manufacturing our products requires compliance with applicable good manufacturing practices regulations, which include requirements relating to quality control and quality assurance, as well as the maintenance of records and documentation. If we cannot comply with regulatory requirements, including applicable good manufacturing practices requirements, we may not be allowed to develop or market the product candidates. If we fail to comply with applicable regulatory requirements at any stage during the regulatory process, it may be subject to sanctions, including fines, product recalls or seizures, injunctions, refusal of regulatory agencies to review pending market approval applications or supplements to approve applications, total or partial suspension of production, civil penalties, withdrawals of previously approved marketing applications and criminal prosecution.

 

Competitors may develop and market pharmaceutical products that are less expensive, more effective or safer, making our products obsolete or uncompetitive.

 

Some of our competitors and potential competitors have greater product development capabilities and financial, scientific, marketing and human resources than we do. Technological competition from pharmaceutical companies and biotechnology companies is intense and is expected to increase. Other companies have developed technologies that could be the basis for competitive products. Some of these products have an entirely different approach or means of accomplishing the desired curative effect than products we are developing. Alternative products may be developed that are more effective, work faster and are less costly than our products. Competitors may succeed in developing products earlier than us, obtaining approvals and clearances for such products more rapidly than us, or developing products that are more effective than those of our company. In addition, other forms of treatment may be competitive with our company's products. Over time, our products may become obsolete or uncompetitive.

If we were successfully sued for product liability, we could face substantial liabilities that may exceed our resources

 

We may be held liable if any product we or our suppliers develop causes injury or is found unsuitable during product testing, manufacturing, marketing, sale or use. These risks are inherent in the development of pharmaceutical products. We do not have product liability insurance. If we choose to obtain product liability insurance but cannot obtain sufficient insurance coverage at an acceptable cost or otherwise protect against potential product liability claims, the commercialization of products that we develop may be prevented or inhibited. If we are sued for any injury caused by its products, our liability could exceed our total assets.

We have limited business insurance coverage.

We do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster may result in our incurring substantial costs and the diversion of our resources.

 

We may be adversely affected by complexity, uncertainties and changes in PRC regulation of pharmaceutical business and companies, including limitations on our abilities to own key assets.

The PRC government regulates the pharmaceutical industry including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the pharmaceutical industry. These laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be a violation of applicable laws and regulations.

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, pharmaceutical businesses in China, including our business.

Any deterioration of political relations between the United States and the PRC could impair our financing activities and your investment in us

The relationship between the United States and the PRC is subject to fluctuation and periodic tension. Changes in political conditions in the PRC and changes in the state of Sino-U.S. relations are difficult to predict and could adversely affect our financing activities. Such a change could lead to a decline in our profitability. Any weakening of relations between the United States and the PRC could have an adverse effect on our efforts to raise capital to expand our present business activities and your investment in us.

 

Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

 

All of Shandong Spring Pharmaceutical's business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China's economy differs from the economies of most developed countries in many respects, including with respect to:

 

While the PRC economy has experienced significant growth in the past 30 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.

Price control may affect both our revenues and net income

The laws of the PRC provide for the government to fix and adjust prices. To the extent that we are subject to price control, our revenue, gross profit, gross margin and net income will be affected since the revenue we derive from our sales will be limited and, unless there is also price control on the products that we purchase from our suppliers, we may face no limitation on our costs. Further, if price controls affect both our revenue and our costs, our ability to be profitable and the extent of our profitability will be effectively subject to determination by the applicable regulatory authorities in the PRC.

 

Our operations may not develop in the same way or at the same rate as might be expected if the PRC economy were similar to the totally market-oriented economies of member countries of the Organization for Economic Cooperation and Development ("OECD").

 

The economy of the PRC has historically been a nationalistic, "planned economy," meaning it functions and produces according to governmental plans and pre- set targets or quotas. In certain aspects, the PRC's economy has been making a transition to a more market-oriented economy, although the government imposes price controls on certain products and in certain industries. However, we cannot predict the future direction of these economic reforms or the effects these measures may have. The economy of the PRC also differs from the economies of most countries belonging to the OECD, an international group of member countries sharing a commitment to democratic government and market economy. For instance:

 

 

As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the economy of the PRC were similar to those of the OECD member countries.

 

We may have limited legal recourse under Chinese law if disputes arise under contracts with third parties.

 

Almost all of our agreements with our employees and third parties, including our supplier and customers, are governed by the laws of the PRC. The legal system in the PRC is a civil law system based on written statutes. Unlike common law systems, such as we have in the United States, it is a system in which decided legal cases have little precedential value. The government of the PRC has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the PRC, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance or seek an injunction under Chinese law are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.

 

Uncertainties with respect to the PRC legal system could adversely affect us.

Our operations in China are governed by PRC laws and regulations. We are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us or our management.

All of our assets are located outside the United States and all of our current operations are conducted in China. Moreover, the majority of our directors and officers are nationals or residents of China. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for our stockholders to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities law of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.

Fluctuation in the value of RMB may have a material adverse effect our financial results as reported in US dollars

The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. All of the Company's  financial assets and its revenues and costs are denominated in RMB. We rely entirely on fees paid to us by our clients. Any significant fluctuation in value of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of the consulting fees payable to us by clients. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly, to the extent that it might need to convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our RMB denominated financial assets into USD, as USD is our reporting currency.

 

We do not anticipate paying any cash dividends in the near future.

We presently do not anticipate that we will pay any dividends on any of our capital stock in the foreseeable future. The payment of dividends, if any, would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends is within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement our business plan; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.

