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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, 2017 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, 2016, 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 $3,673,920.

 

The number of shares outstanding of the issuer's common stock, as of June 28, 2017 was 29,789,168.

CHINA YCT INTERNATIONAL GROUP, INC.

FORM 10K

For the Fiscal Year Ended March 31, 2017

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

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.

        

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. In addition, since 2015, the Chinese FDA issued more restrictive policies over the sales of medicines by eliminating middle layers of distributors between the medicine manufacturers and the end users  This policy, at a certain level, affects our sales of the Huoliyuan Capsule.  Prior to the issuance of this policy, our distributors could sell the medicine to both the end users who were developed by the distributors themselves and developed by their subcontractors.  After the issuance of this policy, our distributors more likely lost the sales to the end users who were developed by their subcontractors because these subcontractors were eliminated by the policy and no longer in the sales channel.  

       

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.

       

Since July 2015, we have produced acer truncatum bunge seed oils and sold the products to customers through our distributors. The Acer truncatum bunge seed oil is extracted from the acer truncatum pods that are purchased from third party vendors. Our self-grown acer truncatum pods will not be ready to be used for production until approximately the fall of 2018. During the year ended March 31, 2017, our sales of Acer truncatum Bunge Seed Oil has increased by 155.1% compared with the prior year.
      

Patents and Technology
       

In March 2010, the Company purchased a patent from Shandong Yongchuntang 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 Yongchuntang 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 Yongchuntang based on the assessed value and was 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 it 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.  One patent was fully impaired in the year ended March 31, 2016.

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 29 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 in 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 was 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 making further investments equal to 10% of our profits arising from Shandong University's technologies.  Currently, we maintain an informal cooperative relationship with Shandong University.

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, 2017, the Company produced approximately 5.63 million boxes of (1*3 pack) and 2.98 million boxes of (1*2 pack) 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 Huoliyuan 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.

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 certification for Ace Truncatum Bunge Seed Oil 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 Yongchuntang 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 Yongchuntang. On February 20, 2017, we renewed the contract with Shandong Yongchuntang for a term of one year ending on February 25, 2018. Pursuant to the renewed one year contract, for the period from February 26, 2017 to February 25, 2018, we can purchase nine products from Shandong Yongchuntang on fixed prices.

 

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, 2017 and 2016, the Company mainly sold products to individual retail customers through ten major distributors. Since May 2015, we have been permitted by Shandong Yongchuntang to use the direct-sale license issued to Shandong Yongchuntang for sales of Shandong Yongchuntang's health care products.  We were able to build up a larger customer basis through the direct-sales' channels and boost the sales of health care products.

Employees

Shandong Spring Pharmaceutical employed 312 individuals, each on a full-time basis, as of March 31, 2017, of which, 23 employees are involved in administration; 42 are dedicated to marketing and other functions, and 29 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 Yongchuntang, to manufacturing and marketing Huoliyuan Capsule and acer truncatum bunge seed oils. 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.

Four suppliers account for most of our purchases.

 

For the year ended March 31, 2017, the amount of health care products purchased from Shandong Yongchuntang RMB 80.2 million (approximately $11.9 million), and the amount purchased from the four major vendors (including Shandong Yongchuntang) was RMB 195.2 million (approximately $29 million), representing 86% of the Company's annual total purchases. In the event we lose the four major vendors including Shandong Yongchuntang 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 business.

 

We have established our own acer truncatum 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 truncatum bunge oil. We have funded $43 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 truncatum bunge. Acer truncatum 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 risks 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.

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.

          

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.

 

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").

 

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 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.  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 38.25% 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.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 2.  DESCRIPTION OF PROPERTY

 

   

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 2,000 Mu of farmland. The lease term is from July 1, 2013 to June 30, 2043. The lease payment is about RMB1,000(approximately USD 145) per Mu annually and payable for five years of rents in advance. The first lease payment was for the first five years in the amount of RMB10,000,000 (approximately USD1.4 million). On March 8, 2017, the Company returned 120 Mu of the leased farmland to the lessor because the lessor needed to use the farmland for a strategic development project which is led by the local government. Based on the March 8, 2017 agreement between the Company and the lessor, the Company's remaining prepaid lease of RMB180,000 (approximately USD 26,090) for the 120 Mu farmland will be used to reduce the next prepayment on the lease. The acer truncatum bunge plants on the 120 Mu farmland were moved to a nearby location. As a result of this new agreement, the total leased farmland in Shiquiao Village is reduced to 1880 Mu as of March 31, 2017.

On March 1, 2014, the Company entered into a second Farmland Leasing Agreement with Zhongce No.4 Village for the lease of 200 Mu 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 140,000) for each five-year period in advance. However, on April 1, 2017, the Company entered an agreement with Zhongce No.4 Village to terminate the lease for the 200 Mu farmland because the parcel of farmland was recalled by local government for building a new urban district. Base on the agreement, the Company will (1) receive the refund of all the remaining prepaid lease payment of approximately $55,000; (2) receive a compensation of approximately $348,000 from the government for the early termination of the lease; and (3) can sell all of the acer truncatum bunge plants in this parcel of farmland. On May 1, 2017, the Company signed two contracts with the third parties to sell all of the plants from the farmland for approximately $2 million. The Company does not believe that there is a material risk that the leases other than the one with Zhongce No.4 Village could be terminated because the parcel subject to the terminated lease is located in a relatively urban and the local government wants the land for urban development area, while the Company's other land is located in rural areas.

On January 7, 2015, the Company entered into a third Farmland Leasing Agreement with Shandong Wanziyuan Tourism Development Co. to lease 2,000 Mu 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 145) per Mu annually and is 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 USD1.4 million).

 

On July 2, 2015, the Company entered into a fourth Farmland Leasing Agreement with a Zhongce Shen Village for the lease of 2,000 Mu 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 145) 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 USD1.4 million), which was paid on July 3, 2015.

 

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, 2015. 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, 2017.

  

 

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.

 

None

 

 

ITEM 6.    SELECTED FINANCIAL DATA 

Not applicable

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS.

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 97% 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 medicine, developing the acer truncatum bunge planting bases, selling acer truncatum seed oil, and distributing health care supplement products manufactured by Shandong Yongchuntang in the PRC.

Since July 2015, the Company has produced acer truncatum bunge seed oil and sold the product to customers through its internet direct sales system.  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 fall of 2018.

