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EX-32 - SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICE - SPRING PHARMACEUTICAL GROUP, INC.exh32.htm
EX-31.2 - RULE 13A-14(A)/ 15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - SPRING PHARMACEUTICAL GROUP, INC.exh31_2.htm
EX-31.1 - RULE 13A-14(A)/ 15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - SPRING PHARMACEUTICAL GROUP, INC.exh31_1.htm

UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C.
20549
 
FORM 10-Q
 
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                    
 
Commission file number: 0-53600
 
CHINA YCT INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
65-2954561
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
c/o Shandong Spring Pharmaceutical Co., Ltd Economic Development Zone.
Gucheng Road Sishui County Shandong Province PR China 273200
(Address of principal executive offices)
(Zip Code)
 
Issuer's telephone number: 406-282-3188
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No
 
The number of shares outstanding of the issuer's common stock on August 11, 2017 was 29,789,168.

 
CHINA YCT INTERNATIONAL GROUP, INC.

Table of Contents
 
 
Page
 
 
Consolidated Balance Sheets as of June 30, 2017 and March 31, 2017 (Unaudited)
F1
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended June 30, 2017 and 2016 (Unaudited)
F2
 
 
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2017 and 2016 (Unaudited)
F3
 
 
Notes to Consolidated Financial Statements (Unaudited)
F4-F9
 



CHINA YCT INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
  JUNE 30,
2017
    MARCH 31,
2017
 
 
           
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
14,892,871
   
$
10,308,622
 
Accounts receivable
   
63,254
     
1,134,967
 
Inventories
   
3,241,402
     
5,483,040
 
Purchase deposit to related party
   
1,318,791
     
-
 
Purchase deposit to vendors
   
-
     
650,790
 
Prepaid leases – current portion
   
869,914
     
900,547
 
Total current assets
   
20,386,232
     
18,477,966
 
                 
Prepaid leases
   
1,066,180
     
1,265,252
 
Development cost of acer truncatum bunge planting
   
42,531,408
     
42,055,972
 
Plant, property, and equipment, net
   
16,568,367
     
14,487,135
 
Intangible assets, net
   
11,951,219
     
12,042,758
 
Deferred tax assets
   
348,585
     
508,521
 
Security deposit to related party
   
1,476,145
     
1,449,422
 
Total assets
 
$
94,328,136
   
$
90,287,026
 
 
               
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Accounts payable to related party
 
$
-
   
$
706,048
 
Accounts payable and other accrued expenses
   
297,206
     
251,307
 
Taxes payable
   
1,146,320
     
2,028,190
 
Total current liabilities
   
1,443,526
     
2,985,545
 
                 
Stockholders' Equity
               
Preferred stock, par value $500 per share; 45 shares authorized, issued and outstanding at June 30, 2017 and March 31, 2017
   
22,500
     
22,500
 
Common stock, par value $0.001 per share; 100,000,000 shares authorized;  29,789,168 shares issued and outstanding at June 30, 2017 and March 31, 2017
   
29,789
     
29,789
 
Additional paid-in capital
   
4,322,838
     
4,322,838
 
Statutory reserve
   
1,828,504
     
1,828,504
 
Retained earnings
   
86,871,403
     
83,061,604
 
Accumulated other comprehensive loss
   
(2,779,830
)
   
(4,386,845
)
Total stockholders' equity attributable to the Company
   
90,295,204
     
84,878,390
 
Noncontrolling interest
   
2,589,406
     
2,423,091
 
Total stockholders' equity
   
92,884,610
     
87,301,481
 
Total liabilities and stockholders' equity
 
$
94,328,136
   
$
90,287,026
 
The accompanying notes are an integral part of these consolidated financial statements.
F - 1

CHINA YCT INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
 
THREE MONTHS ENDED
JUNE 30,
 
 
 
2017
   
2016
 
 
           
Sales
 
$
17,134,865
   
$
9,712,495
 
Cost of Goods Sold (including $4,288,935 and $1,743,479 from a related party for the three months ended June 30, 2017 and 2016, respectively)     10,287,148       5,912,261  
Gross profit
   