 

Certain of our officer and directors own a substantial portion of our outstanding common stock, which enables them to influence many significant corporate actions and in certain circumstances may prevent a change in control that would otherwise be beneficial to our shareholders.

 

As of the report date, our directors and executive officers control approximately 38.19% of our outstanding shares of common stock. These shareholders, acting together, could have a substantial impact on matters requiring the vote of the shareholders, including the election of our directors and most of our corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our shareholders and us and this control could adversely affect the voting and other rights of our other shareholders.

Legislative actions and potential new accounting pronouncements may impact our future financial and results of operations

There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes are likely to increase general and administrative costs and expenses. In addition, there could be changes in certain accounting rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.

The market price for our stock may be volatile and the volatility in our common share price may subject us to securities litigation.

The market price for our stock may be volatile and subject to wide fluctuations in response to factors including the following:

 

 

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.

The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.

Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.

 

The PRC has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to pay dividends to our shareholders.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 2.  DESCRIPTION OF PROPERTY

 

Under current PRC law, land is owned by the state, and parcels of land in rural areas, known as collective land, are owned by the rural collective economic organization.

Shandong Spring Pharmaceutical operates on a property of approximately 56,894 square meters in Sishui, Shandong, pursuant to a land lease agreement with local government,that expires in May 2056. Besides housing our executive offices, the property includes a manufacturing facility measuring 17,200 square meters and a research facility measuring 3,000 square meters.

 

ITEM 3.    LEGAL PROCEEDINGS

 

None.

 

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

PART II

 

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

 

Our common stock is listed for quotation under the trading symbol "CYIG" on the National Quotation Bureau OTCQB. Set forth below are the high and low bid prices for each of the fiscal quarters since April 1, 2014. The reported bid quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions.

 

 

 

 

The information set forth in the table below regarding equity compensation plans (which include individual compensation arrangements) was determined as of March 31, 2016

  

 

All stock options were expired on May 30, 2016 and none of the vested stock options were exercised by the end of the option exercise date.

 

None

 

 

ITEM 6.    SELECTED FINANCIAL DATA 

Not applicable

 

 

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS.

 

Results of Operations

 

The following table sets forth information from our statements of comprehensive income for the years ended March 31, 2016 and 2015, in dollars:

Revenue

 

During the year ended March 31, 2016, we realized $47,827,108 in revenue, representing an increase of 26% or $9,883,995 as compared to $37, 943,113 for the same period in 2015. Revenue increased from the sales of a new product, Acer truncatum oil, and increased sales of the health care products.

During the year ended March 31, 2016, we increased sales of the health care products through our distributors' greater marketing effort on recruiting new customers. We also further increased the promotion of our Acer truncatum oil, Huoliyuan, capsules, and health products by organizing a big marketing event in December 2015.  These promotion efforts boosted our revenue from sales of the health care products and acer truncatum oil.

 

Part of our revenues were generated by us as the distributor for the health care products manufactured by Shandong YCT. We entered into a Purchase & Sale Contract with Shandong YCT on December 26, 2006, which sets forth the wholesale price that we pay to Shandong YCT for each of the products it produces. On February 9, 2010 and February 26, 2015, we renewed the Purchase and Sale Contract with Shandong YCT for a term of five years ending on February 28, 2015 and for a term of two years ending on February 28, 2017, respectively. Pursuant to the contract renewed on February 26, 2015, we can purchase 10 products from Shandong YCT on fixed prices, with the products selected by us according to their sales volume and profit. On June 25, 2015, the Company made an amendment to the renewed Purchase and Sale Contract. Pursuant to the amended Purchase and Sale Contract, the Company no longer purchases and sells the 10 products included in the contract renewed on February 26, 2015 and agreed to purchase and sell four new products without changes in other terms of the previous contract. The Company can purchase these four new products from Shandong YCT at fixed prices. The Company made this strategic product switch because it determined that there was a much bigger market for these four new products.  During the year ended March 31, 2016, 34.1% of our total revenue was generated as the distributor of Shandong YCT, compared to 28.6% during the year ended March 31, 2015.  For the year ended March 31, 2016, our revenue from sales of the health care products was $16,331,597, representing an increase of 50.5% or $5,479,871 as compared to $10,851,726 for the same period in 2015.

Since July 2010, the Company has become not only a distributor of Shandong YCT but also a manufacturer and distributor of our own products, Huoliyuan Capsule. The sales of the Huoliyuan capsules experienced the fastest growth in the years ended March 31, 2012 and 2011. Since the year ended March 31, 2013, the sales of Huoliyuan Capsules have become stabilized. During the year ended March 31, 2016, the sales of Huoliyuan Capsule accounted for 55.9% of our revenue, compared to 71.4% during the year ended March 31, 2015. For the year ended March 31, 2016, our revenue from sales of Huoliyuan Capsules was $26,749,727, representing a slightly decrease of 1.3% or $341,660 as compared to $27,091,387 for the same period in 2015.  The decrease in the sales of Huoliyuan Capsule is primarily due to increasing competition from other companies who produce and sell the same type of the medicine in the market.

Since July 2015, the Company has produced Acer truncatum Bunge Seed Oil and sold the product to customers through its distributors.  The Acer truncatum Bunge Seed Oil was extracted from the acer truncatum pods that were purchased from third party vendors.  The Company's self-grown acer truncatum pods will not be ready to be used for production until approximately the fourth quarter of 2017. During the year ended March 31, 2016, the sales of Acer truncatum Bunge Seed Oil was $4,745,784, which accounted for 10% of our revenue for the year ended March 31, 2016.