On March 18, 2017, the Company entered into an Acquisition Agreement on Acer Truncatum Industrial Project (the "Agreement") with Shandong Yongchuntang.  Pursuant to the Agreement, the Company agreed to transfer 3% equity of Shandong Spring in exchange for tangible and intangible assets related to the Acer Truncatum Industrial Project (the "Project"), which was owned by Shandong Yongchuntang. As a result of this equity transaction, Shandong Yongchuntang has become a 3% shareholder of Shandong Spring.

 

Results of Operations

 

The following table sets forth information from our statements of comprehensive income for the years ended March 31, 2017 and 2016, in dollars:

Revenue

 

During the year ended March 31, 2017, we realized $56,463,164 in revenue, representing an increase of 18.1% or $8,636,056 as compared to $47,827,108 for the same period in 2016. The increase in revenue in RMB was 25.7% as compared to the year ended March 31 2016, but 7.6% of the increase was offset by fewer USD converted from RMB due to a significant RMB depreciation occurred in the year ended March 31, 2017, compared with the same period in 2016. The total 25.7% revenue increase in RMB was due to the increased sales of acer truncatum bunge seed oil and health care products.

Part of our revenues was generated by us as the distributor for the health care products manufactured by Shandong Yongchuntang. We purchase products from Shandong Yongchuntang according to the purchase contract signed between the Company and Shandong Yongchuntang. Pursuant to the two year contract signed on February 26, 2015, we can purchase 10 products from Shandong Yongchuntang on fixed prices.  On June 25, 2015, the Company made an amendment to the two year contract.  Pursuant to the amended contract, the Company no longer purchases the 10 products included in the contract signed on February 26, 2015 and agreed to purchase 4 new products on fixed prices without changes in other terms of the previous contract.   On February 20, 2017, the Company renewed the purchase contract with Shandong Yongchuntang for a term of one year ending on February 25, 2018.  Pursuant to the renewed one year contract, the Company no longer purchases the 4 products included in the amended contract signed on June 25, 2015 and agreed to purchase 9 new products from Shandong Yongchuntang on fixed prices. During the year ended March 31, 2017, 35.7% of our total revenue was generated as the distributor of Shandong Yongchuntang, compared to 34.1% during the year ended March 31, 2016.  For the year ended March 31, 2017, our revenue from sales of the health care products was $20,159,631, representing an increase of 23.4% or $3,828,034 as compared to $ 16,331,597 for the same period in 2016.  The revenue from sales of health care products measured in RMB was increased by 31.4% but was offset by 8.0% decrease due to fewer USD converted from RMB because a significant RMB depreciation occurred during the year ended March 31, 2017 compared with prior year 2016. Since May 2015, we have been permitted by Shandong Yongchuntang to use the direct-sale license issued to Shandong Yongchuntang for sales of Shandong Yongchuntang's health care products.  We were able to build up a larger customer basis through the direct-sales' channels and boost the sales of health care products during the year ended March 31, 2017.

The sales of the Huoliyuan Capsule accounted for 43.8% of our revenue during the year ended March 31, 2017, compared to 55.9% during the year ended March 31, 2016.  The sales of the Huoliyuan Capsule in the year ended March 31, 2017 were $24,733,953, a decrease of 7.5% or $2,015,774 as compared to the year ended March 31, 2016. The revenue from sales of  Huoliyuan Capsule denominated in RMB was only decreased by 1.6%, but the total sales decrease denominated in USD was added by another 5.9% due to a significant RMB depreciation occurred during the year ended March 31, 2017, compared with the prior year. The slight decrease in sales of Huoliyuan Capsule in RMB was primarily due to the increasing competition from other companies that also produce and sell the same type of the medicine in the market.

Since July 2015, we have produced acer truncatum bunge seed oil and sold the product to customers through our distributors.  The acer truncatum bunge seed oil was extracted from the acer truncatum pods that were purchased from third party vendors.  Our self-grown acer truncatum pods will not be ready to be used for production until approximately the fall of 2018. During the year ended March 31, 2017, 20.1% of our total revenue was generated from the sales of acer truncatum oil products, compared to 10.0% during the year ended March 31, 2016.  For the year ended March 31, 2017, our revenue from sales of the acer truncatum oil products was $11,372,538, representing an increase of 139.6% or $6,626,754 as compared to $4,745,784 for the same period in 2016.  The revenue from sales of acer truncatum oil products denominated in RMB was in fact increased by 155.1% but it was offset by 15.5% decrease when converted to USD due to a significant RMB depreciation occurred during the year ended March 31, 2017, compared with the prior year. The significant increase in sales of acer truncatum oil products in RMB was primarily due to the increased promotion of our acer truncatum bunge seed oil by organizing conferences to introduce the features and benefits of the product to our distributors and customers.

The following is the sales breakdown by products during the years ended March 31, 2017 and 2016:

 

Cost of Goods Sold

 

Our costs of goods sold were comprised primarily of the cost of finished goods we purchased from Shandong Yongchuntang, the raw materials we purchased from third party vendors, and the manufacturing costs of acer truncatum bunge seed oil and Huoliyuan Capsule. The cost of manufacturing Huoliyuan Capsule was approximately 48.0% and 57.6% of the total cost of goods sold during the years ended March 31, 2017 and 2016, respectively.

 

During the year ended March 31, 2017, our cost of goods sold totaled $33,284,237, representing an increase of $6,730,215 or 25.3 % as compared to $26,554,022 during the year ended March 31, 2016. There was 33.4% increase in cost in RMB but 8.1% of the increase in cost was offset by fewer USD converted from RMB due to a significant RMB depreciation occurred during the year ended March 31, 2017, compared with prior year 2016. The increase in cost was primarily due to the increase in sales of the health care products and the acer truncatum bunge seed oil and the increase in the production cost of Huoliyuan Capsule.

The percentages of the costs of goods sold to total revenues increased from 55.5% for fiscal year 2016 to 58.9% for fiscal year 2017 primarily due to increase in material and manufacturing costs for Huoliyuan Capsule.

Gross Profit

 

Gross profit for the year ended March 31, 2017 was $23,178,927, an increase of 9.0% or $1,905,841 as compared to the same period for the prior year. The overall gross profit as a percentage of net revenues was approximately 41.1% for the year ended March 31, 2017, decreased from 44.5% for same period of 2016. The gross profit as percentage of net revenues for the health care products was approximately 44.5% for the year ended March 31, 2017, decreased from 46.4% for the same period of 2016.  The gross profit as percentage of net revenues for Huoliyuan was approximately 35.4% for the year ended March 31, 2017, decreased from 42.8% for the same period of 2016. The gross profit as percentage of net revenues for acer truncatum bunge seed oil was approximately 47.3% for the years ended March 31, 2017 and 2016. The lower gross profit as percentage of net revenue for the health care products during the year ended March 31, 2017 was primarily due to the sales of new health care products with higher cost. The lower gross profit as percentage of net revenue for Huoliyuan during the year ended March 31, 2017 was due to the increased raw material and manufacturing costs.

