UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended September 30, 2014
o |
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 |
(IRS Employer Identification No.) |
organization) |
|
|
|
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 x
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 x
No o
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 x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the
issuer’s common stock on November 7, 2014 was 29,700,689.
CHINA YCT INTERNATIONAL GROUP, INC.
FORM 10-Q
SEPTEMBER 30, 2014
TABLE OF CONTENTS
|
CHINA YCT INTERNATIONAL GROUP, INC. |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 |
|
Table of Contents |
CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
| |
| | |
UNIT: USD$ | |
| |
September 30, 2014 | | |
March 31, 2014 | |
| |
| | | |
| | |
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalent | |
$ | 22,471,361 | | |
$ | 18,624,644 | |
Accounts receivable | |
| - | | |
| 42,049 | |
Prepaid lease - short term | |
| 359,715 | | |
| 359,738 | |
Inventory | |
| 2,066,475 | | |
| 1,592,703 | |
Total current assets | |
| 24,897,551 | | |
| 20,619,134 | |
Prepaid lease - long term | |
| 1,017,832 | | |
| 1,197,768 | |
Development cost of acer truncatumbunge planting | |
| 16,354,306 | | |
| 15,333,951 | |
Plant, property, equipment, and leasehold improvement, net | |
| 13,111,770 | | |
| 13,384,995 | |
Construction in progress | |
| - | | |
| - | |
Intangible assets, net | |
| 16,029,117 | | |
| 16,684,032 | |
Total assets | |
| 71,410,576 | | |
| 67,219,880 | |
| |
| | | |
| | |
Liabilities and Stockholders’ Equity (Deficit) | |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Tax payable | |
| 949,831 | | |
| 816,579 | |
Other payable | |
| 8,325 | | |
| 29,552 | |
Total current liabilities | |
| 958,156 | | |
| 846,131 | |
Total liabilities | |
| 958,156 | | |
| 846,131 | |
| |
| | | |
| | |
Stockholders’ Equity | |
| | | |
| | |
Preferred stock, par value $500.00 per share; 45 shares authorized and issued at September 30, 2014 and March 31, 2013 | |
| 22,500 | | |
| 22,500 | |
Common stock, par value $0.001 per share; 500,000,000 and 500,000,000 shares authorized, 29,700,689 and 29,663,023 shares issued and outstanding at September 30, 2014 and March 31, 2014, respectively | |
| 29,701 | | |
| 29,663 | |
Additional paid-in capital | |
| 4,210,407 | | |
| 4,180,095 | |
Statutory reserve | |
| 1,828,504 | | |
| 1,828,504 | |
Retained earnings | |
| 59,802,028 | | |
| 55,676,059 | |
Accumulated other comprehensive income | |
| 4,559,280 | | |
| 4,636,928 | |
Total stockholders’ equity | |
| 70,452,420 | | |
| 66,373,749 | |
Total liabilities and stockholders’ equity | |
$ | 71,410,576 | | |
$ | 67,219,880 | |
The accompanying notes are an integral part
of these financial statements.
CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
| |
| | |
| | |
| | |
UNIT: USD$ | |
| |
FOR THE THREE MONTHS ENDED | | |
FOR THE SIX MONTHS ENDED | |
| |
September 30, 2014 | | |
September 30, 2013 | | |
September 30, 2014 | | |
September 30, 2013 | |
| |
| | |
| | |
| | |
| |
Sales Revenue | |
$ | 8,674,157 | | |
$ | 8,136,960 | | |
$ | 16,854,129 | | |
$ | 16,357,547 | |
Cost of Goods Sold | |
| 4,331,805 | | |
| 3,698,551 | | |
| 8,570,575 | | |
| 7,674,862 | |
Gross Profit | |
| 4,342,353 | | |
| 4,438,409 | | |
| 8,283,554 | | |
| 8,682,685 | |
Selling Expenses | |
| 619,764 | | |
| 546,441 | | |
| 1,186,642 | | |
| 1,090,128 | |
G&A Expense | |
| 560,589 | | |
| 551,480 | | |
| 1,262,168 | | |
| 1,131,388 | |
R&D Expenses | |
| 226,836 | | |
| 60,265 | | |
| 478,101 | | |
| 647,524 | |
Total expense | |
| 1,407,189 | | |
| 1,158,186 | | |
| 2,926,911 | | |
| 2,869,040 | |
Income from operation | |
| 2,935,163 | | |
| 3,280,222 | | |
| 5,356,643 | | |
| 5,813,645 | |
Interest income (Expense) | |
| 20,463 | | |
| - | | |
| 52,489 | | |
| 28,732 | |
Profit before tax | |
| 2,955,626 | | |
| 3,280,222 | | |
| 5,409,132 | | |
| 5,842,377 | |
Income tax | |
| 738,907 | | |
| 840,322 | | |
| 1,283,163 | | |
| 1,480,861 | |
Net income | |
| 2,216,719 | | |
| 2,439,900 | | |
| 4,125,969 | | |
| 4,361,516 | |
Other comprehensive income | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| (71,893 | ) | |
| 307,174 | | |
| (77,648 | ) | |
| 916,257 | |
Comprehensive income | |
$ | 2,144,826 | | |
$ | 2,747,074 | | |
$ | 4,048,321 | | |
$ | 5,277,773 | |
Basic and diluted income per common share | |
| | | |
| | | |
| | | |
| | |
Basic and Diluted | |
| 0.07 | | |
| 0.08 | | |
| 0.14 | | |
| 0.15 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding | |
| | | |
| | | |
| | | |
| | |
Basic and Diluted | |
| 29,663,023 | | |
| 29,663,023 | | |
| 29,663,023 | | |
| 29,663,023 | |
The accompanying notes are an integral part
of these financial statements.
CHINA YCT INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNIT:
USD$
| |
Preferred
Stock Series A | | |
Common
shares | | |
Additional
paid-in capital | | |
Statutory
Reserve | | |
Accumulated
OCI | | |
Retained
Earnings | | |
Total | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance
- March 31, 2014 | |
| 45 | | |
$ | 22,500 | | |
| 29,663,023 | | |
$ | 29,663 | | |
$ | 4,180,095 | | |
$ | 1,828,504 | | |
$ | 4,636,928 | | |
$ | 55,676,059 | | |
$ | 66,373,749 | |
Net
income for the year | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 1,909,249 | | |
| 1,909,249 | |
Issuance
of common shares for services rendered | |
| | | |
| | | |
| 37,666 | | |
| 38 | | |
| 30,312 | | |
| | | |
| | | |
| | | |
| 30,350 | |
Foreign
currency translation adjustment | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (5,755 | ) | |
| | | |
| (5,755 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance - June
30, 2014 | |
| 45 | | |
$ | 22,500 | | |
| 29,700,689 | | |
$ | 29,701 | | |
$ | 4,210,407 | | |
$ | 1,828,504 | | |
$ | 4,631,173 | | |
$ | 57,585,308 | | |
$ | 68,307,593 | |
Net
income for the year | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2,216,720 | | |
| 2,216,720 | |
Foreign
currency translation adjustment | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (71,893 | ) | |
| | | |
| (71,893 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance
- September 30, 2014 | |
| 45 | | |
$ | 22,500 | | |
| 29,700,689 | | |
$ | 29,701 | | |
$ | 4,210,407 | | |
$ | 1,828,504 | | |
$ | 4,559,280 | | |
$ | 59,802,027 | | |
$ | 70,452,419 | |
The accompanying notes are an integral part
of these financial statements.
CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOW
| |
| | |
UNIT: USD$ | |
| |
SIX MONTHS ENDED | |
| |
September 30, 2014 | | |
September 30, 2013 | |
Cash Flows From Operating Activities: | |
| | | |
| | |
Net income | |
$ | 4,125,969 | | |
$ | 4,361,516 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 944,765 | | |
| 761,063 | |
Issue of common shares as compensation | |
| 30,350 | | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Inventory | |
| (473,772 | ) | |
| 190,010 | |
Prepaid land lease | |
| 179,936 | | |
| (1,545,218 | ) |
Accounts receivable | |
| 42,049 | | |
| 135,238 | |
Taxes payable | |
| 133,252 | | |
| 288,970 | |
Accrued expenses and other payables | |
| (21,228 | ) | |
| (358,487 | ) |
Net cash provided by (used in) operating activities | |
| 4,961,321 | | |
| 3,833,092 | |
Cash flows from investing activities: | |
| | | |
| | |
Addition to plant and equipment | |
| -10,210.57 | | |
| (4,363,915 | ) |
Development cost of acer truncatumbunge planting | |
| (1,020,355 | ) | |
| (13,886,792 | ) |
Reduction of construction in progress | |
| - | | |
| 220,874 | |
Net cash provided by (used in) investing activities | |
| (1,030,566 | ) | |
| (18,029,833 | ) |
Effect of exchange rate changes on cash and cash equivalents | |
| (84,038 | ) | |
| 501,695 | |
Net increase (decrease) in cash and cash equivalents | |
| 3,846,717 | | |
| (13,695,046 | ) |
Cash and cash equivalents at beginning of period | |
| 18,624,644 | | |
| 29,924,188 | |
Cash and cash equivalents at ending of period | |
| 22,471,361 | | |
$ | 16,229,142 | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid during the periods for: | |
| | | |
| | |
Interest | |
$ | 172 | | |
$ | - | |
Income taxes | |
$ | 1,087,587 | | |
$ | 1,314,814 | |
Non-cash financing activities: | |
| | | |
| | |
Stock issued for services | |
$ | 30,350 | | |
| - | |
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 the
new food, healthcare and medicine product based on the acer truncatumbunge. The Company is now actively developing the acer truncatumbunge
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, LandwayNano 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 could differ from those estimates. Significant
accounting estimates reflected in the Company’s consolidated financial statements include: the valuation of inventory, and
estimated useful lives and impairment of property and 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 September 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 to write down the inventory to 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:
Building |
|
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 JiningTianruitong 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 truncatumbunge
planting
The Company has started development of
the acer truncatumbunge planting bases and completed planting of 2,000Mu (1Mu is equal to approximately 666.67 square meters) as
of September 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, 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. Per 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. Per 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 September 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 at 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 did not recognize any deferred tax amount at September 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
amount of $191,564 and $205,101 as of September 30, 2014 and March 31, 2014, respectively.
Research and development
Research and development costs relate to
the Company’s developing 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 are depreciated over their estimated useful lives.
The research and development expense for
the three months ended September 30, 2014 and 2013 was $226,836 and $60,265, respectively.
The research and development expense for
the six months ended September 30, 2014 and 2013 was $478,101 and $647,524, 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.
The Company incurred advertising costs
of $12,103 for the three and six months ended September 30, 2014 and nil for the three
months ended June 30, 2014 and June 30,
2013 and the six months ended September 30, 2013, respectively.
Mailing and handling costs
The Company accounts for mailing and handling
fees in accordance with the FASB 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 September 30,
2014 and 2013, the Company incurred $336,934 and $311,967 mailing and handling costs, respectively.
For the six months ended September 30,
2014 and 2013, the Company incurred $652,951 and $617,586mailing 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 are nil shares common stock equivalents
available for dilution purposes as of September 30, 2014 and 2013, respectively.
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 environment 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. The risks include political, economic and legal, 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, accrued liabilities and short-term debt, the carrying amounts approximate their
fair values due to their short maturities.
As of September 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 $(71,893) and $307,174 for the three months ended September 30, 2014 and 2013, and $(77,648) and $916,257
for the six months ended September 30, 2014 and 2013, respectively.
The following exchange rates were adopted
to translate the amounts from RMB into United States dollars (“USD$”) for the respective periods:
| |
September 30, 2014 | | |
March 31, 2014 | | |
September 30, 2013 | |
Quarter End RMB Exchange Rate (RMB/USD$) | |
| 6.1525 | | |
| 6.1787 | | |
| 6.1480 | |
Quarterly Average RMB Exchange Rate (RMB/USD$) | |
| 6.1568 | | |
| 6.2053 | | |
| 6.1678 | |
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 truncatumbunge
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
(refer to 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 truncatumbunge
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 (refer to 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:
| |
September 30, 2014 | |
Prepaid leases | |
| Short-term | | |
| Long-term | |
Shiqiao Village – 2000Mu | |
| 325,071 | | |
| 893,946 | |
Zhongce No. 4 Village – 200Mu | |
| 32,507 | | |
| 111,066 | |
Total prepaid land lease | |
| 357,578 | | |
| 1,005,012 | |
Shandong YCT - Automobile | |
| 2,137 | | |
| 12,821 | |
Total prepaid lease | |
$ | 359,715 | | |
$ | 1,017,832 | |
The prepaid lease is amortized based on
straight-line method.