The following is the sales breakdown by products during the years ended March 31, 2016 and 2015:

Cost of Goods Sold

 

Our costs of revenue were comprised primarily of the cost of finished goods we purchased from Shandong YCT, the raw materials we purchased from third party vendors, and the manufacturing costs of Acer Truncatum Bunge Seed Oil, and our own product, Huoliyuan Capsule. The cost of manufacturing Huoliyuan Capsule was approximately 57.6% and 72.3% of the total cost of goods sold during the years ended March 31, 2016 and 2015, respectively.

 

During the year ended March 31, 2016, our cost of goods sold totaled $26,554,022, representing an increase of $7,980,652 or 43% as compared to $18,573,370 during the year ended March 31, 2015. The percentages of the costs of goods sold to total revenues increased from 49.0% for fiscal year 2015 to 55.5% for fiscal year 2016 primarily due to increase in material costs for Huoliyuan and the sales of new healthcare products that have higher costs but a bigger market.

Gross Profit

 

Gross profit for the year ended March 31, 2016 was $21,273,086, an increase of 9.8% or $1,903,343 as compared to the same period for the prior year. The overall gross profit as a percentage of net revenues was approximately 44.5% for the year ended March 31, 2016, decreased from 51.0% for same period of 2015. The gross profit as percentage of net revenues for the healthcare products was approximately 46% for the year ended March 31, 2016, decreased from 54% for the same period of 2015.  The gross profit as percentage of net revenues for Huoliyuan was approximately 43% for the year ended March 31, 2016, decreased from 50% for the same period of 2015. The lower gross profit as percentage of net revenue for the healthcare products during the year ended March 31, 2016 was primarily due to sales of new healthcare products with higher cost but a bigger market. The lower gross profit as percentage of net revenue for Huoliyuan during the year ended March 31, 2016 was due to increased raw material costs.

The comparison of the profits for the years ended March 31, 2016 and 2015 as follows:

 

 

Research and Development Expenses

 

Our R&D expenses for the year ended March 31, 2016 were $724,287 or approximate 1.5% of total revenue, a decrease of $163,495 or 18.4%, as compared to $887,782 or approximately 2.3% of total revenue for the year ended March 31, 2015.  For the year ended March 31, 2016, we have further reduced our effort related to making investments in research and development of new technologies and products that can be utilized to refine and extract the beneficial components from plants, primarily gingko, due to other focus, such as development of our own acer trunkatum bunge planting bases.

 

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 and acer trunkatum bunge plants. As of March 31, 2016, we had 27 staff in R&D department.

 

Operating expenses

 

Our selling expenses consist primarily of sales commissions, advertising and promotion expenses, freight charges and related compensation. Our selling expenses for year ended March 31, 2016 were $3,759,920 or 7.9% of our total revenue for the period, representing a slightly decrease of 0.6% in the percentage of total revenue from the prior year ended March 31, 2015.

 

Our G&A expenses for the year ended March 31, 2016 increased by 28.9% or $998,323 as compared to the prior year. The increase was mainly due to amortization of stock-based compensation expenses, increase in the amortization of prepaid leases, and loss from disposal of fixed assets.

Our operating expenses for the year ended March 31, 2016 also include loss from impairment of patent. Pursuant to FASB ASC 350-30-50-3, we conducted an annual test for impairment on the patent "Chinese herbal medicine compound to treat renal insufficiency and its preparation" (ZL200710013301.8) as of March 31, 2016. We estimated the future net undiscounted cash flows that are expected to be generated from the use of the patent and its eventual disposal and determined that the fair value of the patent is nil with no disposal cash inflow. Accordingly, we recorded the full impairment of the patent of $1,114,942 in the year ended March 31, 2016 which was included in Operating Expenses.

Net Income

 

As a result of above, during the year ended March 31, 2016, we realized net income of $8,416,769, representing a 5.3% or $473,704 decrease, compared to $8,890,473 during the year ended March 31, 2015. The decrease was mainly due to the lower gross margin and increased operating expenses that are described in operating expenses.

 

Comprehensive Income

 

Our business operates entirely in Chinese RMB, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income. The net income is added to the retained earnings on our balance sheet while the translation adjustment is added to a line item on our balance sheet labeled "other comprehensive income," since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the year ended March 31, 2016, the effect of converting our financial results to USD was a loss of $3,914,783 to our other comprehensive income, as compared to a gain of $114,919 during the year ended March 31, 2015 as a result of the currency exchange rate fluctuation.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity were generated from our operations. As of March 31, 2016, we had $10,455,311 in working capital, a decrease of $2,558,158 or 20% as compared to $13,013,469 in working capital at March 31, 2015. The decline in working capital primarily resulted from our decreased cash inflow from operating activities, because of increased balance in inventory, prepaid leases and accounts receivable, and decreased balance in tax payable as of March 31, 2016.

 

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 $8,553,127 during the year ended March 31, 2016. We had accounts receivable of $533,262 outstanding as of March 31, 2016. We expect our marketing activities to continue to help generate positive cash flow.  The operations of our own manufacturing since fiscal year 2010 and the development of our own acer truncatum bunge planting bases 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.

 

In order to fully implement our business plan, however, we will require capital contributions far in excess of our current asset value. Our budget for bringing our manufacturing facility to an operating level that assures profitability is $5 million. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds we need. At present we have no commitment from any source for additional funds and there can be no assurance that the funds will be available on terms acceptable to us.