The comparison of the gross profits for the years ended March 31, 2017 and 2016 as follows:

 

Research and Development Expenses

 

Our R&D expenses for the year ended March 31, 2017 were $809,485 or approximate 1.4% of total revenue, an increase of $85,198 or 11.8%, as compared to $724,287 or approximately 1.5% of total revenue for the year ended March 31, 2016.  The increase of 11.8% in research and development expense was primarily due to additional purchase of materials for acer truncatum bunge product research. Since the fiscal year 2017, we have switched our focus on development of our own acer truncatum bunge planting bases. In March 2017, we acquired a group of research equipment which will be used for developing an enhanced manufacturing process for production of our acer truncatum bunge seed oil.

 

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 truncatum bunge plants. As of March 31, 2017, 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, 2017 were $3,934,334 or 7.0% of our total revenue for the year, representing a slightly decrease of 0.9% in the percentage of total revenue from the prior year ended March 31, 2016.

 

Our G&A expenses for the year ended March 31, 2017 were $4,248,095 or 7.5% of our total revenue for the year, representing a decrease of 1.8% in the percentage of total revenue from the prior year ended March 31, 2016. Our G&A expenses for the year ended March 31, 2017 decreased by 4.5% or $198,888 as compared to the prior year.  There was 1.2% increase in G&A expenses in RMB but was offset by 5.7% depreciation in RMB occurred during the year ended March 31, 2017, compared with prior year 2016. The increase in G&A expenses was primarily due to the increase in depreciation expenses.  

Our operating expenses for the year ended March 31, 2017 also include loss from reduction in the capitalized cost of acer truncatum bunge planting.  During the year ended March 31, 2017, approximately 2.2% of the acer truncatum bunge plants were dead or lost due to the weather, replanting of trees, relocating of trees, and other natural or technical reasons as per management's estimation.  For the year ended March 31, 2017, an impairment of $986,406 was recorded as reduction of capitalized costs which was included in Operating Expenses.

Income Taxes

Income tax expense increased by $359,590 during the year ended March 31, 2017, as compared to the year ended March 31, 2016, as a result of the increase in income from operation.

Net Income

 

As a result of above, during the year ended March 31, 2017, we realized net income of $10,054,654, representing a  19.5% or $1,637,885 increase, compared to $8,416,769 during the year ended March 31, 2016. The increase was mainly due to higher gross profit and decreased 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, 2017, the effect of converting our financial results to USD was a loss of $5,228,368 to our other comprehensive income, as compared to a loss of $3,914,783 during the year ended March 31, 2016 as a result of the currency exchange rate fluctuation.

 

Noncontrolling interest

On March 18, 2017, 3% equity of Shandong Spring was transferred to Shandong Yongchuntang in exchange for tangible and intangible assets related to Acer Truncatum Industrial Project. As a result of this equity transaction, Shandong Yongchuntang has become a 3% shareholder of Shandong Spring.  During the year ended March 31, 2017, $28,108 of comprehensive loss was attributable to Shandong Yongchuntang.

Liquidity and Capital Resources

 

Our principal sources of liquidity were generated from our operations. As of March 31, 2017, we had $15,492,421 in working capital, an increase of $5,000,470 or 47.7% as compared to $10,491,951 in working capital at March 31, 2016. The increase in working capital primarily resulted from our increased cash inflow from higher sales and the increased balance in accounts payable and tax payable as of March 31, 2017.

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 $9,736,074 during the year ended March 31, 2017. We had accounts receivable of $1,134,967 outstanding as of March 31, 2017. We expect our marketing activities to continue to help generate positive cash flow.  The development of our own acer truncatum bunge planting bases and expanded manufactory of acer truncatum bunge seed oil products 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 $9,736,074 for the year ended March 31, 2017, which was an increase of 13.8% or $1,182,947 from $ 8,553,127 net cash provided by operating activities for the year ended March 31, 2016. The increase was primarily due to the increase in cash inflow from sales, accounts payable and tax payable, offset by increase in cash outflow from inventory, accounts receivable, advance payment to vendors and security deposit.

 

Investing Activities

  

During the year ended March 31, 2017, our net cash used by investing activities was $6,498,520 which was a decrease of 51.7% or $6,959,116 as compared to $13,457,636 of net cash used for the year ended March 31, 2016. This change was primarily due to the overall lower investment in development cost of acer truncatum bunge planting in the year ended March 31, 2017, including lower new farmland lease and acer truncatum bunge planting fee.  As of March 31, 2017, we completed planting trees on 6,080 Mu of leased farmland; which were in the development stage with expected production in the fall of 2018.

Financing Activities

 

No net cash was generated or used by financing activities over the years ended March 31, 2017 and 2016.

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 2017.

 

New Accounting Pronouncements

 

In January 2017, FASB issued ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business". The Board is issuing the amendments in this Update to clarify the definition of a business with the  objective of adding  guidance to assist entities with evaluating whether transactions should be accounted for as  acquisitions (or disposals) of assets or businesses.  The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments in this Update affect all reporting entities that must determine whether they have acquired or sold a business.  Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. However, early application of the amendments in this Update if 1) For transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance  2) For  transactions  in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in  financials.  The Company determined that its recent acquisition of the Acer Truncatum Industrial Project met the early application requirement  and decided to account for the acquisition in accordance with the FASB issued ASU 2017-01 "Business Combinations (Topic 805) - Clarifying the Definition of a Business".

In October 2016, FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory". The core principle of this ASU is that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory.  The amendments in this Update align the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting   Standards   (IFRS).  For  public  business  entities,  the  amendments  in  this  Update  are  effective  for  annual  reporting  periods  beginning  after  December  15,  2017,  including  interim  reporting periods within those annual reporting periods. The Company is currently evaluating the potential impact of adopting this new standard on its consolidated statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU supersedes most of the existing guidance on revenue recognition in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition and establishes a broad principle that would require an entity to 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. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. The FASB has subsequently issued additional ASUs to clarify certain elements of the new revenue recognition guidance. The guidance is effective for fiscal years beginning after December 15, 2017, and is to be applied retrospectively using one of two transition methods at the entity's election. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application. Early adoption is permitted for fiscal years beginning after December 15, 2016.