6,847,717
     
3,800,234
 
Operating expenses
               
Selling expenses
   
1,236,292
     
747,880
 
General and administrative expenses
   
908,405
     
850,357
 
Research and development expenses
   
64,378
     
69,160
 
Total operating expenses
   
2,209,075
     
1,667,397
 
Income from operations
   
4,638,642
     
2,132,837
 
Gain on disposal of acer truncatum bunge plants
   
573,092
     
-
 
Interest income
   
25,103
     
15,422
 
Income before income tax provision
   
5,236,837
     
2,148,259
 
Income tax provision
   
1,309,209
     
572,724
 
Net income
   
3,927,628
     
1,575,535
 
Less: Net income attributable to noncontrolling interest
   
117,829
     
-
 
Net income attributable to the Company
   
3,809,799
     
1,575,535
 
Other comprehensive income (loss):
               
Foreign currency translation adjustment
   
1,655,501
     
(2,085,188
)
Comprehensive income (loss)
   
5,583,129
     
(509,653
)
Less: Comprehensive income attributable to noncontrolling interest
   
166,315
     
-
 
Comprehensive income (loss) attributable to the Company
 
$
5,416,814
   
$
(509,653
)
                 
Earnings per common share
               
Basic and Diluted
 
$
0.13
   
$
0.05
 
 
               
Weighted average number of common shares outstanding
               
Basic and Diluted
   
29,789,168
     
29,755,568
 

 
The accompanying notes are an integral part of these consolidated financial statements.
F - 2


CHINA YCT INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
THREE MONTHS ENDED
JUNE 30,
 
 
 
2017
   
2016
 
Cash Flows From Operating Activities:
           
Net income
 
$
3,927,628
   
$
1,575,535
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of plant, property and equipment
   
287,248
     
176,525
 
Amortization of intangible assets
   
309,948
     
282,974
 
Amortization of prepaid leases
   
210,588
     
237,807
 
Issuance of common shares for services
   
-
     
10,609
 
Stock-based compensation expenses
   
-
     
101,026
 
Deferred taxes
   
167,355
     
(18,630
)
Gain on disposal of acer truncatum bunge plants
   
(573,092
)
   
-
 
Changes in operating assets and liabilities:
               
Advance payment to vendors
   
655,130
     
-
 
Inventory
   
2,315,657
     
(12,762
)
Accounts receivable
   
1,080,011
     
88,876
 
Cancellation of lease
   
55,932
     
-
 
Taxes payable
   
(908,641
)
   
195,296
 
Purchase deposit and accounts payable to related party, net
   
(2,014,308
)
   
109,922
 
Accounts payable and other accrued expenses
   
40,790
     
(45,457
)
Net cash provided by operating activities
   
5,554,246
     
2,701,721
 
                 
Cash Flows From Investing Activities:
               
Acquisition of property, plant and equipment
   
(2,080,416
)
   
(639,877
)
Proceeds from disposal of acer truncatum bunge plants
   
2,084,706
     
-
 
Development cost of acer truncatum bunge planting
   
(1,215,128
)
   
(474,608
)
Net cash used in investing activities
   
(1,210,838
)
   
(1,114,485
)
 
               
Effect of exchange rate changes on cash and cash equivalents
   
240,841
     
(219,655
)
Net increase in cash and cash equivalents
   
4,584,249
     
1,367,581
 
Cash and cash equivalents at beginning of period
   
10,308,622
     
7,639,084
 
Cash and cash equivalents at end of period
 
$
14,892,871
   
$
9,006,665
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the periods for:
               
Interest
 
$
-
   
$
-
 
Income taxes
 
$
1,389,829
   
$
531,488
 

 
The accompanying notes are an integral part of these consolidated financial statements.
F - 3

CHINA YCT INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

China YCT International Group, Inc. ("China YCT") was incorporated in the State of Florida, in the United States of America (the "USA") in January 1989, and reincorporated in the State of Delaware on April 4, 2007.  China YCT, through its 100% owned subsidiary Landway Nano Bio-Tech, Inc. ("Landway Nano"), incorporated in Delaware, owns 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 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of June 30, 2017 and the results of operations and cash flows for the periods ended June 30, 2017 and 2016. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three months ended June 30, 2017 are not necessarily indicative of the results to be expected for any subsequent periods or for the entire year ending March 31, 2018. The balance sheet on March 31, 2017 has been derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended March 31, 2017 as included in our Annual Report on Form 10-K. 

Certain amounts have been reclassified to conform to current year presentation.
Principles of consolidation

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.