  

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

Operating Activities

 

Net cash provided by operating activities was $8,553,127 for the year ended March 31, 2016, which was a decrease of 23.5% or $2,629,400 from $11,182,527 net cash provided by operating activities for the same period one year earlier. The decrease was mainly due to increase in cash out flow from inventory, accounts receivable, and tax payable, offset by loss from impairment of patent.

 

Investing Activities

  

During the year ended March 31, 2016, our net cash used by investing activities was $13,457,636 which was a decrease of 19.6% or $3,290,852 as compared to $16,748,488 of net cash used for the year ended March 31, 2015. This change was primarily due to the overall lower investment in development cost of acer truncatum bunge planting, including lower new farmland lease, acer truncatum bunge planting fee and the fee of acer truncatum bunge trees incurred in the year ending March 31, 2016, although we continued to invest in acer truncatum bunge planting and signed a new farmland lease with Zhongce Shen Village.  As of March 31, 2016, we completed planting trees on the 6,200Mu of leased farmland; which were in the development stage with production expected in the fourth quarter of 2017.

 

Financing Activities

 

No net cash was generated or used by financing activities over the years ended March 31, 2016 and 2015.

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 our financial condition or results of operations.

Critical Accounting Policies and Estimates

 

We have made no material changes to our critical accounting policies in connection with the preparation of financial statements for fiscal year 2016.

 

New Accounting Pronouncements

 

In March 2016, FASB issued ASU 2016-08, "Revenue from Contract with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)". The core principle of this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The intention of this ASU is to improve the operability and understandability of the implementation guidance on principal versus agent considerations. This ASU is effective for annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted, but not earlier than annual and interim periods beginning on or after December 15, 2016, for public entities. The Company is currently evaluating the potential impact of adopting this new standard on its consolidated statements and related disclosures.

 

In July 2015, FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". This ASU applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO") or the retail inventory. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption on permitted at the beginning of an interim and annual reporting period. The Company is currently evaluating the impact of adopting ASU 2015-11 on its consolidated financial statements and related disclosures.

 

In November 2015, FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes". This ASU simplifies the presentation of deferred income taxes and requires deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. This ASU may be applied either prospectively or retrospectively to all periods presented. The Company is currently evaluating the impact of adopting ASU 2015-17 on its consolidated financial statements and related disclosures.

 

In February 2016, FASB issued ASU 2016-02, "Leases". This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements and related disclosures.

 

In March 2016, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, "Improvements to Employee Share-Based Payment Accounting". This ASU is issued as part of its Simplification Initiative. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements and related disclosures.

 

 

ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Exchange Risk

 

While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

 

Inflation

 

Inflationary factors such as increases in the costs of our products and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin, selling and distribution, and general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase to cope with these increased costs.

 

ITEM 8   FINANCIAL STATEMENTS

 

The full text of our audited consolidated financial statements as of March 31, 2016 and 2015 begins on page F-1 of this Report.

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-1
Consolidated Balance Sheets as of March 31, 2016 and 2015	F-2
Consolidated Statements of Comprehensive Income for the Years Ended March 31, 2016 and 2015	F-3
Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 2016 and 2015	F-4
Consolidated Statements of Cash Flows for the Years Ended March 31, 2016 and 2015	F-5
Notes to Consolidated Financial Statements	F-6-F-19

		March 31, 2016				March 31,  2015
Assets
Current assets:
Cash and cash equivalents		$	7,639,084			$	13,083,532
Accounts receivable			533,262				95,544
Inventories			2,287,312				896,843
Prepaid leases – current portion			961,609				685,934
Total current assets			11,421,267				14,761,853
Prepaid leases			2,312,650				2,060,441
Development cost of acer truncatum bunge planting			42,166,533				32,078,148
Plant, property, and equipment, net			12,872,997				12,864,161
Intangible assets, net			12,295,147				15,393,272
Deferred tax assets			246,913				-
Total assets		$	81,315,507			$	77,157,875
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities:
Accounts payable and other accrued expenses		$	190,248			$	145,321
Taxes payable			739,068				1,603,063
Deferred tax liabilities			36,640				-
Total current liabilities			965,956				1,748,384
Stockholders' Equity
Preferred stock, par value $500 per share; 45 shares authorized, issued and outstanding at March 31, 2016 and 2015.			22,500				22,500
Common stock, par value $0.001 per share; 100,000,000 shares authorized;  29,720,690 and 29,700,690 shares issued and outstanding at March 31, 2016 and 2015, respectively.			29,721				29,701
Additional paid-in capital			4,648,461				4,210,407
Statutory reserve			1,828,504				1,828,504
Retained earnings			72,983,301				64,566,532
Accumulated other comprehensive income			837,064				4,751,847
Total stockholders' equity			80,349,551				75,409,491
Total liabilities and stockholders' equity		$	81,315,507			$	77,157,875

		YEARS ENDED MARCH 31,
		2016				2015
Sales		$	47,827,108			$	37,943,113
Cost of Goods Sold			26,554,022				18,573,370
Gross Profit			21,273,086				19,369,743
Operating Expenses
Selling Expenses			3,759,920				3,234,248
General &Administrative Expenses			4,446,983				3,448,660
Research & Development Expenses			724,287				887,782
Impairment of patent			1,114,942				-
Total operating expenses			10,046,132				7,570,690
Income from operations			11,226,954				11,799,053
Interest income			30,850				86,019
Income before income tax provision			11,257,804				11,885,072
Income tax provision			2,841,035				2,994,599
Net income			8,416,769				8,890,473
Other comprehensive income (loss)
Foreign currency translation adjustment			(3,914,783	)			114,919
Comprehensive income		$	4,501,986			$	9,005,392
Earnings per common share
Basic and Diluted		$	0.28			$	0.30
Weighted average number of common shares outstanding
Basic and Diluted			29,709,706				29,693,296