In May 2016, FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients". The update is to address certain issues identified by the FASB/IASB Joint Transition Resource Group for Revenue Recognition (TRG) in the guidance on assessing collectability,  presentation of  sales taxes, noncash consideration, and completed contracts and contract modifications at transition,  the  Board  decided to add a project to its technical agenda to improve Topic 606, Revenue from Contracts with Customers, by reducing: 1) The potential for diversity in practice at initial application 2) The cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The amendments in this Update affect entities with transactions included within the scope of Topic 606.  The scope of that Topic includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity's ordinary activities) in exchange for consideration. The amendments to the recognition and measurement provisions of Topic 606 also affect entities with transactions included within the scope of Topic 610, Other Income. The amendments in this Update affect the guidance in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective.  The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14,   Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the potential impact of adopting this new standard on its consolidated 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.

 

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, 2017 and 2016 begins on page F-1 of this Report.

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2017 AND 2016

 

Table of Contents

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

		MARCH 31, 2017				MARCH 31, 2016
Assets
Current assets:
Cash and cash equivalents		$	10,308,622			$	7,639,084
Accounts receivable			1,134,967				533,262
Inventories			5,483,040				2,287,312
Advance payment to vendors			650,790				-
Prepaid leases – current portion			900,547				961,609
Total current assets			18,477,966				11,421,267
Prepaid leases			1,265,252				2,312,650
Development cost of acer truncatum bunge planting			42,055,972				42,166,533
Plant, property, and equipment, net			14,487,135				12,872,997
Intangible assets, net			12,042,758				12,295,147
Deferred tax assets			508,521				210,273
Security deposit to related party			1,449,422				-
Total assets		$	90,287,026			$	81,278,867
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable to related party		$	706,048			$	63,241
Accounts payable and other accrued expenses			251,307				127,007
Taxes payable			2,028,190				739,068
Total current liabilities			2,985,545				929,316
Stockholders' Equity
Preferred stock, par value $500 per share; 45 shares authorized, issued and outstanding at March 31, 2017 and March 31, 2016			22,500				22,500
Common stock, par value $0.001 per share; 100,000,000 shares authorized;  29,789,168 and 29,720,690 shares issued and outstanding at March 31, 2017 and 2016, respectively			29,789				29,721
Additional paid-in capital			4,322,838				4,648,461
Statutory reserve			1,828,504				1,828,504
Retained earnings			83,061,604				72,983,301
Accumulated other comprehensive income (loss)			(4,386,845	)			837,064
Total stockholders' equity attributable to the Company			84,878,390				80,349,551
Noncontrolling interest			2,423,091				-
Total stockholders' equity			87,301,481				80,349,551
Total liabilities and stockholders' equity		$	90,287,026			$	81,278,867

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

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		YEARS ENDED MARCH 31,
		2017				2016
Sales		$	56,463,164			$	47,827,108
Cost of goods sold (including $11,015,268 and $8,623,417 from a related party for the years ended March 31, 2017 and 2016, respectively)			33,284,237				26,554,022
Gross profit			23,178,927				21,273,086
Operating expenses
Selling expenses			3,934,334				3,759,920
General and administrative expenses			4,248,095				4,446,983
Research and development expenses			809,485				724,287
Impairment of assets			986,406				1,114,942
Total operating expenses			9,978,320				10,046,132
Income from operations			13,200,607				11,226,954
Interest income			54,672				30,850
Income before income tax provision			13,255,279				11,257,804
Income tax provision			3,200,625				2,841,035
Net income			10,054,654				8,416,769
Less: Net loss attributable to noncontrolling interest			(23,649	)			-
Net income attributable to the Company			10,078,303				8,416,769
Other comprehensive income (loss):
Foreign currency translation adjustment			(5,228,368	)			(3,914,783	)
Comprehensive income			4,826,286				4,501,986
Less: Comprehensive loss attributable to noncontrolling interest			(28,108	)			-
Comprehensive income attributable to the Company		$	4,854,394			$	4,501,986
Earnings per common share
Basic and Diluted		$	0.34			$	0.28
Weighted average number of common shares outstanding
Basic and Diluted			29,763,531				29,709,706

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

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

		Preferred Stock Series A								Common Stock								Additional paid-in				Statutory				Accumulated Other Comprehensive Income				Retained				Total Stockholders' Equity Attributable  to the				Non- controlling
		Shares				Amount				Shares				Amount				Capital				Reserve				(Loss)				Earnings				Company				Interest				Total
Balance - March 31, 2015			45			$	22,500				29,700,690			$	29,701			$	4,210,407			$	1,828,504			$	4,751,847			$	64,566,532			$	75,409,491			$	-			$	75,409,491
Net income																															8,416,769				8,416,769								8,416,769
Issuance of common shares for services											20,000				20				9,980																10,000								10,000
Stock option cost																			428,074																428,074								428,074
Foreign currency translation adjustment																											(3,914,783	)							(3,914,783	)							(3,914,783	)
Balance - March 31, 2016			45				22,500				29,720,690				29,721				4,648,461				1,828,504				837,064				72,983,301				80,349,551				-				80,349,551
Net income																															10,078,303				10,078,303				(23,649	)			10,054,654
Issuance of common shares for services											68,478				68				22,041																22,109								22,109
Transfer 3% equity of Shandong Spring to a noncontrolling shareholder																			(448,690	)															(448,690	)			2,451,199				2,002,509
Stock option cost																			101,026																101,026								101,026
Foreign currency translation adjustment																											(5,223,909	)							(5,223,909	)			(4,459	)			(5,228,368	)
Balance - March 31, 2017			45			$	22,500				29,789,168			$	29,789			$	4,322,838			$	1,828,504			$	(4,386,845	)		$	83,061,604			$	84,878,390			$	2,423,091			$	87,301,481