The lease expenses for the three months
ended September 30, 2014 and 2013 were $89,891 and $81,066, respectively.
The lease expenses for the six months ended
September 30, 2014 and 2013 were $179,732 and $81,066, 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 and six months ended September 30, 2014 and 2013. The
components of inventories were as follows:
| |
As of | |
| |
September 30, 2014 | | |
March 31, 2014 | |
Raw materials | |
$ | 750,893 | | |
$ | 874,455 | |
Work-in-progress | |
| 581,018 | | |
| 370,271 | |
Finished goods | |
| 734,564 | | |
| 347,977 | |
Total Inventories | |
$ | 2,066,475 | | |
$ | 1,592,703 | |
| |
| | | |
| | |
NOTE 5 – PLANT, PROPERTY AND EQUIPMENT, NET
The components of property and equipment were as follows:
| |
As of | |
| |
September 30, 2014 | | |
March 31, 2014 | |
Machinery & Equipment | |
$ | 1,471,461 | | |
$ | 1,461,346 | |
Furniture & Fixture | |
| 192,709 | | |
| 192,721 | |
Leasehold Improvements | |
| 1,300,284 | | |
| 1,300,369 | |
Building | |
| 12,562,055 | | |
| 12,554,094 | |
Subtotal | |
| 15,526,509 | | |
| 15,508,531 | |
Less: Accumulated Depreciation | |
| (2,414,739 | ) | |
| (2,123,536 | ) |
Total plant, property and equipment, net | |
$ | 13,111,770 | | |
$ | 13,384,995 | |
| |
| | | |
| | |
The depreciation expense for the three
months ended September 30, 2014 and 2013 was $146,269 and $222,717, respectively.
The depreciation expense for the six months
ended September 30, 2014 and 2013 was $291,204 and $340,957, 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 and six months ended September
30, 2014, the Company mainly sold products to individual retail customers through ten major distributors.
For the three months ended September 30,
2014, the aggregate purchases from four major vendors were $4,172,781, representing 84.5% of the Company’s total purchases
for the quarter.
For the six months ended September 30,
2014, the aggregate purchases from four major vendors were $7,873,642, representing 87.1% of the Company’s total purchase
for the period.
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 | | |
As of | |
| |
Period | |
September 30, 2014 | | |
March 31, 2014 | |
Land use right | |
50 years | |
| 1,649,411 | | |
$ | 1,649,517 | |
Less: Accumulated amortization | |
| |
| (264,626 | ) | |
| (248,148 | )) |
Land use right, net | |
| |
| 1,384,785 | | |
| 1,401,369 | |
Patent 1 | |
16.5 years | |
| 7,476,636 | | |
| 7,477,122 | |
Patent (non-US No. ZL200510045001.9) | |
13.75 years | |
| 10,077,204 | | |
| 10,077,860 | |
Patent (non-US No. ZL200710013301.8) | |
14.95 years | |
| 1,625,356 | | |
| 1,625,461 | |
Less: Accumulated amortization | |
| |
| (4,534,863 | ) | |
| (3,897,780 | ) |
Patents, net | |
| |
$ | 14,644,333 | | |
$ | 15,282,662 | |
The amortization expense of land use right
for the three months ended September 30, 2014 and 2013 was $8,259 and $9,424, respectively. The amortization expense
of patents for the three months ended September 30, 2014 and 2013 was $318,874 and $312,039, respectively.
The amortization expense of land use right
for the six months ended September 30, 2014and 2013 was $16,478 and $20,778, respectively. The amortization expense
of patents for the six months ended September 30, 2014 and 2013 was $637,083 and $517,568, respectively.
