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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

20549

 

FORM 10-Q

 

 

For the quarterly period ended December 31, 2016

 

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes      ☒   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 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.

 

 

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

 

The number of shares outstanding of the issuer's common stock on February 7, 2017 was 29,764,168.

CHINA YCT INTERNATIONAL GROUP, INC.

 

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2016 AND 2015

(UNAUDITED)

 

Table of Contents

 

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENTS

OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

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

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

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

 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

 

China YCT International Group, Inc. ("China YCT") ("the Company") was incorporated in the State of Florida, in the United States of America (the "USA") in January 1989, and reincorporated in the State of Delaware on April 4, 2007.   China YCT, through its 100% owned subsidiary Landway Nano Bio-Tech, Inc. ("Landway Nano"), incorporated in Delaware, owns 100% of Shandong Spring Pharmaceutical Co., Ltd. ("Shandong Spring"), incorporated in the People's Republic of China ("PRC"). China YCT International Group, Inc. and its subsidiaries are collectively referred to as the "Company". Shandong Spring is engaged in the business of research, developing, manufacturing, and selling traditional Chinese medicine and other healthcare products in China.

 

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of December 31, 2016 and the results of operations and cash flows for the periods ended December 31, 2016 and 2015. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three and nine months ended December 31, 2016 are not necessarily indicative of the results to be expected for any subsequent periods or for the entire year ending March 31, 2017. The balance sheet on March 31, 2016 has been derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended March 31, 2016 as included in our Annual Report on Form 10-K. 

Certain amounts have been reclassified to conform to current year presentation.

 

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

 

 

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

 

The Company sells two types of products: non-medical products and medical products. Medical products are sold to certified medicine distributors. Non-medical products are sold directly to its customers through its internet sales channel. To order non-medical products, customers place orders on the Company's online order system. Customers need to make payment when they place their orders. Goods are shipped to customers once the orders and payments are received.

The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin ("SAB") 104, included in the Codification as ASC 605, Revenue Recognition. Sales revenue is recognized on the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured. According to the Company's policy, customers can exchange defective products, but they are not allowed to return products. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits.

  

 

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

 

 

The Company accounts for income tax under the asset and liability method as stipulated by ASC 740 "Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns.  Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities.  Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

 

 

The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. Share-based payments to consultants, service providers and other non-employees are accounted for under in accordance with ASC Topic 718, ASC Topic 505, "Equity Payments to Non-Employees" or other applicable authoritative guidance. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

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

 

The Company has adopted the provisions of ASC Topic 820, "Fair Value Measurements and Disclosures", which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates fair values because of the short-term maturing of these instruments.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets or liabilities

 

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

We have no financial assets or liabilities measured at fair value on a recurring basis.

 

 

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

 

Translation adjustments resulting from this process amounted to $(3,096,813) and $(1,619,240) for the three months ended December 31, 2016 and 2015, and $(5,747,120) and $(4,384,481) for the nine months ended December 31, 2016 and 2015, respectively.

 

The following exchange rates were used to translate the amounts from RMB into United States dollars ("USD") for the respective periods:

 

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

NOTE 3 - INVENTORY

 

Inventory consists of finished goods, work-in-process, packaging materials, and raw materials. No allowance for inventory was made for the three and nine months ended December 31, 2016 and 2015.

 

The components of inventories as of December 31, 2016 and March 31, 2016 were as follows:

 

NOTE 4 – PLANT, PROPERTY, AND EQUIPMENT, NET

 

The components of property and equipment were as follows:

 

 

The depreciation and amortization expense for the three months ended December 31, 2016 and 2015 was $176,755 and $153,963, respectively.

 

The depreciation and amortization expense for the nine months ended December 31, 2016 and 2015 was $534,567 and $468,176, respectively.

      

NOTE 5 - MAJOR CUSTOMER AND VENDOR

The Company sold products through thirteen distributors during the three and nine months ended December 31, 2016. The Company sold products through ten distributors during the three and nine months ended December 31, 2015. Sales to three distributors represented 19%, 15%, and 12% of total sales for the three months ended December 31, 2016 and sales to two distributors represented 23% and 19% of total sales for the three months ended December 31, 2015, respectively.