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

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		YEARS ENDED MARCH 31,
		2017				2016
Cash Flows From Operating Activities:
Net income		$	10,054,654			$	8,416,769
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of plant, property and equipment			746,931				652,123
Amortization of intangible assets			1,098,757				1,274,901
Amortization of prepaid leases			923,380				903,778
Stock-based compensation			123,135				438,074
Deferred taxes			(319,501	)			(214,923	)
Loss on abandonment of property, plant and equipment			184,262				217,042
Impairment of assets			986,406				1,114,942
Changes in operating assets and liabilities:
Advance payment to vendors			(667,291	)			-
Inventory			(3,425,678	)			(1,466,478	)
Prepaid lease			-				(1,581,928	)
Accounts receivable			(651,680	)			(452,220	)
Taxes payable			1,369,927				(802,206	)
Security deposit to related party			(1,486,171	)			-
Accounts payable to related party			663,222				21,668
Accounts payable and other accrued expenses			135,721				31,585
Net cash provided by operating activities			9,736,074				8,553,127
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment			(2,880,051	)			(1,527,367	)
Development cost of acer truncatum bunge planting			(3,618,469	)			(11,930,269	)
Net cash used in investing activities			(6,498,520	)			(13,457,636	)
Effect of exchange rate changes on cash and cash equivalents			(568,016	)			(539,939	)
Net increase (decrease) in cash and cash equivalents			2,669,538				(5,444,448	)
Cash and cash equivalents at beginning of year			7,639,084				13,083,532
Cash and cash equivalents at end of year		$	10,308,622			$	7,639,084
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest		$	-			$	-
Income taxes		$	2,521,061			$	3,601,110
Noncash Investing Activities:
Transfer 3% equity of Shandong Spring in exchange for equipment and intangible assets		$	2,134,537			$	-

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BUSINESS

 

China YCT International Group, Inc. ("China YCT") was incorporated in the State of Florida, in the United States of America (the "USA") in January 1989, and reincorporated in the State of Delaware on April 4, 2007.   China YCT, through its 100% owned subsidiary Landway Nano Bio-Tech, Inc. ("Landway Nano"), incorporated in Delaware, owns 97% 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". The Company, through its 97% owned subsidiary, Shandong Spring, engages in the business of research, developing, manufacturing, and selling traditional Chinese medicine and other healthcare products in China.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

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

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 97% 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, and intangible assets and the valuation of deferred tax assets.

 

 

Cash and cash equivalents including cash on hand and deposits placed with banks or other financial institutions, which are unrestricted as to withdrawal and use and with an original maturity of three months or less.

 

Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. The Company believes the probability of a bank failure, causing loss to the Company, is remote.

 

 

Accounts receivable are recognized and carried at the original invoice amounts less an allowance for any uncollectible amount. The Company extends credit to our customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for potential bad debts if required.

The Company determines whether an allowance for doubtful accounts is required by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. We may also record a general allowance as necessary.

 

Direct write-offs are taken in the period when we have exhausted our efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that we should abandon such efforts.

 

The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties being experienced by its major customers. No allowance for doubtful accounts receivable were recorded in the years ended March 31, 2017 and 2016, respectively.

 

Inventories are valued at the lower of cost or market with cost determined on a weighted average basis. Management compares the cost of inventory with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost.

 

 

Property and equipment are stated at cost. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and locations for its intended use. Leasehold improvements are stated at cost and amortized over the shorter of the useful life of the assets or the length of the lease in accordance to ASC 840-10-35-6. Depreciation and amortization are calculated using the straight-line method over the following useful lives:

 

 

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

 

Purchased intangible assets are recognized and measured at fair value upon acquisition. Separately identifiable intangible assets that have determinable lives are amortized over their estimated useful lives using the straight-line method as follows:

 

The Company has developed the acer truncatum bunge planting bases and completed planting of 6,080Mu (1Mu is equal to approximately 666.67 square meters) as of March 31, 2017. The agricultural product (e.g., seeds, oil extract, etc.) derived from the planting is intended to be the supply for an integrated use including edible oil, protein, medicine and health care, tannin extract, industrial chemicals, nectar source, nervonic acid, and specialty lumber, as well as for landscaping and conservation of soil and water.

The Company accounts for the development costs of the planting in accordance to ASC 905. Pursuant to ASC 905-360-25-3, limited-life land development costs and direct and indirect development costs of orchards, groves, vineyards, and intermediate-life plants shall be capitalized during the development period. Pursuant to ASC 905-360-35-7, costs capitalized during the development period are depreciated over the estimated useful life of the land development or that of the tree, vine, or plant. The planting is currently in the development stage with production expected in the fall of 2018; therefore, no depreciation expenses were recognized as of March 31, 2017.

Development costs primarily include land development cost incurred for land leveling, irrigation, and fertilization, the purchase costs of acer truncatum bunge trees, and acer truncatum bunge planting fee.

 

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 order system through internet. Customers who purchase through internet need to make payment when they place their orders. Goods are shipped to customers once the orders and payments were 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 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 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 identifies related parties, and accounts for, and discloses related party transactions in accordance with ASC 850, "Related Party Disclosures" and other relevant ASC standards.

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

Transactions between related parties commonly occurred in the normal course of business are considered to be related party transactions. Transactions between related parties are also considered to be related party transactions even though they may not be given accounting recognition. While ASC does not provide accounting or measurement guidance for such transactions, it requires their disclosure nonetheless.

Liabilities for loss contingencies arising from claims, assessments, litigations, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

 

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.

 

Sales revenue represents the invoiced value of goods, net of a Value-Added Tax ("VAT"). All of the Company's products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.

 

 

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

 

The research and development expense for the years ended March 31, 2017 and 2016 was $809,485 and $724,287, respectively.

 

 

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

 

The Company incurred advertising costs of $2,972 and $601,133 for the years ended March 31, 2017 and 2016, respectively, which are included in selling expenses on the Company's consolidated financial statements.

 

 

The Company accounts for mailing and handling fees in accordance with the FASB Accounting Standards Codification ("ASC") 605-45 (Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs).  Amounts incurred by the Company for freight are included in selling expenses. For the years ended March 31, 2017 and 2016, the Company incurred $2,070,029 and $1,795,796 shipping and handling costs, respectively.

 

 

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)

The Company has 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. companies 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 comprehensive 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 comprehensive income.

 

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

 

In January 2017, FASB issued ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business". The Board is issuing the amendments in this Update to clarify the definition of a business with the  objective of adding  guidance to assist entities with evaluating whether transactions should be accounted for as  acquisitions (or disposals) of assets or businesses.  The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments in this Update affect all reporting entities that must determine whether they have acquired or sold a business.  Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. However, early application of the amendments in this Update if 1) For transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance  2) For  transactions  in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in  financials.  The Company determined that its recent acquisition of the Acer Truncatum Industrial Project met the early application requirement  and decided to account for the acquisition in accordance with the FASB issued ASU 2017-01 "Business Combinations (Topic 805) - Clarifying the Definition of a Business".