NOTE 9 - TAX PAYABLE
Tax payable at September 30, 2014 and March
31, 2014 were as follows:
| |
As of | |
| |
September 30, 2013 | | |
March 31, 2013 | |
| |
| | |
| |
Corporate Income Tax | |
$ | 739,423 | | |
$ | 567,227 | |
Value-Added Tax | |
| 191,564 | | |
| 205,101 | |
Other Tax & Fees | |
| 18,844 | | |
| 44,251 | |
Total Tax Payable | |
$ | 949,831 | | |
$ | 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 September 30,
2014 and 2013, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $738,907
and $840,322, respectively.
For the six months ended September 30,
2014 and 2013, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $1,283,163
and $1,480,861, respectively.
NOTE 11 - STOCKHOLDERS’ EQUITY
Stock Issued to Independent Directors
The total amount of the compensation in the form of issuing
shares of common stocks for services rendered was $30,350 and nil for the three and six months ended September 30, 2014, respectively.
No common stock shares were issued for services for the three
and six months ended September 30, 2013.
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 September 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 September 30, 2014, future minimum
lease payments under the operating lease pursuant to the Farmland Leasing Agreement were as follows:
Fiscal year ended March 31 | |
Operating Leases | |
2015 | |
| 178,789 | |
2016 | |
| 357,578 | |
2017 | |
| 357,578 | |
2018 | |
| 357,578 | |
2019 | |
| 357,578 | |
2020 and thereafter | |
| 8,692,943 | |
Total minimum lease payments | |
$ | 10,302,044 | |
Less: prepaid leases | |
| 1,362,590 | |
Net total minimum lease payments | |
$ | 8,939,454 | |
The farmland lease payments for the first
five years have been made in advance; and therefore, resulted in prepaid lease payments as of September 30, 2014 (refer to Note
3 – OPERATING LEASES). The actual future minimum lease payments are $8,939,454, after reduction of the prepaid amounts of
$1,362,590.
NOTE 13 – SUBSEQUENT EVENTS
There have been no subsequent events as
of November 5, 2014.
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: LandwayNano Bio-Tech, Inc. ("LandwayNano”),
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 developing,
manufacturing, and selling its own medicine made primarily from gingko extract, development of the acer truncatumbunge planting
bases, and distributing health care supplement products manufactured by another company in the PRC.
Results of Operations – Three
Months ended September 30, 2014 and 2013 respectively
The
following table sets forth information from our statements of operations for the three months ended September 30, 2014 and 2013,
in dollars:
| |
Three Months Ended | | |
| | |
| |
| |
September 30, | | |
$ | | |
% | |
| |
2014 | | |
2013 | | |
Change | | |
Change | |
Sales Revenue | |
| 8,674,157 | | |
| 8,136,960 | | |
| 537,197 | | |
| 6.6 | % |
Cost of Sales | |
| (4,331,805 | ) | |
| (3,698,551 | ) | |
| (633,253 | ) | |
| 17.1 | % |
Gross Profit | |
| 4,342,353 | | |
| 4,438,409 | | |
| (96,056 | ) | |
| -2.2 | % |
Operating Expenses | |
| (1,407,189 | ) | |
| (1,158,186 | ) | |
| (249,003 | ) | |
| 21.5 | % |
Operating Income | |
| 2,935,164 | | |
| 3,280,223 | | |
| (345,059 | ) | |
| -10.5 | % |
Interest Income, net | |
| 20,463 | | |
| - | | |
| 20,463 | | |
| 100.0 | % |
Income Tax Provision | |
| (738,907 | ) | |
| (840,322 | ) | |
| 101,416 | | |
| -12.1 | % |
Net Income | |
| 2,216,720 | | |
| 2,439,901 | | |
| (223,181 | ) | |
| -9.1 | % |
Comprehensive Income (Loss) | |
| 2,144,826 | | |
| 2,747,074 | | |
| (602,248 | ) | |
| -21.9 | % |
Net Sales Revenue
During the three months ended September
30, 2014, we had net sales revenue of $8,674,157, as compared with $8,136,960 for the same period in 2013, an increase of $537,197,
or 6.6% due to market conditions.
We entered into a purchase and sale contract
with Shandong Yong Chun Tang (“Shandong YCT”) on December 26, 2006 (the “Purchase and Sale Contract”),
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 types of health care supplement products from Shandong YCT on a fixed price, which were selected according
to their sales volume and profit margin. For the three months ended September 30, 2014, 30.7% of our revenue was from the sale
of the health care supplement products of Shandong YCT, compared to 32.6% in the three months ended September 30, 2013.
