CHINA YCT
INTERNATIONAL GROUP, INC.
CONDENSED
CONSOLIDATED BALANCE SHEET
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UNIT: USD$
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June 30, 2014
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March 31,
2014
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Assets
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Current assets:
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Cash and cash equivalent
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$
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20,484,189
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$
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18,624,644
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Accounts receivable
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-
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42,049
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Prepaid lease - short term
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359,698
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359,738
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Inventory
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1,457,100
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1,592,703
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Total current assets
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22,300,987
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20,619,134
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Prepaid lease - long term
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1,107,707
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1,197,768
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Development cost of acer truncatum bunge planting
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15,931,478
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15,333,951
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Plant, property, equipment, and leasehold improvement, net
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13,238,296
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13,384,995
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Construction in progress
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-
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-
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Intangible assets, net
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16,355,234
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16,684,032
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Total assets
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68,933,702
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67,219,880
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Liabilities and Stockholders’ Equity (Deficit)
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Liabilities:
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Current liabilities:
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Tax payable
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617,784
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816,579
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Other payable
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8,325
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29,552
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Total current liabilities
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626,109
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846,131
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Total liabilities
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626,109
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846,131
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Stockholders’ Equity
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Preferred stock, par value $500.00 per share; 45 shares authorized and issued at September 30, 2013 and March 31, 2012
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22,500
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22,500
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Common stock, par value $0.001 per share; 500,000,000 and 100,000,000 shares authorized,
29,700,690
and 29,663,023 shares issued and outstanding at June 30, 2014 and March 31, 2014, respectively
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29,701
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29,663
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Additional paid-in capital
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4,210,407
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4,180,095
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Statutory reserve
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1,828,504
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1,828,504
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Retained earnings
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57,585,308
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55,676,059
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Accumulated other comprehensive income
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4,631,173
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4,636,928
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Total stockholders’ equity
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68,307,593
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66,373,749
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Total liabilities and stockholders’ equity
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$
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68,933,702
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$
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67,219,880
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The accompanying notes are an integral
part of these financial statements.
CHINA
YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
UNIT: USD$
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FOR THE THREE MONTHS ENDED
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June 30, 2014
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June 30, 2013
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Sales Revenue
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$
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8,179,972
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$
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8,220,587
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Cost of Goods Sold
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4,238,770
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3,976,310
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Gross Profit
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3,941,202
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4,244,277
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Selling Expenses
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566,878
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543,686
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G&A Expense
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701,580
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579,908
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R&D Expenses
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251,265
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587,259
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Total expense
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1,519,723
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1,710,853
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Income from operation
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2,421,479
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2,533,424
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Interest income (Expense)
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32,026
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28,732
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Profit before tax
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2,453,505
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2,562,156
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Income tax
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544,256
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640,539
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Net income
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1,909,249
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1,921,617
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Foreign currency translation adjustment
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(5,755
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)
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609,083
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Comprehensive income
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$
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1,903,494
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$
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2,530,700
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Basic and diluted income per common share
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Basic and Diluted
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0.06
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0.06
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Weighted average number of common shares outstanding
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Basic and Diluted
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29,671,265
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29,663,023
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The accompanying notes are an integral
part of these financial statements.
CHINA
YCT INTERNATIONAL GROUP, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
UNIT:
USD$
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Preferred
Stock Series A
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Common shares
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Additional
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Statutory
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Accumulated
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Retained
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Shares
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Amount
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Shares
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Amount
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paid-in capital
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Reserve
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OCI
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Earnings
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Total
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Balance - March 31, 2013
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45
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$
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22,500
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29,663,023
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$
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29,663
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$
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4,180,095
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$
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956,633
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$
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3,794,929
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$
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48,426,955
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$
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57,410,775
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Net income for the year
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1,921,617
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1,921,617
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Foreign currency translation adjustment
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609,083
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609,083
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Balance - June 30, 2013
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45
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$
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22,500
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29,663,023
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$
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29,663
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$
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4,180,095
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$
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956,633
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$
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4,404,012
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$
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50,348,572
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$
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59,941,475
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Balance - March 31, 2014
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45
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$
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22,500
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29,663,023
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$
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29,663
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$
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4,180,095
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$
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1,828,504
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$
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4,636,928
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$
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55,676,059
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$
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66,373,749
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Net income for the year
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1,909,249
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1,939,599
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Common stock issued for services
rendered
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37,666
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$
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38
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$
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30,312
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30,350
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Foreign currency translation adjustment
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(5,755
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)
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(5,755
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)
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Balance - June 30, 2014
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45
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$
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22,500
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29,700,690
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$
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29,701
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$
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4,210,407
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$
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1,828,504
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$
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4,631,173
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$
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57,585,308
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$
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68,307,593
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The accompanying notes are an integral
part of these financial statements.
CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
UNIT: USD$
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THREE MONTHS ENDED
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June 30, 2014
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June 30, 2013
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Cash Flows From Operating Activities:
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Net income
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$
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1,909,249
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$
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1,921,617
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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471,363
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335,123
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Common stock issued for services rendered
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30,350
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-
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Changes in operating assets and liabilities:
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Inventory
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135,603
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(1,842,166
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)
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Prepaid land lease
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90,061
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-
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Accounts receivable
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42,049
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135,238
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Taxes payable
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(198,795
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)
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(462,146
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)
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Accrued expenses and other payables
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(21,228
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)
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(358,530
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)
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Net cash provided by (used in) operating activities
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2,458,652
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(270,864
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)
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Cash flows from investing activities:
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Addition to plant and equipment
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-
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(3,029,360
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)
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Development cost of acer truncatum bunge planting
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(597,527
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)
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-
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Reduction of construction in progress
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-
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220,874
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Prepayment/(deposit) to Jining Tianruitong for purchase of patents
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-
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-
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Net cash provided by (used in) investing activities
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(597,527
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)
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(2,808,486
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)
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Effect of exchange rate changes on cash and cash equivalents
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(1,580
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)
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325,678
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Net increase (decrease) in cash and cash equivalents
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1,859,545
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(2,753,671
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)
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Cash and cash equivalents at beginning of period
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18,624,644
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29,924,188
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Cash and cash equivalents at ending of period
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20,484,189
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$
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27,170,517
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Supplemental disclosures of cash flow information:
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Cash paid during the periods for:
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Interest
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$
|
88
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|
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$
|
128
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Income taxes
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$
|
185,713
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$
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1,651,089
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Non-cash financing activities:
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Stock issued for services
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$
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30,350
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-
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|
The accompanying notes are an integral
part of these financial statements.
NOTE 1 - ORGANIZATION AND PRINCIPAL
ACTIVITIES
China YCT International
Group, Inc. (“China YCT”) was incorporated in the State of Florida, in the United States of America (the “USA”)
in January 1989, and reincorporated in the State of Delaware on April 4, 2007. China YCT, through its 100% owned subsidiary
Landway Nano Bio-Tech, Inc. (“Landway Nano”), incorporated in Delaware, owns 100% of Shandong Spring Pharmaceutical
Co., Ltd. (“Shandong Spring”), incorporated in the People’s Republic of China (“PRC”). China YCT
International Group, Inc. and its subsidiaries are collectively referred to as the “Company”. Shandong Spring is engaged
in the business of developing, manufacturing, and selling its own medicine made primarily from gingko extract, research and development
of new food, healthcare and medicine product based on the acer truncatum bunge, now actively developing the acer truncatum bunge
planting bases, and distributing health care supplement products manufactured by another company in the PRC.
NOTE 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
The consolidated
financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”).
Principles
of consolidation
The consolidated
financial statements include the financial statements of China YCT, Landway Nano and its wholly owned subsidiary, Shandong Spring. All
inter-company transactions and balances are eliminated in consolidation.
Use of
estimates
The preparation
of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results 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.
Cash
and cash equivalents
For the purposes
of the statement of cash flow, the Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Accounts receivable
The Company
recognizes as accounts receivable any products shipped where payments have not been rendered. As of March 31, 2014, the Company
considered all its accounts receivable to be collectable and no provision for doubtful accounts had been made in the consolidated
financial statements. There were no accounts receivable as of June 30, 2014.
Inventory
Inventory is
primarily composed of raw materials and packing materials for manufacturing, work in process, and finished goods. Inventories
are valued at the lower of cost or market with cost determined on a weighted average basis. Management compares the cost of inventory
with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost.
Property
and equipment
Property and
equipment are stated at cost. The cost of an asset comprises its purchase price and any directly attributable costs of bringing
the asset to its present working condition and locations for its intended use. Leasehold improvements are stated at cost and amortized
over the shorter of the useful life of the assets or the length of the lease in accordance to
ASC 840-10-35-6
. Depreciation
and amortization are calculated using the straight-line method over the following useful lives:
Buildings
|
30-35 years
|
Machinery, equipment and automobiles
|
7-15 years
|
Furniture and fixtures
|
7-10 years
|
Leasehold improvements
|
30 years
|
Expenditures
for maintenance and repairs are charged to expense as incurred. Additions, renewals and betterments are capitalized.