F - 4

Foreign currency translation
 
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:
 
June 30
 
June 30
 
 
2017
 
2016
 
Period End Exchange Rate (RMB/USD)
   
6.7744
     
6.6312
 
Average Period Exchange Rate (RMB/USD)
   
6.8536
     
6.5317
 

 Recent accounting pronouncements

The Company's management has evaluated all the recently issued accounting pronouncements during the quarter ended June 30, 2017 and does not believe that they will have a material effect on the Company's consolidated financial position and results of operations.
 
NOTE 3 - INVENTORIES
 
The components of inventories were as follows: 

 
June 30,
   
March 31,
 
 
 
2017
   
2017
 
Raw materials
 
$
1,196,558
   
$
1,276,254
 
Packaging materials
   
418,148
     
476,803
 
Work-in-process
   
683,124
     
1,373,919
 
Finished goods
   
943,572
     
2,356,064
 
Total inventories
 
$
3,241,402
   
$
5,483,040
 

F - 5

NOTE 4 – PLANT, PROPERTY, AND EQUIPMENT, NET
 
The components of property and equipment were as follows:

 
June 30,
   
March 31,
 
 
 
2017
   
2017
 
Machinery and equipment
 
$
3,336,425
   
$
2,254,813
 
Office equipment
   
713,754
     
717,259
 
Building
   
12,629,964
     
12,401,320
 
Leasehold improvements
   
3,936,159
     
2,803,052
 
Subtotal
   
20,616,302
     
18,176,444
 
Less: Accumulated Depreciation & Amortization
   
(4,047,935
)
   
(3,689,309
)
Total plant, property and equipment, net
 
$
16,568,367
   
$
14,487,135
 

 
The depreciation and amortization expense for the three months ended June 30, 2017 and 2016 was $287,248 and $176,525, respectively.

 
NOTE 5 – DEVELOPMENT OF ACER TRUNCATUM BUNGE

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.

Since July 2013, the Company has developed the acer truncatum bunge planting bases. As of March 31, 2017, the Company had completed planting of 6,080 Mu (1Mu is equal to approximately 666.67 square meters) at four leased farmlands. 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 received the refund of all the remaining prepaid lease payment of approximately $56,000 (RMB383,333) and a compensation of approximately $350,000 (RMB2,400,000) from the government for the early termination of the lease.  On May 1, 2017, the Company signed two contracts with the third parties to sell all of the plants from the farmland for approximately $1,974,000 (RMB13,527,000). The total capitalized cost of the acer truncatum bunge planting in Zhongce No.4 Village farmland was approximately $1,512,000 (RMB10,360,000). In addition, the Company incurred approximately $239,000 (RMB1,639,260) expense to pack the plants for sale. The gain from disposal of acer truncatum bunge plants was approximately $573,000. As a result of the lease termination, the Company's acer truncatum bunge planting acreage has reduced to 5,880 Mu at June 30, 2017 from 6,080 Mu at March 31, 2017.
F - 6

NOTE 6 - TAXES PAYABLE
 
Taxes payable at June 30, 2017 and March 31, 2017 were as follows:

 
As of
 
 
June 30,
 
March 31,
 
 
2017
 
2017
 
Corporate income tax
 
$
1,156,996
   
$
1,382,382
 
Value-added tax
   
(10,676
)
   
576,086
 
Other tax and fees
   
-
     
69,722
 
Total tax payable
 
$
1,146,320
   
$
2,028,190
 

 
NOTE 7 - 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 three months ended June 30, 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 subsidiaries are governed by the Income Tax Law of the PRC concerning the privately run and foreign invested enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

The 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 $8,687,140 and $8,306,160 as of June 30, 2017 and March 31, 2017, 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.
F - 7

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

Three Months Ended
 
 
June 30,
 
 
2017
 
2016
 
         
U.S. Statutory rate
 
$
1,832,893
   
$
751,891
 
Tax rate difference between China and U.S.
   