		YEARS ENDED MARCH 31,
		2016				2015
Cash Flows From Operating Activities:
Net income		$	8,416,769			$	8,890,473
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,927,024				1,902,402
Amortization of prepaid leases			903,778				441,334
Issuance of common shares for services			10,000				30,350
Stock-based compensation expenses			428,074				-
Deferred taxes			(214,923	)			-
Loss on disposal of property, plant and equipment			217,042				-
Impairment of patent			1,114,942				-
Changes in operating assets and liabilities:
Prepaid leases			(1,581,928	)			(1,626,651	)
Inventory			(1,466,478	)			695,861
Accounts receivable			(452,220	)			(53,495	)
Taxes payable			(802,206	)			786,484
Accounts payable and other accrued expenses			53,253				115,769
Net cash provided by operating activities			8,553,127				11,182,527
Cash flows from investing activities:
Acquisition of property, plant and equipment			(1,527,367	)			(43,693	)
Development cost of acer truncatum bunge planting			(11,930,269	)			(16,704,795	)
Net cash used in investing activities			(13,457,636	)			(16,748,488	)
Effect of exchange rate changes on cash and cash equivalents			(539,939	)			24,849
Net decrease in cash and cash equivalents			(5,444,448	)			(5,541,112	)
Cash and cash equivalents at beginning of year			13,083,532				18,624,644
Cash and cash equivalents at end of year		$	7,639,084			$	13,083,532
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest		$	-			$	-
Income taxes		$	3,601,110			$	2,543,766

Buildings	30-35 years
Machinery, equipment	3-20 years
Office equipment and automobiles	3-10 years
Leasehold improvements	10-30 years (or the lease term, if shorter)

(i)

Land Use Rights:

(ii)

Patents:

	March 31, 2016				March 31, 2015
Year End Exchange Rate (RMB/USD)			6.4612				6.1422
Average Period Exchange Rate (RMB/USD)			6.3214				6.1476

		As of March 31, 2016
		Current portion				Long-term
Shiqiao Village and – 2000Mu		$	309,540			$	386,925
Shandong Wanziyuan – 2000Mu			309,540				851,235
Zhongce No. 4 Village – 200Mu			30,954				59,329
Zhongce Shen Village - 2000Mu			309,540				1,006,005
Total prepaid land lease			959,574				2,303,494
Shandong YCT - Automobile			2,035				9,156
Total prepaid lease		$	961,609			$	2,312,650

		March 31, 2016				March 31, 2015
Raw materials		$	998,342			$	68,349
Packaging materials			145,860				181,847
Work-in-process			639,342				289,188
Finished goods			503,768				357,459
Total Inventories		$	2,287,312			$	896,843

		March 31, 2016				March 31, 2015
Machinery & equipment		$	1,740,751			$	1,495,311
Office equipment and automobiles			486,779				193,519
Building			12,605,012				12,586,247
Leasehold improvements			1,238,160				1,302,465
Subtotal			16,070,702				15,577,542
Less: Accumulated depreciation & amortization			(3,197,705	)			(2,713,381	)
Total plant, property and equipment, net		$	12,872,997			$	12,864,161

			As of
	Amortization   Period			March 31, 2016				March 31, 2015
Land use right	50 years		$	1,570,605			$	1,652,177
Patent (non-US No. ZL200610068850.0)	16.5 years			7,119,421				7,489,173
Patent (non-US No. ZL200510045001.9)	14 years			9,595,741				10,094,103
Patent (non-US No. ZL200710013301.8)	15 years			-				1,628,082
Less: Accumulated amortization				(5,990,620	)			(5,470,263	)
Intangible assets, net			$	12,295,147			$	15,393,272

		As of
		March 31, 2016				March 31, 2015
Corporate Income Tax		$	435,686			$	1,019,371
Value-Added Tax			273,317				500,991
Other Tax & Fees			30,065				82,701
Total Tax Payable		$	739,068			$	1,603,063

	Years Ended March 31,
	2016				2015
U.S. Statutory rate		$	3,940,231			$	4,159,775
Tax rate difference between China and U.S.			(1,125,780	)			(1,188,507	)
Permanent difference			26,584				23,331
Effective tax rate		$	2,841,035			$	2,994,599

		Years Ended March 31,
		2016				2015
Current		$	3,055,958			$	2,994,599
Deferred			(214,923	)			-
Total		$	2,841,035			$	2,994,599

		March 31,				March 31,
		2016				2015
Impairment loss		$	272,705			$	-
Less valuation allowance			-				-
Total net deferred tax assets			272,705				-
Revenue			(62,432	)			-
Total deferred tax liabilities			(62,432	)			-
Net deferred tax assets		$	210,273			$	-
Current deferred tax liability, net of assets		$	(36,640	)		$	-
Long-term deferred tax asset			246,913				-
Net deferred tax assets		$	210,273			$	-

·	Expected volatility 92.03%;
·	Risk-free interest rate 0.33%;
·	Expected term (year) 0.85;
·	Exercise price $0.4.

Fiscal year ended March 31,		Shiqiao Village				Shandong Wanziyuan				Zhongce No.4 Village				Zhongce Shen Village				Total  Operating Leases
2017		$	-			$	-			$	-			$	-			$	-
2018			-				-				-				-				-
2019			1,547,700				-				154,770				-				1,702,470
2020			-				1,547,700				-				-				1,547,700
2021			-				-				-				1,547,700				1,547,700
2022 and thereafter			6,190,800				1,238,160				619,080				1,238,160				9,286,200
Total minimum lease payments		$	7,738,500			$	2,785,860			$	773,850			$	2,785,860			$	14,084,070

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None

 

ITEM 9A.   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 annual report (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 not effective.