The Company's sales through three distributors represented 20%, 15%, and 13% of total sales for the nine months ended December 31, 2016, and sales through two distributors represented 27% and 21% of total sales for the nine months ended December 31, 2015, respectively.

The Company sold 7 and 6 products during the three months ended December 31, 2016 and 2015. Sales of three products represented 46%, 20%, and 14% of total sales for the three months ended December 31, 2016. Sales of three products represented 51%, 17%, and 11% of total sales for the three months ended December 31, 2015.

The Company sold 7 and 16 products during the nine months ended December 31, 2016 and 2015. Sales of three products represented 48%, 17%, and 16% of total sales for the nine months ended December 31, 2016.  Sales of two products represented 57% and 12% of total sales for the nine months ended December 31, 2015.

The Company purchases certain of its products from Shandong Yong Chun Tang ("Shandong YCT") according to the contract renewed on February 26, 2015 between the Company and Shandong YCT. Pursuant to the renewed contracts for the period from February 26, 2015 to February 25, 2017, as amended on June 25, 2015, the Company can purchase four products from Shandong YCT at fixed prices.  Total purchases from Shandong YCT represented 30% and 37% of our total purchases during the three months ended December 31, 2016 and 2015, respectively.  The purchases from three other vendors represented 33%, 16%, and 10% of the Company's total purchases for the three months ended December 31, 2016. The purchases from two other vendors represented 32% and 16% of the Company's total purchases for the three months ended December 31, 2015. Total purchases from Shandong YCT represented 32% and 34% of our total purchases during the nine months ended December 31, 2016 and 2015, respectively.  The purchases from two other vendors represented 25 and 17% of the Company's total purchases for the nine months ended December 31, 2016. The purchases from two other vendors represented 31% and 20% of the Company's total purchases for the nine months ended December 31, 2015.

NOTE 6 - TAXES PAYABLE

 

Taxes payable at December 31, 2016 and March 31, 2016 were as follows:

NOTE 7 - INCOME TAXES

 

The Company is incorporated in the United States of America and is subject to United States federal taxation. No provisions for income taxes have been made, as the Company had no U.S. taxable income for the three and nine months ended December 31, 2016 and 2015.

The Company's Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning the privately run and foreign invested enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

 

The reconciliation of income tax expense at the U.S. statutory rate of 35% to the Company's effective tax rate is as follows:

The provisions for income taxes are summarized as follows:

 

 

NOTE 8 - STOCKHOLDERS' EQUITY

 

Stock Issued for Compensation and Service

 

On April 19, 2016, in accordance with an Company's agreement with an independent director, the Company issued 43,478 shares of common stock to one independent director, which were valued at $10,609 based on the quoted price at issuance date.

 

Stock Option Plan 

On July 23, 2015, the Company adopted a stock option plan that was approved by its Board of Directors on June 15, 2015.  This plan was intended to retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests.  Under this stock option plan, the participants of the plan include the Company's directors, officers and some employees who were previously determined by the Board of Directors.  On July 23, 2015, the Company signed stock option agreements with each participant and granted options to purchase a total of 2.6 million shares of Common Stock to the participants.  The vesting period of the stock options was ten months from July 23, 2015, the grant date of the stock options.  Immediately following the date when the stock options were vested, the participants would have five consecutive business days to exercise the stock options at an exercise price of $0.40 per share.  Stock options not exercised within the five consecutive business days would expire.  The Company assessed the fair value of the total granted stock options on the grant date using a Black-Scholes Stock Option Pricing Model. Significant assumptions used in calculating fair value of options are as follows:

 

The estimated fair value of the total granted stock options on the grant date was $529,100 which was being amortized over ten months period. For the nine months ended December 31, 2016, the amortization of stock-based compensation expense was $101,026. As of June 30, 2016, the total estimated fair value of the stock options in amount of $529,100 had been fully amortized. All stock options expired on May 30, 2016 and none of the vested stock options were exercised by the end of the option exercise date.

A summary of the changes in stock options outstanding under the Company's stock option plan during the nine months ended December 31, 2016 is presented below:  

NOTE 9 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events that have occurred after the date of the balance sheet through the date of issuance of these consolidated financial statements and determined that no subsequent event requires recognition or disclosure to the consolidated financial statements.