Since September 2009, we started to engage
in the production and distribution of our own non-prescription drug, Huoliyuan Capsule, which is patented in China, 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 channels of Huoliyuan Capsule. Since July 2010, the Company changed from being solely 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 69.3% of our revenue for the three months
ended September 30, 2014, compared to 67.4% for the three months ended September 30, 2013.
The following table sets forth a sales
breakdown comparison by product for the periods under review:
| |
Three months ended | | |
| | |
| |
Sales from: | |
September 30, 2014 | | |
September 30, 2013 | | |
Change in $ | | |
Variance | |
Health care supplements | |
| 2,660,377 | | |
| 2,649,403 | | |
| 10,974 | | |
| 0.4 | % |
Drugs | |
| 6,013,780 | | |
| 5,487,557 | | |
| 526,223 | | |
| 9.6 | % |
Total | |
| 8,674,157 | | |
| 8,136,960 | | |
| 537,197 | | |
| 6.6 | % |
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 September 30,
2014, we had cost of sales of $4,331,805 as compared with cost of sales of $3,698,551
during the same period in 2013, an increase of approximately $633,253, or 17.1%.
The increase was a result of the increased sales revenue, offset by the increased production cost of our own product, Huoliyuan
capsules. The percentage of the costs of sales to total revenues increased to 49.9%
from 45.5% as compared to the same quarter of the previous year. In 2013, our cost of sales for our own product, Huoliyuan capsules
was lower than average because we increased our production upon obtaining the GMP (good manufacturing practices) certification.
In 2014, our production cost resumed to the average level.
Gross Profit
As
a result of the changes in sales and costs, gross profit during the three months ended September 30, 2014 was $4,342,353,
a decrease of $96,056 or 2.2% as compared to the same period in the previous year.
Our gross margin decreased to 50.1% during the three months ended September 30, 2014 from 54.5% during the three months ended September
30, 2013.
The following table sets forth a breakdown
of our gross profits of different products during the three months ended September 30, 2014 and 2013:
| |
Three months ended | | |
| | |
| |
Gross Profit: | |
September 30, 2014 | | |
September 30, 2013 | | |
Change in $ | | |
Variance | |
Health care supplementst | |
| 1,406,482 | | |
| 1,397,535 | | |
| 8,947 | | |
| 0.6 | % |
Drugs | |
| 2,935,871 | | |
| 3,040,873 | | |
| (105,003 | ) | |
| -3.5 | % |
Total | |
| 4,342,353 | | |
| 4,438,409 | | |
| (96,056 | ) | |
| -2.2 | % |
Research and Development Expenses
Research
and development expenses were $226,836 during the three months ended September 30,
2014 compared with $60,265 during the three months ended September 30, 2013, an increase of $166,572 or
276.4%. 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 September 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 the Shandong Herbal Medicine Research
Institute.
Selling Expenses
Our
selling expenses increased by $73,323 or 13.4%
to $619,764 for the three months ended September 30, 2014, from $546,441 for the same
period of 2013, which was mainly driven by the increased sales. As a percentage of sales, selling expenses increased slightly to
7.1% for the three months ended September 30, 2014 from 6.7%
for the same period in 2013.
General
and Administrative Expenses
Our
general and administrative expenses were $560,589 during the three months ended September
30, 2014, compared with $551,480 during the three months ended September 30, 2013, a slight increase of $9,109 or
approximately 1.7%.
Interest
Income (Expense), Net
For
the three months ended September 30, 2014, the interest income was $20,463.Interest
income or expense was nil for the three months ended September 30, 2013.
Income
Tax
Income
tax was $738,907 during the three months ended September 30, 2014, as compared to
$840,322 for the same period of 2013, a decrease of $101,416or approximately 12.1%. The
decrease was primarily due to the decreased taxable income during the three months ended September 30, 2014.
Net
Income
As
a result of the above factors, we had a net income of $2,216,719during the three months
ended September 30, 2014, compared with a net income of $2,439,900 during the three months ended September 30, 2013, a decrease
of $223,181 or approximately 9.1%. .