In October 2016, FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory". The core principle of this ASU is that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory.  The amendments in this Update align the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting   Standards   (IFRS).  For  public  business  entities,  the  amendments  in  this  Update  are  effective  for  annual  reporting  periods  beginning  after  December  15,  2017,  including  interim  reporting periods within those annual reporting periods. The Company is currently evaluating the potential impact of adopting this new standard on its consolidated statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU supersedes most of the existing guidance on revenue recognition in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition and establishes a broad principle that would require an entity to 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. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. The FASB has subsequently issued additional ASUs to clarify certain elements of the new revenue recognition guidance. The guidance is effective for fiscal years beginning after December 15, 2017, and is to be applied retrospectively using one of two transition methods at the entity's election. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application. Early adoption is permitted for fiscal years beginning after December 15, 2016.

In May 2016, FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients". The update is to address certain issues identified by the FASB/IASB Joint Transition Resource Group for Revenue Recognition (TRG) in the guidance on assessing collectability,  presentation of  sales taxes, noncash consideration, and completed contracts and contract modifications at transition,  the  Board  decided to add a project to its technical agenda to improve Topic 606, Revenue from Contracts with Customers, by reducing: 1) The potential for diversity in practice at initial application 2) The cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The amendments in this Update affect entities with transactions included within the scope of Topic 606.  The scope of that Topic includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity's ordinary activities) in exchange for consideration. The amendments to the recognition and measurement provisions of Topic 606 also affect entities with transactions included within the scope of Topic 610, Other Income. The amendments in this Update affect the guidance in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective.  The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14,   Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the potential impact of adopting this new standard on its consolidated 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.

 

NOTE 3 – OPERATING LEASES

 

On October 1, 2011, the Company entered into an agreement with Shandong Yongchuntang Bioengineering Co., Ltd. ("Shandong Yongchuntang") for the lease of one automobile. The lease term is from October 1, 2011 to September 30, 2021. The total lease payment of RMB131,468 (approximately USD19,055) was paid in full upon signing the lease agreement and is being amortized over the life of the lease.

On June 20, 2013, the Company entered into a Farmland Leasing Agreement with Shiqiao Village for the lease of 2,000Mu farmland for the development of the acer truncatum bunge planting bases. The lease term is from July 1, 2013 to June 30, 2043. The lease payment is RMB1, 000 (approximately USD 145) 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 USD 1.4 million), which was paid on July 10, 2013. On March 8, 2017, the Company returned 120Mu of the leased farmland to the lessor because the lessor needed to use the farmland for a strategic development project which is led by the local government. Based on the March 8, 2017 agreement between the Company and the lessor, the Company's remaining prepaid lease of RMB180,000 (approximately USD 26,090) for the 120Mu farmland will be used to reduce the next prepayment on the lease. The acer truncatum bunge plants on the 120Mu farmland were moved to a nearby location. As a result of this new agreement, the total leased farmland in Shiquiao Village is reduced to 1880Mu as of March 31, 2017.

 

On March 1, 2014, the Company entered into a Farmland Leasing Agreement with Zhongce No.4 Village for the lease of 200Mu farmland to the development of the acer truncatum bunge planting bases. The lease term is from March 1, 2014 to February 28, 2044. The lease payment is RMB1,000 (approximately USD 145) 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 RMB1,000,000 (approximately USD140,000), which was paid on March 10, 2014.  The lease was terminated on April 1, 2017.  (See Note 15).

On January 7, 2015, the Company entered into a Farmland Leasing Agreement with a company, Shandong Wanziyuan Tourism Development Co. to lease 2,000Mu 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 145) 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 USD1.4 million), which was paid on January 8, 2015.

On July 2, 2015, the Company entered into a 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 145) 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 USD 1.4 million), which was paid on July 3, 2015.

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

 

The components of prepaid lease were as follows:

The prepaid lease is amortized over prepaid period based on straight-line method. The lease expenses for the years ended March 31, 2017 and 2016 were $923,380 and $903,778, respectively.

NOTE 4 - INVENTORIES

 

The components of inventories were as follows:

     

No allowances for obsolete or unsalable inventories were made for the years ended March 31, 2017 and 2016.

 

NOTE 5 – PLANT, PROPERTY, AND EQUIPMENT, NET

 

The components of property and equipment were as follows:

The depreciation and amortization expense of plant, property and equipment for the years ended March 31, 2017 and 2016 was $746,931 and $652,123, respectively.

 

NOTE 6 – DEVELOPMENT OF ACER TRUNCATUM BUNGE

Since July 2013, the Company has developed the acer truncatum bunge planting bases. As of March 31, 2017, the Company has completed planting of 6,080 Mu (1Mu is equal to approximately 666.67 square meters) at four leased farmlands. The Company accounts for the development costs of the planting in accordance to ASC 905. Pursuant to ASC 905-360-25-3, limited-life land development costs, direct and indirect development costs of orchards, groves, vineyards, and intermediate-life plants shall be capitalized during the development period. Development costs primarily include land development cost incurred for land leveling, irrigation, and fertilization, the purchase costs of acer truncatum bunge trees, and acer truncatum bunge planting fee. During the year ended March 31, 2017, approximately 2.2% of the acer truncatum bunge plants were dead or lost due to the weather, replanting of trees, relocating of trees, and other natural or technical reasons as per management's estimation.  An impairment of $986,406 was recorded during the year ended March 31, 2017.

NOTE 7 - INTANGIBLE ASSETS, NET

 

The intangible assets consist of the following:

 

All land in the PRC is owned by the government and cannot be sold to any individual or company.  However, the government may grant a "land use right" for occupying, developing and using land. The Company records land use rights obtained as intangible assets at cost, which is amortized on the straight line method over the grant period of 50 years.

 

 

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

 

In October 2011, two patents were transferred to the Company based on a purchase agreement signed with Jining Tianruitong Technology development Company, Limited on October 26, 2010; which are "Treatment to ischemic encephalopathy and its preparation method" (ZL200510045001.9) and "Chinese herbal medicine compound to treat renal insufficiency and its preparation" (ZL200710013301.8). The patents were recorded at cost when purchased, and are being amortized over its legal lives, 14 years and 15 years, respectively; on a straight-line basis. Both patents' legal lives are considered shorter than their remaining useful lives.

One of the patents acquired in October 2011 is a Chinese herbal medicine compound to treat renal insufficiency and its preparation (ZL200710013301.8). The purpose of the acquisition was to increase the variety of the products which were made of pure Chinese herbals. The product was targeted to cure chronic renal insufficiency through strengthening the spleen, kidney and promoting blood circulation to dispel blood stasis. Lately, however, the same type of medicines with the similar therapeutic effect were also produced by other companies and appeared to be over supplied in the market.  In addition, due to the short supply of one core component – Sanqi, the cost of the production has been increasing.  The Company also found out certain deficiency in its product formulation which is needed to be improved.  However, the Company does not have plan to invest in such improvement because, since late 2014, it has shifted manufacturing focus from producing Chinese medicines for curing regular diseases to producing these for curing highly incidence of diseases such as cardiovascular disease.  Due to the reasons stated above, the Company decided to cease the further development of the product using this patent and the production of the medicine that uses this patent.