(523,684
)
   
(214,826
)
Permanent difference
   
-
     
35,659
 
Effective tax rate
 
$
1,309,209
   
$
572,724
 

 
The provisions for income taxes are summarized as follows: 

Three Months Ended
 
 
June 30,
 
 
2017
 
2016
 
Current
 
$
1,141,854
   
$
591,354
 
Deferred
   
167,355
     
(18,630
)
Total
 
$
1,309,209
   
$
572,724
 

 
NOTE 8 - RELATED PARTY TRANSACTIONS AND BALANCES

Balances:

(i)
Security deposit to related party:
The security deposit - related party of $1,476,145 represents the deposit paid to Shandong Yongchuntang Bioengineering Co. Ltd. ("Shandong Yongchuntang") on January 4, 2017 for using the direct-sales license issued to Shandong Yongchuntang. The amount is non-interest bearing and not secured. Shandong Yongchuntang owns 3% equity of Shandong Spring.

(ii)
Trade related balance with related party:

On June 30, 2017, purchase deposit to related party of $1,318,791 pertains to purchase deposit paid in respect of purchase of healthcare products from Shandong Yongchuntang.

On March 31, 2017, accounts payable balance of $706,048 pertains to payable in respect of purchase of healthcare products from Shandong Yongchuntang.

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.
F - 8

NOTE 9 - MAJOR CUSTOMERS AND VENDORS
 
The Company sold products through ten distributors during the three months ended June 30, 2017 and 2016. Sales to four distributors represented 19%, 16%, 11% and 11% of total sales for the three months ended June 30, 2017. Sales to three distributors represented 23%, 16%, and 14% of total sales for the three months ended June 30, 2016.

The Company sold 10 and 6 products during the three months ended June 30, 2017 and 2016, respectively. Sales of four products represented 37%, 17%, 11%, and 11% of total sales for the three months ended June 30, 2017.  Sales of three products represented 53%, 15%, and 14% of total sales for the three months ended June 30, 2016. 

The Company purchases its products from Shandong Yongchuntang according to the purchase contract signed between the Company and Shandong Yongchuntang. Pursuant to the renewed one year contract dated February 20, 2017, the Company agreed to purchase 9 products from Shandong Yongchuntang at fixed prices. Total purchases from Shandong YCT represented 54% and 33% of our total purchases during the three months ended June 30, 2017 and 2016, respectively. The purchases from two other vendors represented 19% and 14% of the Company's total purchases for the three months ended June 30, 2017. The purchases from three other vendors represented 23%, 18%, and 14% of the Company's total purchases for the three months ended June 30, 2016.

NOTE 10 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events that have occurred after the date of the balance sheet through the date of issuance of these consolidated financial statements and determined that no subsequent event requires recognition or disclosure to the consolidated financial statements.
F - 9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
 
 You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K. This discussion contains forward-looking statements. These forward-looking statements are based on information available at the time the statements are made and/or management's belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein and in other filings made by the company with the Securities and Exchange Commission. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date this Form 10-Q is filed with the Securities and Exchange Commission.
 
Overview
 
China YCT International Group, Inc. ("China YCT") was incorporated in the State of Florida in January 1989, and reincorporated in the State of Delaware on April 4, 2007. China YCT principally operates through its wholly-owned subsidiary, Landway Nano Bio-Tech, Inc. ("Landway Nano"), incorporated in Delaware, which, in turn, owns 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.
1

Results of Operations
 
The following table sets forth information from our statements of comprehensive income (loss) for the three months ended June 30, 2017 and 2016, in dollars:

   
Three Months Ended
             
   
June 30,
    $    
%
 
   
2017
   
2016
   
Change
   
Change
 
Sales
   
17,134,865
     
9,712,495
     
7,422,370
     
76.4
%
Cost of Goods sold
   
(10,287,148
)
   
(5,912,261
)
   
(4,374,887
)
   
74.0
%
Gross Profit
   
6,847,717
     
3,800,234
     
3,047,483
     
80.2
%
Operating Expenses
   
(2,209,075
)
   
(1,667,397
)
   
(541,678
)
   
32.5
%
Operating Income
   
4,638,642
     
2,132,837
     
2,505,805
     
117.5
%
Interest Income
   
25,103
     
15,422
     
9,681
     
62.8
%
Gain on Disposal of Acer Truncatum Bunge Plants
   
573,092
     
-
     
573,092
     
100.0
%
Income Tax Provision
   
(1,309,209
)
   
(572,724
)
   
(736,485
)
   
128.6
%
Net Income
   
3,927,628
     
1,575,535
     
2,352,093
     
149.3
%
Comprehensive Income (Loss)
   
5,583,129
     
(509,653
)
   
6,092,782
     
(1,195.5
)%
 
Revenue
 
During the three months ended June 30, 2017, we realized $17,134,865 in revenue, representing an increase of 76.4% or $7,422,370 as compared to $9,712,495 for the same period in 2016.  The increase in revenue in RMB was 85.1% as compared to the three months ended June 30, 2016, but 8.7% of the increase was offset by fewer USD converted from RMB due to a significant RMB depreciation occurred in the three months ended June 30, 2017, compared with the same period in 2016. The total 85.1% revenue increase in RMB was due to the increased sales of health care products, acer truncatum bunge seed oil, and Huoliyuan Capsule.