Intangible
Assets
All land in
the PRC is owned by the government and cannot be sold to any individual or company. However, the government may grant
a “land use right” for occupying, developing and using land. The Company records land use rights obtained as intangible
assets at cost, which is amortized evenly over the grant period of 50 years.
In March 2010,
the Company purchased one patent from Shandong YCT Corp. The patent is the Company’s exclusive right to use an
aglycone type and purification method of biotransformation in the gingko product manufacturing process for a period of 20 years
from the patent application date. The patent was recorded at cost when purchased, and is being amortized over the shorter
of its remaining legal life, 16.5 years, or its useful life, on a straight-line basis.
In October
2011, two patents were transferred to the Company based on a purchase agreement signed with Jining Tianruitong Technology development
Company, Limited on October 26, 2010; which are “Treatment to ischemic encephalopathy and its preparation method”
(ZL200510045001.9) and “Chinese herbal medicine compound to treat renal insufficiency and its preparation” (ZL200710013301.8).
The patents were recorded at cost when purchased, and are being amortized over the shorter of the remaining legal lives, 13.75
years and 14.95 years, respectively; or their useful lives, on a straight-line basis.
Development
costs of acer truncatum bunge planting
The Company
has started development of the acer truncatum bunge planting bases and completed planting of 2,200Mu (1Mu is equal to approximately
666.67 square meters) as of the three months ended June 30, 2014. The agricultural product (e.g., seeds, oil extract, etc.) derived
from the planting is intended to be the supply for an integrated usage including edible oil, protein, medicine and health care,
tannin extract, industrial chemicals, nectar source, 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 Codification 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
under paragraph 905-360-25-3 shall be depreciated over the estimated useful life of the land development or that of the tree,
vine, or plant. The planting is currently in the development stage with production expected in 2015; therefore, no depreciation
expenses were recognized as of June 30, 2014.
Revenue
recognition
The Company’s
revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104, included in the Codification
as ASC 605,
Revenue Recognition
. Sales revenue is recognized on the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist,
and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded
as customer deposits.
Unearned
revenue
Revenue from
the sale of goods or services is recognized at the time that goods are delivered or services are rendered. Receipts in advance
for goods to be delivered or services to be rendered in a subsequent period are carried forward as unearned revenue.
Impairment
of long-lived assets
The Company reviews and evaluates
the net carrying value of its long-lived assets at least annually, or upon the occurrence of other events or changes in circumstances
that indicate that the related carrying amounts may not be recoverable. Per ASC 360-10-35-21, a long-lived asset (asset group)
shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
Per ASC 360-10-35-17, an impairment loss shall be recognized only if the carrying amount of the long-lived asset (asset group)
is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group).
Income taxes
The Company
accounts for income tax under the asset and liability method as stipulated by ASC 740 formerly Statement of Financial Accounting
Standards (”SFAS”) No. 109, “
Accounting for Income Taxes
”, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements
or tax returns. Deferred Income taxes are recognized for all significant temporary differences between tax and financial
statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when
it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company didn’t recognize
any deferred tax amount at June 30, 2014 and March 31, 2014.
China YCT International,
Inc. is a holding company of Shandong Spring Pharmaceutical Co., Ltd and does not have any operating activities. Although the
contract of the acquisition of the US patent was executed by the holding company, in substance, the patent was acquired and is
used by the Company’s operating entity in China. For the same reason, the amortization of the patent was a deduction to
the Chinese operating entity’s tax liability. Therefore, the Company does not incur any US income tax liabilities.
Value-added
tax
Sales revenue
represents the invoiced value of goods, net of a Value-Added Tax (“VAT”). All of the Company’s products that
are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price. This VAT may be offset
by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.
The Company
recorded net VAT payable in the amount of $134,305 and $205,101 as of June 30, 2014 and March 31, 2014, respectively.
Research
and development
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 three months ended June 30, 2014 and 2013 was $251,265 and $587,259, respectively.
Advertising
costs
Advertising
costs for newspaper and television are expensed as incurred in accordance to the ASC 720-35 “Advertising Costs”. Pursuant
to ASC 720-35-25-5, costs of communication advertising are not incurred until the item or service has been received and shall
not be reported as expenses before the item or service has been received, except as discussed in paragraph 340-20-25-2.
Advertising
costs for newspaper and television are expensed as incurred. The Company incurred advertising costs of nil for the
three months ended June 30, 2014 and 2013, respectively.