Pursuant to FASB ASC 350-30-50-3, the Company conducted its annual test for impairment on patent as of March 31, 2017 and 2016. At March 31, 2016, the Company estimated the future net undiscounted cash flows that are expected to be generated from the use of the patent and its eventual disposal. The Company determined that the fair value of one patent (ZL200710013301.8) is nil with no disposal cash inflow. Accordingly, the Company recorded the full impairment of the patent of $1,114,942 in the year ended March 31, 2016. No impairment of patents was recorded in the year ended March 31, 2017.

On March 18, 2017, the Company entered into an acquisition agreement (the "Agreement") with Shandong Yongchuntang to acquire a group of tangible and intangible assets for producing and marketing acer truncatum products. Pursuant to the Agreement, the Company agreed to transfer 3% equity of Shandong Spring to Shandong Yongchuntang in exchange for a group of research equipment and a group of intangible assets related to Acer Truncatum Industrial Project (the "Project). The group of the intangible assets includes a patent on the refinery process of the Acer Truncatum's seed oils, a trademark with the name of "Bao Feng San Yi", and certain related certifications.  The fair value of assets acquired is approximately $2,135,000. Approximately $532,000 was allocated to research equipment acquired and approximately $1,603,000 was allocated to intangible assets acquired. This acquisition is considered as an asset acquisition as per ASU 2017-01, "Business Combinations (Topic 805). The excess amount of consideration paid over the fair market value of assets acquired was $448,690 which was recorded as a reduction to the Company's equity. The tangible and intangible assets acquired related to the Project are being depreciated or amortized over the useful life of 3 to 10 years on a straight-line basis.

The amortization expense of land use right for the years ended March 31, 2017 and 2016 was $30,163 and $32,107, respectively.

 

The amortization expense of patent for the years ended March 31, 2017 and 2016 was $1,068,594 and $1,242,794, respectively.

NOTE 8 – SECURITY DEPOSIT

The security deposit – related party represents the deposit paid to Shandong Yongchuntang for using the direct-sales license issued to Shandong Yongchuntang.

The Company was permitted by Shandong Yongchuntang to sell Shandong Yongchuntang's products using the direct-sales license issued to Shandong Yongchuntang from July 1, 2015 to June 30, 2020. To ensure the appropriate use of the direct-sales license in the market, the Company provided a deposit of approximately $1,449,422 to Shandong Yongchuntang as a marketing deposit based on an agreement between the Company and Shandong Yongchuntang, which was signed on January 4, 2017. If no violations of rules or regulations related to the direct-sales occur during the contract period, the security deposit will be fully returned to the Company at the end of the contract period. The amount of security deposit is non-interest bearing and is not secured.

NOTE 9 - TAXES PAYABLE

Tax payable at March 31, 2017 and 2016 were as follows:

 

NOTE 10 - INCOME TAXES

 

China YCT and Landway Nano were incorporated in the United States of America and are subject to United States federal taxation. No provisions for income taxes have been made, as there was no taxable income from U.S. operations for the years ended March 31, 2017 and 2016. The Company has net loss carryforward of approximately $22,000 which will be expired in 2047. The Company has set up 100% valuation allowance on deferred tax assets resulting from net operation loss incurred in the U.S.

The Company's Chinese subsidiary is 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 Company has not provided deferred taxes on undistributed earnings attributable to its PRC subsidiaries as they are to be permanently reinvested. On February 22, 2008, MOF, and SAT, jointly issued Cai Shui 2008 Circular 1, "Circular 1." According to Article 4 of Circular 1, distributions of accumulated profits earned by foreign investment enterprises, ("FIE") prior to January 1, 2008 to their foreign investors will be exempt from withholding tax, ("WHT") while distribution of the profits earned by a FIE after January 1, 2008 to its foreign investors shall be subject to WHT.

Dividend payments by PRC subsidiaries are limited by certain statutory regulations in the PRC. No dividends may be paid by PRC subsidiaries without first receiving prior approval from SAFE. Dividend payments are restricted to 90% of after tax profits.

Should the Company's PRC subsidiaries distribute all their profits generated after December 31, 2007, the aggregate withholding tax amount will be $8,306,160 and $7,298,330 as of March 31, 2017 and 2016, respectively.

The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of ASC Topic 740, Income Taxes. Since Shandong Spring intends to reinvest its earnings to further expand its businesses in mainland China, it does not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, the Company has not recorded any deferred taxes in relation to US tax on the cumulative amount of undistributed retained earnings since January 1, 2008.

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:

The tax effects of temporary differences that give rise to the Company's net deferred tax assets as of March 31, 2017 and 2016 are as follows:

NOTE 11 - STOCKHOLDERS' EQUITY

 

Stock Issued for compensation and service

On October 19, 2015, in accordance with the Company's agreement with an independent director, the Company issued 20,000 shares of common stock to one independent director, which were valued at $10,000 based on the quoted market price at issuance.

 

On April 19, 2016, in accordance with the 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 market price at issuance date.

On March 10, 2017, in accordance with the Company's service agreement with an investor relations firm, the Company issued 25,000 shares of common stock to the firm for the services provided, which were valued at $11,500 based on the quoted market price at issuance date.

Noncontrolling interest

On March 18, 2017, the Company entered into an Acquisition Agreement on Acer Truncatum Industrial Project (the "Agreement") with Shandong Yongchuntang.  Pursuant to the Agreement, the Company agreed to transfer 3% equity of Shandong Spring in exchange for tangible and intangible assets related to the Acer Truncatum Industrial Project (the "Project"), which was owned by Shandong Yongchuntang. The assets acquired include research equipment, a patent on the refinery process of the Acer Truncatum's seed oils, a trademark with the name of "Bao Feng San Yi", and some relevant certifications issued to Shandong Yongchuntang.  (See NOTE 7).

Statutory Reserve

 

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

 

The Company appropriated nil to the statutory reserve for the years ended March 31, 2017 and 2016, respectively.