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. 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 agreed to purchase 9 new products from Shandong Yongchuntang at fixed prices. During the three months ended June 30, 2017, 45.8% of our total revenue was generated as the distributor of Shandong Yongchuntang, compared to 32.8% during the three months ended June 30, 2016.  For the three months ended June 30, 2017, our revenue from sales of the health care products was $7,845,001, representing an increase of 146.4% or $4,660,662 as compared to $3,184,339 for the same period in 2016.  The revenue from sales of health care products measured in RMB was increased by 158.5% but was offset by 12.1% decrease due to fewer USD converted from RMB because a significant RMB depreciation occurred during the three months ended June 30, 2017 compared with the same period in 2016. The significant increase in sales of the health care products in RMB was primarily due to the growth of our customer basis and the internet direct-sales.
2

The sales of Huoliyuan Capsule accounted for 37.3% of our revenue during the three months ended June 30, 2017, compared to 52.7% during the three months ended June 30, 2016. The decrease in the sales of Huoliyuan Capsule over our total revenue is primarily due to the sales growth of Huoliyuan Capsule being slower than the sales growth of health care products and acer truncatum bunge seed oil. The sales of the Huoliyuan Capsule during the three months ended June 30, 2017 were $6,395,042, an increase of 24.9% or $1,276,023 as compared to the three months ended June 30, 2016. The revenue from sales of  Huoliyuan Capsule denominated in RMB was increased by 31.1%, but was offset by 6.2% decrease due to fewer USD converted from RMB because a significant RMB depreciation occurred during the three months ended June 30, 2017 compared with the same period in 2016. The increase in sales of Huoliyuan Capsule in RMB was primarily due to the stabilization of the market competition.

Since July 2015, the Company has produced Acer truncatum Bunge Seed Oil and sold the product to customers through its distributors.  The Acer truncatum Bunge Seed Oil was extracted from the acer truncatum pods that were purchased from third party vendors.  Our self-grown acer truncatum pods will not be ready to be used for production until approximately the fall of 2018. During the three months ended June 30, 2017, 16.9% of our total revenue was generated from the sales of acer truncatum oil products, compared to 14.5% during the same period in 2016. During the three months ended June 30, 2017, the sales of acer truncatum bunge seed oil was $2,894,822, representing an increase of 105.4% or $1,485,685 compared to $1,409,137 for the same period in 2016. 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 three months ended June 30, 2017 and 2016:

   
For the Three Months Ended June 30,
 
   
2017
   
2016
 
Health care supplements
   
7,845,001
     
45.8
%
   
3,184,339
     
32.8
%
Drugs (Huoliyuan Capsule)
   
6,395,042
     
37.3
%
   
5,119,019
     
52.7
%
Acer truncatum oil
   
2,894,822
     
16.9
%
   
1,409,137
     
14.5
%
Total
   
17,134,865
     
100
%
   
9,712,495
     
100
%

Cost of Goods Sold
 
Our costs of revenue 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 42.2% and 57.5% of the total cost of goods sold during the three months ended June 30, 2017 and 2016, respectively. The cost of manufacturing acer truncatum bunge seed oil was approximately 15.6% and 12.6% of the total cost of goods sold during the three months ended June 30, 2017 and 2016, respectively.
 