Mailing
and handling costs
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
). The Company includes shipping and handling fees billed to customers in net revenues. Amounts incurred by
the Company for freight are included in cost of goods sold. For the three months ended June 30, 2014 and 2013, the Company incurred
$316,017 and $305,619 mailing and handling costs, respectively.
Stock Based Compensation
The Company
measures compensation expense for its non-employee stock-based compensation under FASB ASC 718. The fair value of the stock issued
is used to measure the transaction, as this is more reliable than the fair value of the services received. Fair value is measured
as the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been
reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation
expense.
Net income
(loss) per share (“EPS”)
Basic EPS excludes
dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts
to issue common stock (convertible preferred stock, forward contracts, warrants to purchase common stock, contingently issuable
shares, common stock options and warrants and their equivalents using the treasury stock method) were exercised or converted into
common stock. There were nil shares common stock equivalents available for dilution purposes as of June 30, 2014 and March 31,
2014.
Risks
and uncertainties
The Company’s
operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations
may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy.
The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated
with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic
and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
Fair
Value of Financial Instruments
For certain
of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts
payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.
As of June 30, 2014, the Company
did not identify any financial instruments that are required to be presented on the balance sheet at fair value other than those
whose carrying amounts approximate fair value due to their short maturities.
Foreign
currency translation
The accounts
of the Company’s Chinese subsidiary are maintained in RMB and the accounts of the U.S. parent company are maintained in
USD. The accounts of the Chinese subsidiary were translated into USD in accordance with Accounting Standards Codification (“ASC”)
Topic 830 “Foreign Currency Matters,” with the RMB as the functional currency for the Chinese subsidiary. According
to Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity
is translated at historical rates and statement of income items are translated at the weighted average exchange rate for the period.
The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive
Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in
the statements of income.
Translation
adjustments resulting from this process amounted to $(5,755) and $609,083 for the three months ended June 30, 2014 and 2013, respectively.
The following
exchange rates were adopted to translate the amounts from RMB into United States dollars (“USD$”) for the respective
periods:
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
Year End RMB Exchange Rate (RMB/USD$)
|
|
|
6.1528
|
|
|
|
6.1787
|
|
Average Period RMB Exchange Rate (RMB/USD$)
|
|
|
6.1581
|
|
|
|
6.2053
|
|
Recent
accounting pronouncements
The Company’s management has
evaluated all the recently issued accounting pronouncements through the filing date of these consolidated financial statements
and does not believe that they will have a material effect on the Company’s consolidated financial position and results
of operations.
NOTE 3 – OPERATING LEASES
On October
1, 2011, the Company entered into an agreement with Shandong YCT for the lease of one automobile. The lease term is from October
1, 2011 to September 30, 2021. The total lease payment of RMB131,468 (approximately USD21,370) was paid in full at lease signing
and amortized over the life of the lease.
On June 20,
2013, the Company entered into a Farmland Leasing Agreement with Shiqiao Village for the lease of 2,000Mu farmland for the development
of the acer truncatum bunge planting bases. The lease term is from July 1, 2013 to June 30, 2043. The lease payment is about RMB1,
000(approximately USD 163) per Mu annually and payable for five years of rents in advance. The first lease payment was for the
rents of the first five years in the amount of RMB10,000,000 (approximately USD1,625,461), which were made within 15 working days
from the signing of the Lease. (See NOTE 12 - FUTURE MINIMUM LEASE PAYMENTS)
On March 1,
2014, the Company entered into a Farmland Leasing Agreement with Zhongce No.4 Village for the lease of 200Mu farmland to the development
of the acer truncatum bunge planting bases. The lease term is from March 1, 2014 to February 28, 2044. The lease payment is RMB1,000,000
(approximately USD 162,546) for each five-year period in advance. The first lease payment was for the rents of the first five
years in the amount of RMB1,000,000 (approximately USD162,546), which were made within 10 working days from the signing of the
Lease. (See NOTE 12 - FUTURE MINIMUM LEASE PAYMENTS)
The Company accounts for the lease agreement
as an operating lease in accordance to ASC 840-10-25-37, which requires, if land is the sole item of property leased and either
the transfer-of-ownership criterion in paragraph 840-10-25-1(a) or the bargain-purchase-option criterion in paragraph 840-10-25-1(b)
is met, the lessee shall account for the lease as a capital lease. Otherwise, the lessee shall account for the lease as an operating
lease. Per ASC 840-2-25-1, rent shall be charged to expense by lessees over the lease term as it becomes payable.