Changes in internal controls.

 

The term "internal control over financial reporting" (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company's internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, 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.

 

Management's Report on Internal Control over Financial Reporting.

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of those internal controls as of March 31, 2016, using the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") Internal Control – Integrated Framework as a basis for our assessment.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company's annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified one material weakness in our internal control over financial reporting.

 

As disclosed in our annual report on Form 10-K for the year ended March 31, 2016 we had identified the following material weakness in internal control over financial reporting:

Lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters

 

Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in Shandong Province in the PRC. Few of our employees have experience or familiarity with U.S accounting principles. We have retained a consultant to advise us on a part-time basis as to U.S. accounting principles.

 

As an interim solution, the Company engaged two part time consultants who are qualified financial professionals. In addition, we require all of the accounting personnel in the accounting department take a minimum of 24 CPE credits annually with a focus on US GAAP and internal financial reporting standards. Therefore, management believes that we have remediated the weakness and can remove the assessment going forward. Our Chief Executive Officer and Chief Financial Officer concluded that we have remediated the weakness and China YCT International Group's system of disclosure controls and procedures was not effective as of March 31, 2016 for the purposes described in this paragraph.

 

This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

ITEM 9B                    OTHER INFORMATION

 

None.

PART III

ITEM 10.                    DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following individuals are the members of our Board of Directors and executive officers as of June 21, 2016.

 

All directors hold office until the next annual meeting of our shareholders and until their successors have been elected and qualify.  Officers serve at the pleasure of the Board of Directors.

 

Yan Tinghe. Mr. Yan has served as our Chairman and Chief Executive Officer since 2007. Mr. Yan has over twenty years of experience in corporate management within the food and food supplements industries. Mr. Yan founded Shandong Spring Pharmaceuticals, and he has served as its Chairman since January 2006. During the eight years prior to founding Shandong Spring Pharmaceutical, Mr. Yan was employed as Chairman and General Manager of Shandong YCT Bioengineering Co., Ltd., which manufactures a wide variety of food supplements and is currently the exclusive supplier for Shandong Spring Pharmaceutical. During the period from 1988 to 1997 Mr. Yan served as Executive Vice President of Shishui Sanyin Company, and from 1985 to 1987 as Factory Director of Beijing Shishui Lianhe Preserved Fruits, both of which were multi-facility enterprises in the food industry.

Li Chuanmin. Mr. Li has been our Chief Financial Officer since 2005 and has been involved with corporate financial management and accounting for over 29 years. Since 2005, he has been employed as Chief Financial Officer of the Company's subsidiary, Shandong Spring Pharmaceutical Co., Ltd. From 2000 to 2005 Mr. Li was employed as Chief Financial Officer of Shandong Yongchuntang Biotechnology Co., Ltd. From 1998 to 2000, Mr. Li was a teacher at the Shandong Finance Institute. From 1990 to 1998, he was employed by an accounting firm in Jining City. In 1986, Mr. Li received a diploma from the Shandong Finance Institute.

Zhang Jirui. Mr. Zhang brings over twenty years of technical training to Shandong Spring Pharmaceutical, where he has been employed as Director since January 2006. During 2005, Mr. Zhang was the Manager of the International Market Department for Shandong YCT Bioengineering Co., Ltd., which manufactures a wide variety of food supplements and is currently the exclusive supplier for Shandong Spring Pharmaceutical. During the 22 years prior to joining Shandong YCT, Mr. Zhang was employed as an Instructor in the Shandong Chemical Engineering Vocational School.

 

Robert J. Fanella. Mr. Fanella, CPA, was appointed as an independent director, effective April 6, 2009. During Mr. Fanella's more than 36 years career specializing in corporate finance and accounting, he was responsible for audit and financial service oversight for both private and publicly traded companies. Since 2006, Mr. Fanella has been an independent financial consultant, working on various financial and operational projects for companies in industries such as electronic manufacturing, industrial plating, chemical, and health products.  From April 2011 to March 2012, Mr. Fanella has served as CFO for ARCIS Resources Corporation (OTCBB: ARCS). From 2002 to 2006, Mr. Fanella was employed as CFO/Owner of Tru-Way, Inc., a metal fabrication business mainly serving the electronics manufacturing industry. The business was sold in 2006. From 1984 to 2002, Mr. Fanella was employed as CFO by MicroEnergy, Inc, a public company of which he was co-founder. MicroEnergy, Inc was a manufacturing firm designing and selling custom switch-mode power supplies to major companies in the OEM electronics market. During the 12 year period prior to founding MicroEnergy, Inc., Mr. Fanella  was  the CFO/Controller for two smaller businesses in the electronics manufacturing business and welding supplies distribution business, and he spent seven years at Motorola, Inc., in various capacities from Financial Analyst to Business Controller. Mr. Fanella currently serves on the Board of Directors and also is Audit Committee Chairman for American Nano Silicon Technologies, Inc. (OTCBB: ANNO). Mr. Fanella was awarded a Bachelor of Science Degree in Finance by Northern Illinois University in 1972. He was awarded a Masters of Business Administration Degree in Finance with a Marketing concentration from the University of Chicago in 1979. In 1975, Mr. Fanella was registered as a certified public accountant in Illinois.