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

 

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

 

Overview

 

China YCT International Group, Inc. ("China YCT") was incorporated in the State of Florida in January 1989, and reincorporated in the State of Delaware on April 4, 2007. China YCT principally operates through its wholly-owned subsidiary, Landway Nano Bio-Tech, Inc. ("Landway Nano"), incorporated in Delaware, which, in turn, owns 100% of  Shandong Spring Pharmaceutical Co., Ltd. ("Shandong Spring"), incorporated in the People's Republic of China (the "PRC"). China YCT International Group, Inc. and its subsidiaries are collectively referred to as the "Company". China YCT, through Shandong Spring, is engaged in the business of developing, manufacturing, and selling its own medicine made primarily from gingko extract, development of the acer truncatum bunge planting bases, and distributing health care supplement products manufactured by another company in the PRC. 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.

Results of Operations

 

The following table sets forth information from our statements of comprehensive income (loss) for the three months ended December 31, 2016 and 2015, in dollars:

 

The following table sets forth information from our statements of comprehensive income (loss) for the nine months ended December 31, 2016 and 2015, in dollars:

Revenue

 

During the three months ended December 31, 2016, we realized $14,171,624 in revenue, representing an increase of 19.5% or $2,313,597 as compared to $11,858,027 for the same period in 2015.  However, the actual increase in revenue was 27% as compared to the same period in 2015, but 7.5% of the increase was offset by fewer USD converted from RMB due to a significant RMB depreciation occurred during the quarter ended December 31, 2016, compared with the same period in 2015. The total 27% revenue increase was due to the increased sales of the acer truncetum bunge seed oil, the Huoliyuan capsules, and the health care products.

During the nine months ended December 31, 2016, we realized $35,478,603 in revenue, representing a decrease of 5.3% or $1,988,914 as compared to $37,467,517 for the same period in 2015.  The revenue in RMB was in fact increased by 1.1% as a result of the increased sales of acer truncatum bunge seed oil offset by the decreased sales of both the Huoliyuan capsules and the health care products.  However, the 1.1% increase was offset by 6.4% decrease due to fewer USD converted from RMB because a significant RMB depreciation occurred during the nine months ended December 31, 2016 compared with the same period in 2015.

Part of our revenues was generated by us as the distributor for the health care products manufactured by Shandong YCT. The Company purchases its products from Shandong YCT according to the contract renewed on February 26, 2015 between the Company and Shandong YCT. Pursuant to the renewed two year contracts, for the period from February 26, 2015 to February 25, 2017,  as amended on June 25, 2015, the Company can purchase four  products from Shandong YCT at fixed prices.   During the three months ended December 31, 2016, 33.4% of our total revenue was generated as the distributor of Shandong YCT, as compared to 31.5% during the three months ended December 31, 2015.  During the nine months ended December 31, 2016, 34.2% of our total revenue was generated as the distributor of Shandong YCT, as compared to 35.8% during the nine months ended December 31, 2015.

The sales of the Huoliyuan Capsule accounted for 45.5% of our revenue during the three months ended December 31, 2016, compared to 50.9% during the three months ended December 31, 2015.  The sales of the Huoliyuan Capsule accounted for 48.2% of our revenue during the nine months ended December 31, 2016, compared to 56.8% during the nine months ended December 31, 2015.  Since July 2010, the Company has become not only a distributor of Shandong YCT's products but also a manufacturer and distributor of our own product, Huoliyuan Capsule. The sales of the Huoliyuan Capsule in the three months ended December 31, 2016 was $6,452,906, an increase of 6.9% or $416,159 as compared to the same period for the prior year. The increase in sales of the Huoliyuan Capsule was primarily due to the stronger demand from the distributors that sell the products to the end customers. These distributors had higher expectation for the sales of the Huoliyuan Capsule and required more inventory than that in the same period for the prior year.  The sales of the Huoliyuan Capsule for the nine months ended December 31, 2016 was $17,087,618, a decrease of 20% or $4,209,474 as compared to the same period for the prior year.  The decrease in the sales of the Huoliyuan Capsule was primarily due to the increasing competition from other companies that produce and sell the same type of the medicine in the market, and overall slowdown of the Chinese economy recently.