The components of prepaid lease were as
follows:
Prepaid leases
|
|
As of June 30, 2014
|
|
|
|
Short-term
|
|
|
Long-term
|
|
Shiqiao Village – 2000Mu
|
|
$
|
325,055
|
|
|
$
|
975,166
|
|
Zhongce No. 4 Village – 200Mu
|
|
|
32,506
|
|
|
|
119,187
|
|
Total prepaid land lease
|
|
|
357,561
|
|
|
|
1,094,353
|
|
Shandong YCT - Automobile
|
|
|
2,137
|
|
|
|
13,355
|
|
Total prepaid lease
|
|
$
|
359,698
|
|
|
$
|
1,107,707
|
|
The prepaid lease is amortized based on
straight-line method. The lease expenses for the three months ended June 30, 2014 and 2013 were $89,841 and $0, respectively.
NOTE 4 - INVENTORY
Inventory consists of finished goods, work-in-process,
and raw materials. No allowance for inventory was made for the three months ended June 30, 2014 and 2013.
The components of inventories were as follows:
|
|
As of
|
|
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
Raw materials
|
|
$
|
931,215
|
|
|
$
|
874,455
|
|
Work-in-progress
|
|
|
474,651
|
|
|
|
370,271
|
|
Finished goods
|
|
|
51,234
|
|
|
|
347,977
|
|
Total Inventories
|
|
$
|
1,457,100
|
|
|
$
|
1,592,703
|
|
NOTE 5 – PLANT, PROPERTY, AND EQUIPMENT, NET
The components of property and equipment
were as follows:
|
|
As of
|
|
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
Machinery & Equipment
|
|
$
|
1,461,181
|
|
|
$
|
1,461,346
|
|
Furniture & Fixture
|
|
|
192,699
|
|
|
|
192,721
|
|
Building
|
|
|
1,300,221
|
|
|
|
12,554,094
|
|
Leasehold Improvements
|
|
|
12,552,666
|
|
|
|
1,300,369
|
|
Subtotal
|
|
|
15,506,767
|
|
|
|
15,508,530
|
|
Less: Accumulated Depreciation & Amortization
|
|
|
(2,268,470
|
)
|
|
|
(2,123,536
|
)
|
Total plant, property and equipment, net
|
|
$
|
13,238,296
|
|
|
$
|
13,384,995
|
|
The depreciation expense for the three
months ended June 30, 2014 and 2013 was $144,935 and $118,240, respectively.
NOTE 6 – CONSTRUCTION IN PROGRESS
Construction in progress represents direct
costs of construction or acquisition and design fees incurred for the Company’s new plant and equipment. Capitalization of
these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities
necessary to prepare the assets for their intended use are completed. No depreciation is made until construction is completed and
put into use.
NOTE 7 - MAJOR CUSTOMER AND VENDOR
In the three months ended June 30, 2014,
the Company mainly sold products to individual retail customers through nine major distributors.
The Company purchases its products from
Shandong Yong Chun Tang (“Shandong YCT”) according to the contract signed on December 26, 2006 between the Company
and Shandong YCT. On February 19, 2010, the Company renewed the Purchase and Sale Contract with Shandong YCT for a term of five
years ending on February 28, 2015. For the three months ended June 30, 2014 and 2013, the purchases from the four major vendors,
including Shandong YCT, represented 90% and 93% of the Company’s annual total purchase, respectively.
NOTE 8 - INTANGIBLE ASSETS, NET
The intangible assets of the Company consist
of land use right and purchased patents.
Net land use right and purchased patents
were as follows:
|
|
Amortization
|
|
As of
|
|
|
|
Period
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
Land use right
|
|
50 years
|
|
|
1,649,329
|
|
|
$
|
1,649,517
|
|
Less: Accumulated amortization
|
|
|
|
|
(256,367
|
)
|
|
|
(248,148
|
)
|
Land use right, net
|
|
|
|
|
1,392,963
|
|
|
|
1,401,369
|
|
Patent 1
|
|
16.5 years
|
|
|
7,476,271
|
|
|
|
7,477,122
|
|
Patent (non-US No. ZL200510045001.9)
|
|
13.75 years
|
|
|
10,076,713
|
|
|
|
10,077,860
|
|
Patent (non-US No. ZL200710013301.8)
|
|
14.95 years
|
|
|
1,625,276
|
|
|
|
1,625,461
|
|
Less: Accumulated amortization
|
|
|
|
|
(4,215,989
|
)
|
|
|
(3,897,780
|
)
|
Patents, net
|
|
|
|
$
|
14,962,271
|
|
|
$
|
15,282,662
|
|
The amortization expense of land use right
for the three months ended June 30, 2014 and 2013 was $8,219 and $13,191, respectively.