During the three months ended June 30, 2017, our cost of goods sold totaled $10,287,148, representing an increase of $4,374,887 or 74.0% as compared to $5,912,261 during the three months ended June 30, 2016. The cost of goods sold, in RMB, increased by 82.6%, in which 8.6% was offset by fewer USD converted from RMB due to a significant RMB depreciation during the three months ended June 30, 2017 compared with the same period in 2016. The percentages of the costs of goods sold to total revenues decreased slightly from 60.9% for the three months ended June 30, 2016 to 60.0% for the three months ended June 30, 2017.   
3

Gross Profit

Gross profit for the three months ended June 30, 2017 was $6,847,717, an increase of 80.2% or $3,047,483 as compared to the same period for the prior year. The overall gross profit as a percentage of net revenues was approximately 40.0% for the three months ended June 30, 2017, a slight increase from 39.1% for the same period of 2016. The gross profit as percentage of net revenues for the health care products was approximately 44.7% for the three months ended June 30, 2017, a slight increase from 44.4% for the same period of 2016.  The gross profit as percentage of net revenues for Huoliyuan was approximately 32.1% for the three months ended June 30, 2017, decreased from 33.6% for the same period of 2016. The gross profit as percentage of net revenues for acer truncatum bunge seed oil was approximately 44.5% for the three months ended June 30, 2017, decreased from 47.2% for the same period of 2016. The lower gross profit as percentage of net revenue for Huoliyuan during the three months ended June 30, 2017 was due to the increased raw material and manufacturing costs. The lower gross profit as percentage of net revenue for the acer truncatum bunge seed oil during the three months ended June 30, 2017 was primarily due to the increased raw material cost.

The comparison of the gross profits for the three months ended June 30, 2017 and 2016 as follows:

   
June 30,
2017
   
Gross
Profit
Margin
   
June 30,
2016
   
Gross
Profit
Margin
   
Change
in $
   
Variance
 
Health care supplements
   
3,508,114
     
44.7
%
   
1,414,571
     
44.4
%
   
2,093,543
     
148.0
%
Drugs (Huoliyuan Capsule)
   
2,051,767
     
32.1
%
   
1,720,074
     
33.6
%
   
331,693
     
19.3
%
Acer truncatum oil
   
1,287,836
     
44.5
%
   
665,589
     
47.2
%
   
622,247
     
93.5
%
Total
   
6,847,717
     
40.0
%
   
3,800,234
     
39.1
%
   
3,047,483
     
80.2
%
Research and Development Expenses
 
Our R&D expenses for the three months ended June 30, 2017 were $64,378 or approximate 0.4% of total corresponding revenue, a decrease of $4,782 or 6.9%, as compared to $69,160 or approximately 0.7% of total corresponding revenue for the three months ended June 30, 2016.  
 
Our long-term goal is to utilize advanced biological technology to refine and extract the beneficial compounds in plants that have traditionally been known to have medicinal benefits, primarily gingko and acer trunkatum bunge plants. As of June 30, 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 the three months ended June 30, 2017 were $1,236,292 or 7.2% of our total revenue for the period, representing slight decrease on the percentage of total revenue from 7.7% for the prior year's quarter ended June 30, 2016. Our selling expenses for the three months ended June 30, 2017 increased by 65.3% or $488,412 as compared to the same period in the prior year. There was 73.5% increase in selling expenses in RMB but was offset by 8.2% due to depreciation in RMB occurred during the three months ended June 30, 2017, compared with the prior year's quarter ended June 30, 2016. The increase in selling expenses was primarily due to the increase in shipping cost and sales commission as a result of increased sales.
4

Our G&A expenses for the three months ended June 30, 2017 were $908,405 or 5.3% of our total revenue for the period, representing a decrease on the percentage of total revenue from 8.8% for the prior year's quarter ended June 30, 2016.  Our G&A expenses for the three months ended June 30, 2017 increased by 6.8% or $58,048 as compared to the same period in the prior year.  There was 12.1% increase in G&A expenses in RMB but was offset by 5.3% due to depreciation in RMB occurred during the three months ended June 30, 2017, compared with the prior year's quarter ended June 30, 2016. The increase in G&A expenses was primarily due to the increase in depreciation and amortization expenses.

Net Income

As a result of above, during the three months ended June 30, 2017, we realized net income of $3,927,628, representing a 149.3% or $2,352,093 increase, compared to $1,575,535 during the three months ended June 30, 2016. The increase was mainly due to the higher revenue from sales of all of our products and the gain from disposal of acer truncatum bunge plants.

Income Taxes

Income tax expense increased by $736,485 during the three months ended June 30, 2017, as compared to the prior quarter ended June 30, 2016, as a result of the increase in income from operation and the gain from disposal of acer truncatum bunge plants.