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. The sales of Acer truncatum Bunge Seed Oil accounted for 21.1% of our revenue during the three months ended December 31, 2016, compared to 17.6% during the three months ended December 31, 2015.  The sales of Acer truncatum Bunge Seed Oil accounted for 17.6% of our revenue during the nine months ended December 31, 2016, compared to 7.4% during the nine months ended December 31, 2015. 

The following is the sales breakdown by products during the three months ended December 31, 2016 and 2015:

The following is the sales breakdown by products during the nine months ended December 31, 2016 and 2015:

Cost of Goods Sold and Gross Margin

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 the Huoliyuan Capsule was approximately 49.8% and 52.0% of the total cost of goods sold during the three months ended December 31, 2016 and 2015, respectively.  The cost of manufacturing the Huoliyuan Capsule was approximately 52.5% and 57.2% of the total cost of goods sold during the nine months ended December 31, 2016 and 2015, respectively.

 

During the three months ended December 31, 2016, our cost of goods sold totaled $8,358,123, representing an increase of $1,576,477 or 23.2% as compared to $6,781,646 during the three months ended December 31, 2015. However, the 23.2% increase in cost was a net result of the actual increase in cost and the depreciation of RMB. There was 31.2% actual increase in cost due to the increased sales of the acer truncetum bunge seed oil, the Huoliyuan capsules, and the health care products, but 8.0% of the increase was offset by fewer USD converted from RMB due to a significant RMB depreciation occurred during the three months ended December 31, 2016, compared with the same period in 2015.

During the nine months ended December 31, 2016, our cost of goods sold totaled $21,281,950, representing an increase of $795,996 or 3.9% as compared to $20,485,954 during the nine months ended December 31, 2015.  Similarly, the 3.9% increase in cost was a net result of the actual increase in cost and the depreciation of RMB. There was 10.9% actual increase in cost due to the increased sales of Acer truncatum Bunge Seed Oil, but 7.0% of the increase in cost was offset by fewer USD converted from RMB due to a significant RMB depreciation occurred during the nine months ended December 31, 2016, compared with the same period in 2015.

Gross Profit

 

Gross profit for the three months ended December 31, 2016 was $5,813,501, an increase of 14.5% or $737,120 as compared to the same period for the prior year. Gross profit as a percentage of net revenues was approximately 41.0% for the three months ended December 31, 2016, decreased slightly from 42.8% for the same period of 2015.  Our cost for production of Huoliyuan was slightly higher compared with that for the same period of the prior year due to slightly higher raw material costs.

The comparison of the profits for the three months ended December 31, 2016 and 2015 as follows:

Gross profit for the nine months ended December 31, 2016 was $14,196,653, a decrease of 16.4% or $2,784,910 as compared to the same period for the prior year. Gross profit as a percentage of net revenues was approximately 40.0% for the nine months ended December 31, 2016, decreased from 45.3% for same period of 2015. During the nine months ended December 31, 2016, our cost for production of Huoliyuan increased compared with the same period of the prior year. In addition, the cost of four healthcare products that were sold during the nine month ended December 31, 2016 was higher than the ten healthcare products that were sold during the same period of the prior year.  The Company started to sell the four new healthcare products since July 2015, which had lower margins but a bigger market.

The comparison of the profits for the nine months ended December 31, 2016 and 2015 as follows:

Research and Development Expenses

 

Our R&D expenses for the three months ended December 31, 2016 were $279,589 or approximately 2.0% of total corresponding revenue, an increase of $32,330 or 13.1%, as compared to $247,259 or approximately 2.1% of total corresponding revenue for the three months ended December 31, 2015.  Our R&D expenses for the nine months ended December 31, 2016 were $754,485 or approximate 2.1% of total corresponding revenue, an increase of $94,649 or 14.3%, as compared to $659,836 or approximately 1.8% of total corresponding revenue for the nine months ended December 31, 2015. 

 

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 December 31, 2016, we had 27 staff in R&D department.

Selling, General and Administrative Expenses

 

Our selling expenses consist primarily of sales commissions, advertising and promotion expenses, freight charges and related compensation. Our selling expenses for the three months ended December 31, 2016 were $969,495 or 6.8% of our total revenue for the period, representing a decrease on the percentage of total revenue from 12.0% for the prior year's quarter ended December 31, 2015, mainly due to decrease in advertising expense.