The amortization expense of patent for
the three months ended June 30, 2014 and 2013 was $318,209 and $734,169, respectively.
NOTE 9 - TAX PAYABLE
Tax payable at June 30, 2014 and March
31, 2014 were as follows:
|
|
As of
|
|
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
Corporate Income Tax
|
|
$
|
467,981
|
|
|
$
|
567,227
|
|
Value-Added Tax
|
|
|
134,305
|
|
|
|
205,101
|
|
Other Tax & Fees
|
|
|
15,498
|
|
|
|
44,251
|
|
|
|
|
|
|
|
|
|
|
Total Tax Payable
|
|
$
|
617,784
|
|
|
$
|
816,579
|
|
NOTE 10 - INCOME TAXES
Shandong Spring Pharmaceutical Co., Ltd
is subject to the Enterprise income tax (“EIT”) at a statutory rate of 25%.
For the three months ended June 30, 2014
and 2013, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $544,256 and $640,539, respectively.
NOTE 11 - STOCKHOLDERS’ EQUITY
Stock Issued for Services
The total amount of the compensation in the form of issuing
shares of common stock for services rendered was $30,350 and nil for the three months ended June 30, 2014 and 2013, respectively.
Statutory Reserve
Subsidiaries incorporated in China are
required to make appropriations to reserve funds, based on after-tax net income determined in accordance with generally accepted
accounting principles of the People’s Republic of China (“PRC GAAP”). Effective January 1, 2006, the
Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum, and any contributions
are not to exceed 50% of the respective companies’ registered capital.
As of June 30, 2014 and March 31, 2014, the Company appropriated
$1,828,504 to the statutory reserve, respectively.
NOTE 12 – FUTURE MINIMUM LEASE PAYMENTS
As of June 30, 2014, future minimum lease
payments under the operating lease pursuant to the two Farmland Leasing Agreements were as follows:
Fiscal year ended March 31,
|
|
Shiqiao Village
|
|
|
Zhongce No.4
Village
|
|
|
Total Operating Leases
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
$
|
243,791
|
|
|
$
|
24,379
|
|
|
$
|
268,171
|
|
2016
|
|
|
325,055
|
|
|
|
32,506
|
|
|
|
357,561
|
|
2017
|
|
|
325,055
|
|
|
|
32,506
|
|
|
|
357,561
|
|
2018
|
|
|
325,055
|
|
|
|
32,506
|
|
|
|
357,561
|
|
2019
|
|
|
325,055
|
|
|
|
32,506
|
|
|
|
357,561
|
|
2020 and thereafter
|
|
|
7,882,590
|
|
|
|
809,929
|
|
|
|
8,692,519
|
|
Total minimum lease payments
|
|
$
|
9,426,603
|
|
|
$
|
964,331
|
|
|
$
|
10,390,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: prepaid lease
|
|
|
1,300,221
|
|
|
|
151,692
|
|
|
|
1,451,914
|
|
Actual future minimum lease payments
|
|
|
8,126,381
|
|
|
|
812,638
|
|
|
|
8,939,020
|
|
The farmland lease payments for the first
five years have been made in advance; and therefore, resulted in prepaid lease payments as of June 30, 2014 (refer to Note 3).
The actual future minimum lease payments are $8,939,020, after reduction of the prepaid amounts of $1,451,914.
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operation
You should read
the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Form
10-Q and our audited financial statements included in our Annual Report on Form 10-K. This discussion contains forward-looking
statements. These forward-looking statements are based on information available at the time the statements are made and/or management’s
belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes
to be materially different. Important factors that could cause such differences include but are not limited to: competitive factors,
general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation
and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein and in other filings made by the company with the Securities and Exchange
Commission. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation
to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent
to the date this Form 10-Q is filed with the Securities and Exchange Commission.
Overview
China YCT International Group, Inc. (“China
YCT”) was incorporated in the State of Florida in January 1989, and reincorporated in the State of Delaware on April 4, 2007.
China YCT principally operates through two of its wholly-owned subsidiaries: Landway Nano Bio-Tech, Inc. ("Landway Nano”),
incorporated in Delaware, and Shandong Spring Pharmaceutical Co., Ltd. (“Shandong Spring”), incorporated in the People’s
Republic of China (the “PRC”). China YCT International Group, Inc. and its subsidiaries are collectively referred to
as the “Company”. China YCT, through its wholly-owned subsidiary, Shandong Spring, is engaged in the business of (i)
developing, manufacturing, and selling its own medicine made primarily from gingko extract, (ii) researching and developing new
food, healthcare and medicine products based on the acer truncatum bunge, and (iii) actively developing the acer truncatum bunge
planting bases and distributing health care supplement products manufactured by another company in the PRC.