Comprehensive Income (Loss)
 
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 "Accumulated other comprehensive income (loss)," since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the three months ended June 30, 2017, the effect of converting our financial results to Dollars was income of $1,655,501 to our other comprehensive income, as compared to a loss of $2,085,188 during the three months ended June 30, 2016 as a result of the currency exchange rate fluctuation.
 
Noncontrolling interest

Since March 18, 2017, Shandong Yongchuntang has become a 3% shareholder of Shandong Spring.  During the three months ended June 30, 2017, $166,315 of comprehensive income was attributable to Shandong Yongchuntang.

Liquidity and Capital Resources
 
Our principal sources of liquidity were generated from our operations. As of June 30, 2017, we had $18,942,706 in working capital, an increase of $3,450,285 or 22.3% as compared to $15,492,421 in working capital 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 $5,554,246 during the three months ended June 30, 2017. We had accounts receivable of $63,254 outstanding as of June 30, 2017. We expect our marketing activities to continue to help generate positive cash flow.  The operations of our own manufacturing since fiscal year 2010 and the development of our own acer truncatum bunge planting bases have put some pressure on our cash flow. We may be required to seek additional capital and reduce certain spending as needed on an on-going basis. There can be no assurance that any additional financing will be available on acceptable terms.
5

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:

   
For the Three Months
Ended June 30,
             
   
2017
   
2016
   
Change in $
   
Change in %
 
Net cash provided by operating activities
 
$
5,554,246
   
$
2,701,721
     
2,852,525
     
105.6
%
Net cash used in investing activities
 
$
(1,210,838
)
 
$
(1,114,485
)
   
(96,353
)
   
8.6
%
Effect of exchange rate change on cash and cash equivalents
 
$
240,841
   
$
(219,655
)
   
460,496
     
(209.6
)%
Net increase (decrease) in cash and cash equivalents
 
$
4,584,249
   
$
1,367,581
     
3,216,668
     
235.2
%
Cash and cash equivalents, beginning balance
 
$
10,308,622
   
$
7,639,084
     
2,669,538
     
34.9
%
Cash and cash equivalents, ending balance
 
$
14,892,871
   
$
9,006,665
     
5,886,206
     
65.4
%

Operating Activities
 
Net cash provided by operating activities was $5,554,246 for the three months ended June 30, 2017, which was an increase of 105.6% or $2,852,525 from the $2,701,721 net cash provided by operating activities for the same period of the prior year. The increase was primarily due to the increase from cash inflow from sales revenue and accounts receivable, and the decrease from cash out flow from inventory.

Investing Activities
 
During the three months ended June 30, 2017, our net cash used in investing activities was $1,210,838, as compared to $1,114,485 of net cash used for the three months ended June 30, 2016. The cash used in investing activities for the three months ended June 30, 2017 of $1,210,838 was primarily attributable to the acquisition of property, plant and equipment of $2,080,416, and capital expenditures of $1,215,128 in acer truncatum bunge planting, and offsetting by cash receipt of $2,084,706 from disposal of acer truncatum bunge plants.
 
Financing Activities
 
No net cash was generated or used by financing activities over the three months ended June 30, 2017 and 2016.
6

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
A smaller reporting company is not required to provide the information required by this Item.
 
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The term "disclosure controls and procedures" (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within required time periods. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q (the "Evaluation Date"). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were not effective.
 
Changes in Internal Controls
 
The term "internal control over financial reporting" (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2017, and they have concluded that there was no change to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II.
OTHER INFORMATION
 
Item 1. Legal Proceedings
 
There are no material pending legal proceedings to which the Company is a party.
 
Item 1A. Risk Factors
 
A smaller reporting company is not required to provide the information required by this Item.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Not Applicable

Item 3. Defaults Upon Senior Securities.
 
None
7

Item 4. Removed and Reserved
 
Item 5. Other Information
 
None
 
Item 6. Exhibits

 
31.1
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
 
 
31.2
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
 
 
32
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
 
 
101.INS
XBRL Instance Document.
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
 

8


SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
CHINA YCT INTERNATIONAL GROUP, LTD.
 
Date: August 14, 2017

/s/ Yan Tinghe
Yan Tinghe Chief Executive Officer (Principal Executive Officer)

 
/s/ Li Chuanmin
Li Chuanmin Chief Financial Officer (Principal Financial Officer)
 
 
9