Zhang Wengao. Mr. Zhang was appointed as an independent director of China YCT International Group on April 6, 2009. Mr. Zhang has over 30 years of experience in pharmaceutical, Chinese traditional medicine and diagnostic industries. Mr. Zhang is a full time professor of Shandong University of Traditional Chinese Medicine, specializing in clinical treatment via both Chinese and western methods. From 1985 to 1998, Professor Zhang was a dean of the research and development department of Shandong University of Traditional Chinese Medicine. Professor Zhang has received various awards within the clinical medicine field, including awards for combining western clinical treatment with traditional Chinese medicine methods, and the 20th Geneva Invention Silver Award. Professor Zhang has published more than 200 papers concerning the advantages of Chinese traditional medicine in clinical treatment. Among his other engagements, Mr. Zhang is an associate commissioner of the International Chinese Medicine Association and director of the International Chinese Medicine Association Cardiovascular Committee. In 1968, Mr. Zhang received his bachelor degree majoring in Pharmacy from Shandong University of Traditional Chinese Medicine.

 

Sun Maogang,  Mr. Sun has served as our general manager, deputy general manager, director of pharmaceutical production, quality management, marketing, for Shandong Spring Pharmaceutical Co., Ltd since 2006.    Mr. Sun has been engaged in drug manufacturing for 20 years. From 1995 to 2000, he worked  in the Sishui pharmaceutical factory in Shandong province. From 2001 to 2007, he worked in the department of pharmaceutical preparation in a hospital for the Chinese People's Liberation Army  Mr. Sun graduated from  the Shandong province county people college, where he majored  in Chinese Traditional Medicine and engineering..

 

Zhang Qiang. Mr. Zhang has served for Shandong Spring Pharmaceutical Co., Ltd., our wholly owned subsidiary, as its Chief Administrative Officer and Head of Human Resource since 2009. He has been involved with Human Resource management for over 10 years. From October 2003 to December 2008, he was employed by Shandong Huajin Group, Inc. as the Head of Administration. Mr. Zhang graduated from Shandong Economies College and is pursuing his Senior HR Manager Certificate.

 

Ding Xuzhong. Mr. Ding has been served for Shandong Spring Pharmaceutical Co., Ltd., our wholly owned subsidiary, as its Chief Marketing Officer since 2008. He joined us in 2003, and was involved in our marketing development since then. Mr. Ding has over 20 years of experience on marketing, since he graduated from Shandong University in 1991, majoring in marketing.

Shao Zecheng. Mr. Shao has been involved with capital business for over 10 years. Since 2007 he has been employed as vice president of the Company's subsidiary, Shandong Spring Pharmaceutical Co., Ltd. From 1997 to 2007, Mr. Shao was employed as Minister of Korean Daewoo Group.  During the period, he successfully managed, designed and programmed 2 ERP projects and cooperated with the other departments of the company in the past years. All the projects were released on schedule, with high quality that helped the company's business grow. From 1994 to 1997, Mr. Shao was a computer engineer at the Shandong Huajin Group. In 1994, Mr. Shao received a diploma from the Shandong Teachers' University. In 2000, he received the Super Development Engineer Certificate for PoweBuilder in Sybase Center.

 

Involvement in Certain Legal Proceedings

None of our directors, executive officers, or control persons has been involved in any of the following events during the past ten years:

 

 

 

 

Nominating, Compensation and Audit Committees

 

We have certain standing committees of the Board, each of which is described below.

 

The Audit Committee consists of Robert J. Fanella, and Zhang Wengao. Mr. Fanella serves as the chairman of the Audit Committee. The Board has determined that each of the members of the Audit Committee satisfies the independence requirements of the NASDAQ Stock Market. The Audit Committee oversees our accounting and financial reporting processes and procedures, reviews the scope and procedures of the internal audit function, appoints our independent registered public accounting firm and is responsible for the oversight of its work and the review of the results of its independent audits.

The Board of Directors has determined that Robert J. Fanella, who serves as Chairman of the Audit Committee, is an audit committee financial expert by reason of his experience in corporate finance. Mr. Fanella is an independent director, within the definition of that term applicable to issuers listed on the NASDAQ Stock Market.

The Compensation Committee consists of Robert J. Fanella, and Zhang Wengao. Mr. Zhang serves as chairman of the Compensation Committee. The Board has determined that each of the members of the Compensation Committee satisfies the independence requirements of the NASDAQ Stock Market. The Compensation Committee oversees the Company's policies regarding compensation and benefits, evaluates the performance of the Company's executive officers, reviews and approves the compensation of the Company's executive officers, and sets the compensation for members of the Board of Directors.

The Nominating and Corporate Governance Committee consists of Robert J. Fanella, and Zhang Wengao. The Board has determined that each of the members of the Nominating and Corporate Governance Committee satisfies the independence requirements of the NASDAQ Stock Market. The Nominating and Corporate Governance Committee makes recommendations to the Board regarding nominees to be submitted to our shareholders for election at each annual meeting of shareholders, selects candidates for consideration by the full Board to fill any vacancies on the Board, and oversees all of our corporate governance matters.

 

Code of Ethics

 

The Board of Directors adopted a code of ethics applicable to the Company's executive officers in 2009.

 

Section 16(a) Beneficial Ownership Reporting Compliance

None of the officers, directors or beneficial owners of more than 10% of the Company's common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended March 31, 2016.