Results of Operations – Three
Months ended June 30, 2014and June 30, 2013
The
following table sets forth information from our statements of operations for the three months ended June 30, 2014 and 2013, in
dollars:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
$
|
|
|
%
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
Change
|
|
Revenues
|
|
|
8,179,972
|
|
|
|
8,220,587
|
|
|
|
(40,616
|
)
|
|
|
-0.5
|
%
|
Cost of Sales
|
|
|
(4,238,770
|
)
|
|
|
(3,976,310
|
)
|
|
|
(262,460
|
)
|
|
|
6.6
|
%
|
Gross Profit
|
|
|
3,941,202
|
|
|
|
4,244,277
|
|
|
|
(303,075
|
)
|
|
|
-7.1
|
%
|
Operating Expenses
|
|
|
(1,519,723
|
)
|
|
|
(1,710,853
|
)
|
|
|
191,130
|
|
|
|
-11.2
|
%
|
Operating Income
|
|
|
2,421,479
|
|
|
|
2,533,424
|
|
|
|
(111,945
|
)
|
|
|
-4.4
|
%
|
Interest Income, net
|
|
|
32,026
|
|
|
|
28,732
|
|
|
|
3,294
|
|
|
|
11.5
|
%
|
Income Tax Provision
|
|
|
(544,256
|
)
|
|
|
(640,539
|
)
|
|
|
96,283
|
|
|
|
-15.0
|
%
|
Net Income
|
|
|
1,909,249
|
|
|
|
1,921,617
|
|
|
|
(12,368
|
)
|
|
|
-0.6
|
%
|
Comprehensive Income (Loss)
|
|
|
1,903,494
|
|
|
|
2,530,700
|
|
|
|
(627,206
|
)
|
|
|
-24.8
|
%
|
Net Sales
During the three months ended June 30,
2014, we realized $8,179,972 of sales revenue, a slight decrease of 0.5% or $40,616 as compared to $8,220,587 for the same period
in 2013.
We entered into a Purchase & Sale Contract
with Shandong Yong Chun Tang (“Shandong YCT”) on December 26, 2006, which sets forth the wholesale price that we pay
to Shandong YCT for distributing their products. On February 9, 2010, we renewed the Purchase and Sale Contract with Shandong YCT
for a term of five years ending on February 28, 2015. Pursuant to the renewed contract, we can purchase 10 products from Shandong
YCT on a fixed price, which were selected according to the sales volume and profit margin. For the three months ended June 30,
2014, 32.3% of our revenues were from the sale of the ten types of health care supplement products, compared to 33.6% in the three
months ended June 30, 2013.
Since September 2009, we started to engage
in the production and distribution of our own patented drug, Huoliyuan Capsule, and developed distribution channels for the drug.
Our sales have increased since September 2009 as a result of the establishment of our manufacturing and distribution of Huoliyuan
Capsule. Starting from July 2010, the Company changed from being a distributor of Shandong YCT to both a manufacturer and distributor
of our own products, the Huoliyuan Capsules. As a result, we obtained new customers and expanded our sales of Huoliyuan Capsules.
The Huoliyuan Capsule product accounted for 67.7% of our revenue for the three months ended June 30, 2014, compared to 66.4% for
the three months ended June 30, 2013.
The following table sets forth a sales
breakdown comparison by product for the periods under review:
|
|
Three months ended
|
|
|
|
|
|
|
|
Sales from:
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
Change in $
|
|
|
Variance
|
|
Health care supplements
|
|
|
2,639,717
|
|
|
|
2,766,193
|
|
|
|
(126,476
|
)
|
|
|
-4.6
|
%
|
Drugs
|
|
|
5,540,255
|
|
|
|
5,454,394
|
|
|
|
85,860
|
|
|
|
1.6
|
%
|
Total
|
|
|
8,179,972
|
|
|
|
8,220,587
|
|
|
|
(40,616
|
)
|
|
|
-0.5
|
%
|
Cost of Goods Sold
Our costs of revenue were comprised primarily
of the cost of finished goods we purchased from Shandong YCT, the manufacturing cost of Huoliyuan Capsules, and the raw materials
we purchased from third party vendors. During the three months ended June 30, 2014, our cost of goods sold totaled $4,238,770,
representing a decrease of $262,460 or 6.6% as compared to $3,976,310 during the same period of 2013. The percentages of the costs
of goods sold to total revenues increased to 51.8% from 48.4%, as compared to the same quarter of the previous year due to increased
raw material price.