Our selling expenses for the nine months ended December 31, 2016 were $2,525,178 or 7.1% of our total revenue for the period, representing a decrease on the percentage of total revenue from 8.2% for the prior year's nine months ended December 31, 2015, mainly due to decrease in advertising expense.

Our G&A expenses for the three months ended December 31, 2016 were $1,137,609 or 8.0% of our total revenue for the period, representing a slight decrease on the percentage of total revenue from 8.6% for the prior year's quarter ended December 31, 2015, mainly due to decrease in the amortization of stock-based compensation expenses.

Our G&A expenses for the nine months ended December 31, 2016 were $2,722,468 or 7.7% of our total revenue for the period, representing a slight increase on the percentage of total revenue from 7.1% for the prior year's nine months ended December 31, 2015.  The slight increase on the percentage of G&A over total revenue compared with the nine months ended December 31, 2015 mainly due to increase in the amortization of prepaid leases.

Income Taxes

 

Income tax expense increased by $287,635 during the three months ended December 31, 2016, as compared to the prior year's quarter ended December 31, 2015, as a result of the increase in income from operation.

Income tax expense decreased by $519,707 during the nine months ended December 31, 2016, as compared to the same period ended December 31, 2015, as a result of the decrease in income from operation.

Net Income

As a result of the above, during the three months ended December 31, 2016, we realized net income of $2,588,165, representing a 40.8% or $749,476 increase, compared to $1,838,689 during the three months ended December 31, 2015. The increase was mainly due to higher revenue from the sales of Acer truncatum Bunge Seed Oil, health care products, and the Huoliyuan capsules in the three months ended December 31, 2016.

During the nine months ended December 31, 2016, we realized net income of $6,159,400, representing a 23.1% or $1,853,497 decrease, compared to $8,012,897 during the nine months ended December 31, 2015. The decrease was mainly due to the lower revenue from sales of both the Huoliyuan Capsule and health care products, the higher manufacturing costs of Huoliyuan, and the higher cost of the new healthcare products in the nine months ended December 31, 2016.

Comprehensive Income

 

Our business operates entirely in Chinese RMB, but we report our results in our SEC filings in USD. The conversion of our accounts from RMB to USD 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 three months ended December 31, 2016, the effect of converting our financial results to USD was a loss of $3,096,813 to our other comprehensive income, as compared to a loss of $1,619,240 during the three months ended December 31, 2015 as a result of the currency exchange rate fluctuation.

 

During the nine months ended December 31, 2016, the effect of converting our financial results to USD was a loss of $5,747,120 to our other comprehensive income, as compared to a loss of $4,384,481 during the nine months ended December 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 December 31, 2016, we had $13,418,293 in working capital, an increase of $2,962,982 or 28.3% as compared to $10,455,311 in working capital 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 $7,283,144 during the nine months ended December 31, 2016. We had accounts receivable of $506,196 outstanding as of December 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 $7,283,144 for the nine months ended December 31, 2016, which was an increase of 34.4% or $1,865,043 from the $5,418,101 net cash provided by operating activities for the same period of the prior year. The increase of net cash provided by operating activities was mainly due to the decrease in cash out flow from prepaid lease, inventory and tax payable.

Investing Activities

 

During the nine months ended December 31, 2016, our net cash used in investing activities was $4,508,068, as compared to $13,333,542 of net cash used for the nine months ended December 31, 2015. The cash used in investing activities for the nine months ended December 31, 2016 of $4,508,068 was primarily attributable to the acquisition of office and production equipment, road and building construction in process, and capital expenditures in acer truncatum bunge planting.

 

Financing Activities

 

No net cash was generated or used by financing activities over the three and nine months ended December 31, 2016 and 2015.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The term "disclosure controls and procedures" (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within required time periods. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q (the "Evaluation Date"). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were not effective.

 

Changes in Internal Controls

 

The term "internal control over financial reporting" (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2016, and they have concluded that there was no change to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II.    OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

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

 

Not Applicable

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Removed and Reserved

 

Item 5. Other Information

 

None

Item 6. 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.

 

Date: February 13, 2016

Yan Tinghe Chief Executive Officer (Principal Executive Officer)

 

Li Chuanmin Chief Financial Officer (Principal Financial Officer)