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 is being amortized over ten months period.  For the years ended March 31, 2017 and 2016, the amortization of stock-based compensation expense was $101,026 and $428,074, respectively. As of March 31, 2017, 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 for the years ended March 31, 2017 and 2016 is presented below:  

NOTE 12 - RELATED PARTY TRANSACTIONS AND BALANCES

Balances:

(i)	Security deposit - related party:

 

On January 4, 2017, the Company signed a supplemental agreement with Shandong Yongchuntang to make security deposit of $1,449,422. The amount is non-interest bearing and not secured. (See Note 8.)

(ii)	Amounts due to related party:

Trade related balance pertains to payable in respect of purchase of healthcare products from Shandong Yongchuntang. (See Note 13.)

Transactions:

(i)	Acquisition of assets

On March 18, 2017, 3% equity of Shandong Spring was transferred to Shandong Yongchuntang in exchange for tangible and intangible assets related to Acer Truncatum Industrial Project. (See Note 7 and Note 11.)

(ii)	Sales to related party

During the year ended March 31, 2017, the Company sold acer truncatum oil product to Shandong Yongchuntang for $134,413.

Contingency:

The Company is authorized by Shandong Yongchuntang to sell Shandong Yongchuntang's products using the direct-sales license issued to Shandong Yongchuntang.  As a condition for using the direct-sales license, the Company needs to make 20% sales increase each year based on the 95% of sales of the year 2014.  If the Company cannot meet this sales target in any year from April 1, 2017 to June 30, 2020, the Company needs to pay approximately $1.4 million as an annual fee for using the direct-sales license.  There is risk that the Company may fail to meet the sales target and may need to pay approximate $1.4 million in the subsequent years.

 

NOTE 13 - MAJOR CUSTOMERS AND VENDORS

The Company sold products mostly through ten distributors during the years ended March 31, 2017 and 2016. Sales to four distributors represented 18%, 13%, 12%, and 11% of total sales for the year ended March 31, 2017. Sales to two distributors represented 26% and 21% of total sales for the year ended March 31, 2016.

The Company sold 14 and 16 products during the years ended March 31, 2017 and 2016. Sales of three products represented 44%, 19%, and 14% of total sales for the year ended March 31, 2017.  Sales of three products represented 56%, 12%, and 10% of total sales for the year ended March 31, 2016.

 

The Company purchase products from Shandong Yongchuntang according to the purchase contract signed between the Company and Shandong Yongchuntang. Pursuant to the two year contract signed on February 26, 2015, the Company can purchase 10 products from Shandong Yongchuntang at fixed prices.  On June 25, 2015, the Company made an amendment to the two year contract.  Pursuant to the amended contract, the Company no longer purchases the 10 products included in the contract signed on February 26, 2015 and agreed to purchase 4 new products at fixed prices without changes in other terms of the previous contract.  On February 20, 2017, the Company renewed the purchase contract with Shandong Yongchuntang for a term of one year ending on February 25, 2018.  Pursuant to the renewed one year contract, the Company no longer purchases the 4 products included in the amended contract signed on June 25, 2015 and agreed to purchase 9 new products from Shandong Yongchuntang at fixed prices. Total purchases from Shandong Yongchuntang represented 36% and 35% of our total purchases during the years ended March 31, 2017 and 2016, respectively. The revenue from sale of products purchased from Shandong Yongchuntang represented 36% and 34% of total revenue for the years ended March 31, 2017 and 2016, respectively. The purchases from three other vendors represented 24%, 15%, and 12% of the Company's total purchases for the year ended March 31, 2017. The purchases from two other vendors represented 31% and 19% of the Company's total purchases for the year ended March 31, 2016.

NOTE 14 – FUTURE MINIMUM LEASE PAYMENTS

 

As of March 31, 2017, future minimum lease payments under the operating lease pursuant to the four Farmland Leasing Agreements were as follows:

The lease of Zhongce No.4 Village farmland was terminated by the lessor on April 1, 2017. Therefore, there are no more future payments for the canceled lease of Zhongce No.4 Village farmland. (See Note 15.)

 

NOTE 15 – SUBSEQUENT EVENTS

On April 1, 2017, the Company entered an agreement with Zhongce No.4 Village to terminate the lease for the 200 Mu farmland because the parcel of farmland was recalled by local government for building a new urban district. Base on the agreement, the Company will (1) receive the refund of all the remaining prepaid lease payment of approximately $55,000 (2) receive a compensation of approximately $348,000 from the government for the early termination of the lease; (3) the Company can sell all of the acer truncatum bunge plants in this parcel of farmland.

On May 1, 2017, the Company signed two contracts with the third parties to sell all of the plants from the farmland for approximately $2 million. The total capitalized cost of the acer truncatum bunge planting in Zhongce No.4 Village farmland was approximately $1,490,000 as of March 31, 2017. In addition, the Company incurred approximately $238,000 expense to pack the plants for sale. The estimated net income from sale of acer truncatum bunge plants is approximately $272,000.

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, 2017, 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, 2017, 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.

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 26, 2017.

 

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.

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.

        

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, 2017.

 

ITEM 11.   EXECUTIVE COMPENSATION DISCUSSION AND ANALYSIS

 

Background and Compensation Philosophy

 

Our Compensation Committee consists of Robert J. Fanella, and Zhang Wengao, both 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, 2017 was RMB300,000 (USD44,585) and RMB200,000 (USD29,723) respectively. All such amounts were paid in cash. The base salary reflects each executive's skill set and the market value of that skillset as determined by our Board of Directors and/or our executive officers.

 

Bonuses

        

Equity Awards

 

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, 2017 exceeded $100,000.

 

		Fiscal Year		Salary				Bonus				Stock Awards				Option Awards				Other Compensation
Yan Tinghe, CEO		2017		$	44,585				0				0				0				0
		2016		$	49,019				0				0				0				0
		2015		$	49,019				0				0				0				0
Chuanmin Li, CFO		2017		$	29,723				0				0				0				0
		2016		$	32,679				0				0				0				0
		2015		$	32,679				0				0				0				0

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

 

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.

 

Name and Address of Beneficial Owner (1)		Amount and Nature of Beneficial Ownership (2)				Percentage of Class
Yan Tinghe			9,653,689	(3)			32.40	%
Zhang Jirui			1,427,782				4.77	%
Robert J. Fanella			300,595				1.01	%
Zhang Wengao			12,500				*
All officers and directors as a group (6 persons)			11,394,566	(3)			38.25	%

* 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, Zhang Wengao, and Dong Li.

 

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Audit Fees

 

PARITZ & COMPANY, P.A. billed $100,000 and $100,000 to the Company during fiscal year ending March 31, 2017 and 2016 for assurance and related services that are reasonably related to the performance of the fiscal 2017 and fiscal 2016 audits.

 

PART IV