Gross Profit
As a result of decreased sales revenue
and cost of goods sold, gross profit during the three months ended June 30, 2014 was $3,941,202, a decrease of 7.1% or $303,075
as compared to the same period in the previous year.
The following table sets forth a breakdown
of our gross profits of different products during the three months ended June 30, 2014 and 2013:
|
|
Three months ended
|
|
|
|
|
|
|
|
Gross Profit:
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
Change in $
|
|
|
Variance
|
|
Health care supplements
|
|
|
1,373,560
|
|
|
|
1,466,372
|
|
|
|
(92,811
|
)
|
|
|
-6.3
|
%
|
Drugs
|
|
|
2,567,641
|
|
|
|
2,777,906
|
|
|
|
(210,264
|
)
|
|
|
-7.6
|
%
|
Total
|
|
|
3,941,202
|
|
|
|
4,244,277
|
|
|
|
(303,075
|
)
|
|
|
-7.1
|
%
|
Research and Development Expenses
Our R&D expenses during the three months
ended June 30, 2014 and 2013 were $251,265 and $587,259, respectively. Our long-term goal is to utilize advanced biological technology
to refine and extract the beneficial compounds in plants that have traditionally been known to have medicinal benefits, primarily
gingko. As of June 30, 2014, we have 27 employees working on R&D. In addition we maintain close ties to the research staffs
at Tsinghua University, China Agriculture University, Shandong Herbal Medicine University, and Shandong Herbal Medicine Research
Institute.
Selling Expenses
Our selling expenses increased slightly
by $23,191 or 4.3% to $566,878 for the three months ended June 30, 2014, from $543,686 for the same period of 2013. As a percentage
of sales, selling expenses also increased slightly to 6.9% for the three months ended June 30, 2014 from 6.6% for the same period
in 2013.
General
and Administrative Expenses
Our
general and administrative expenses were $
701,580
during the three months ended June
30, 2014, compared with $
579,908
during the three months ended June 30, 2013, an increase
of $
121,672
or approximately 21.0%. The increase was due to increased professional
fees and other taxes.
Net Income
During the three months ended June 30,
2014, we realized net income of $1,909,249, representing a 0.6% or $12,368 increase as compared to $1,921,617 during the three
months ended June 30, 2013.
Liquidity and Capital Resources
Our principal sources of liquidity were
primarily generated from our operations. As of June 30, 2014, Shandong Spring Pharmaceutical had $21,674,878 in working capital,
an increase of $1,901,875 or 10% as compared to $19,773,003 in working capital as of March 31, 2014. The increase was mainly due
to an increase in cash and cash equivalent.
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. We expect our marketing
activities to help generate positive cash flow. The operations of our own manufacturing since fiscal year 2010 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.
The following table sets forth a summary
of our cash flows for the periods as indicated:
|
|
Three months ended
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
Net cash provided by operating activities
|
|
$
|
2,458,652
|
|
|
$
|
(270,864
|
)
|
Net cash provided by(used in) investing activities
|
|
$
|
(597,527
|
)
|
|
$
|
(2,808,486
|
)
|
Net cash provided by financing activities
|
|
$
|
-
|
|
|
$
|
-
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
$
|
(1,580
|
)
|
|
$
|
325,678
|
|
Net increase in cash and cash equivalents
|
|
$
|
1,859,545
|
|
|
$
|
(2,753,671
|
)
|
Cash and cash equivalents, beginning balance
|
|
$
|
18,624,644
|
|
|
$
|
29,924,188
|
|
Cash and cash equivalents, ending balance
|
|
$
|
20,484,189
|
|
|
$
|
27,170,517
|
|
Operating Activities
Net cash provided by operating activities
was $2,458,652 for the three month period ended June 30, 2014, an increase of 1,007.7% or $2,729,516 from the $270,864 net cash
used for the three month period ended June 30, 2013. The increase was mainly attributable to the difference in inventory fluctuation.
Investing Activities
During the three months ended June 30,
2014, our net cash used by investing activities was $597,527, as compared to $2,808,486 during the same period ended June 30, 2013.
The change was primarily due to the addition of plant and equipment for 2013.
Financing Activities
No net cash was provided or used by financing
activities over the three months ended June 30, 2014 and 2013.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.