 

ITEM 11.   EXECUTIVE COMPENSATION DISCUSSION AND ANALYSIS

 

Background and Compensation Philosophy

 

Our Compensation Committee consists of Robert J. Fanella, and Zhang Wengao , independent directors. The Compensation Committee determined the compensation to be paid to our executive officers based on our financial and operating performance and prospects, the level of compensation paid to similarly situated executives in comparably sized companies, and contributions made by the officers' to our success. Each of the named officers will be measured by a series of performance criteria by the Board of Directors, or the compensation committee, on a yearly basis. Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.

 

Our Board of Directors and Compensation Committee have not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers. The Compensation Committee makes an independent evaluation of appropriate compensation to key employees, with input from management. The Compensation Committee has oversight of executive compensation plans, policies and programs.

 

Our compensation program for our executive officers and all other employees is designed such that it will not incentivize unnecessary risk-taking. The base salary component of our compensation program is a fixed amount and does not depend on performance. Our cash incentive program takes into account multiple metrics, thus diversifying the risk associated with any single performance metric, and we believe it does not incentivize our executive officers to focus exclusively on short-term outcomes. Our equity awards are subject to vesting to align the long-term interests of our executive officers with those of our stockholders.

Elements of Compensation

We provide our executive officers with a base salary and certain bonuses to compensate them for services rendered during the year. Our policy of compensating our executives with a cash salary has served us well. Because of our history of attracting and retaining executive talent, we do not believe it is necessary at this time to provide our executives equity incentives, or other benefits in order for us to continue to be successful, apart from the common stock award granted to our directors as described below.

 

Base Salary

 

The annual compensation for Yan Tinghe and Li Chuanmin for the year ended March 31, 2016 was RMB300,000 (USD48,738) and RMB200,000 (USD32,492) respectively. All such amounts were paid in cash. The base salary reflects each executive's skill set and the market value of that skill set as determined by our Board of Directors and/or our executive officers.

Bonuses

For the year ended March 31, 2016, Yan Tinghe and Li Chuanmin did not receive cash bonuses.

 

Equity Awards

 

There were no stock options granted to the executive officers during the year ended March 31, 2016.

On June 16, 2015, the Board of Directors granted stock options to purchase 100,000 shares of common stock to each of Tinghe Yan and Chuanmin Li.  The grants were part of a grant of options to purchase a total of 2,600,000 shares of common stock to management of the Company.  The options have a term of ten months and an exercise price of $0.40 per share.  The options expired in May 2016.

 

SUMMARY COMPENSATION TABLE

The following table sets forth all compensation awarded to, earned by, or paid by the Company and its subsidiaries to our Chief Executive Officer and Chief Financial Officer, during the past three fiscal years. There were no executive officers whose total salary and bonus for the fiscal year ended March 31, 2016 exceeded $100,000.

 

 

Remuneration of Directors

 

The total amount of the compensation in the form of shares of common stock to the independent directors was $10,000.00 for the year ended March 31, 2016.

The Board of Directors agreed to issue to Dr. Bai Junying and Zhang Wengao, upon commencement of their service in 2009 and on each anniversary of his commencement date common shares with a market value equal to $10,000 cash plus $25,000 in the form of restricted shares of common stock. There were no common shares paid for the year ended March 31, 2016.

The Board of Directors agreed to issue to Mr. Robert J. Fanella, upon commencement of his service in 2009 and on each anniversary of his commencement date, common shares with a market value equal to $15,000 cash plus $40,000 in the form of restricted shares of common stock. Starting from April 8, 2013, the commission structure for Mr. Fanella has been changed to $7,500 cash plus $20,000 in the form of restricted shares of comment stock. There were 20,000 restricted shares issued during the year ended March 31, 2016.

 

The compensation paid to the independent directors during the fiscal year ended March 31, 2016 was as follows: Robert J. Fanella: $27,500; Wengao Zhang: $10,000.

 

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth information known to us with respect to the beneficial ownership of our 29,764,168 outstanding shares of common stock as of June 20, 2016 regarding the following:

 

 

Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below have sole voting power and investment power with respect to their shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission.

 

 

* Indicate less than 0.01%

 

 

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Certain Relationships

 

None of our officer and directors has engaged in any transaction with China YCT International Group or Shandong Spring Pharmaceutical during the past two fiscal years that had a transaction value in excess of $60,000.

Director Independence

 

The following members of our Board of Directors are independent, as "independent" is defined in the rules of the NASDAQ Stock Market: Robert J. Fanella, and Zhang Wengao.

 

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Audit Fees

 

PARITZ & COMPANY, P.A. billed $79,000 and $100,000 to the Company for professional services rendered for the audit of the financial statements for the fiscal years ending on March 31, 2015 and 2016, respectively

Audit-Related Fees

PARITZ & COMPANY, P.A. billed $0 to the Company during fiscal year ending March 31, 2015 and 2016 for assurance and related services that are reasonably related to the performance of the fiscal 2015 and fiscal 2016 audits.

Tax Fees

PARITZ & COMPANY, P.A. billed $0 to the Company during fiscal year ending March 31, 2015 and 2016for professional services rendered for tax compliance, tax advice and tax planning.

All Other Fees

 

PARITZ & COMPANY, P.A. billed $0 to the Company in fiscal year ending March 31, 2015 and 2016 for services not described above.

It is the policy of the Company that all services other than audit, review or attest services must be pre-approved by the Board of Directors. No such services have been performed by PARITZ & COMPANY, P.A. during the fiscal years ending on March 31, 2015 and 2016.

 

PART IV

ITEM 15.                    EXHIBITS

 

 

 

 

 

 

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.

By:

 

 

                     In accordance with the Exchange Act, this Report has been signed below by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated.

 

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