Other
Comprehensive Income
As
a result of the currency translation adjustment, we had other comprehensive loss of $71,893during
the quarter ended September 30, 2014, compared with other comprehensive income of $307,174 during the quarter ended September 30,
2013 due to exchange rate fluctuations from Chinese RMB, the functional currency used in our Chinese subsidiary, to US dollar,
our reporting currency.
Results
of Operations – for the Six Months ended September 30, 2014 and 2013:
The
following table sets forth information from our statements of operations for the six months ended September 30, 2014 and 2013,
in dollars:
| |
Six Months Ended | | |
| | |
| |
| |
September 30, | | |
$ | | |
% | |
| |
2014 | | |
2013 | | |
Change | | |
Change | |
Sales Revenue | |
| 16,854,129 | | |
| 16,357,547 | | |
| 496,582 | | |
| 3.0 | % |
Cost of Sales | |
| (8,570,575 | ) | |
| (7,674,862 | ) | |
| (895,713 | ) | |
| 11.7 | % |
Gross Profit | |
| 8,283,554 | | |
| 8,682,685 | | |
| (399,131 | ) | |
| -4.6 | % |
Operating Expenses | |
| (2,926,911 | ) | |
| (2,869,040 | ) | |
| (57,871 | ) | |
| 2.0 | % |
Operating Income | |
| 5,356,643 | | |
| 5,813,645 | | |
| (457,002 | ) | |
| -7.9 | % |
Interest Income, net | |
| 52,489 | | |
| 28,732 | | |
| 23,757 | | |
| 82.7 | % |
Income Tax Provision | |
| (1,283,163 | ) | |
| (1,480,861 | ) | |
| 197,698 | | |
| -13.4 | % |
Net Income | |
| 4,125,969 | | |
| 4,361,516 | | |
| (235,547 | ) | |
| -5.4 | % |
Comprehensive Income (Loss) | |
| 4,048,321 | | |
| 5,277,773 | | |
| (1,229,452 | ) | |
| -23.3 | % |
Net sales revenue
During
the six months ended September 30, 2014, we had net sales revenue of $16,854,129,
as compared with $16,357,547during the same period in 2013, an increase of $496,582 or
3.0%.
For
the six months ended September 30, 2014, 31.4% of our revenue was from the sale of
the 10 products distributed for Shandong YCT, compared to 33.1% in the six months ended September 30, 2013. The Huoliyuan Capsule
products accounted for 68.6% of our revenue for the six months ended September 30,
2014, compared to 66.9% for the six months ended September 30, 2013.
The
following table presents the breakdown of revenues by product mix:
| |
Six months ended | | |
| | |
| |
Sales from: | |
September 30, 2014 | | |
September 30, 2013 | | |
Change in $ | | |
Variance | |
Health care supplements | |
| 5,300,094 | | |
| 5,415,596 | | |
| (115,501 | ) | |
| -2.1 | % |
Drugs | |
| 11,554,035 | | |
| 10,941,951 | | |
| 612,083 | | |
| 5.6 | % |
Total | |
| 16,854,129 | | |
| 16,357,547 | | |
| 496,582 | | |
| 3.0 | % |
Cost of Sales and Gross
Margin
During
the six months ended September 30, 2014, we had cost of sales of $8,570,575, as compared
with cost of sales of $7,674,862during the same period in 2013, an increase of $895,713 or
11.7%, reflecting the increase in sales.
The
gross profit reduced to $8,283,554for the six months ended September 30, 2014, which
was decreased from the same period in 2013. The decrease was due to increased cost of sales. Our gross margin decreased to 49.1%
during the six months ended September 30, 2014 from 53.1% during the six months ended September 30, 2013. In
2013, the cost of sales for our own product, Huoliyuan capsules was lower than average because we increased our production by obtaining
the GMP (good manufacturing practices) certification.
Selling
Expenses
Our
selling expenses increased by $96,514, or 8.9%,
to $1,186,642 for the six months ended September 30, 2014, from $1,090,128
for the same period of 2013. As a percentage of sales, selling expenses increased slightly
from 6.7% for the six months ended September 30, 2013 to 7.0% for the same period of 2013, mainly due to increase in mailing and
handling costs and advertising costs.
General
and Administrative Expenses
Our
general and administrative expenses were $1,262,168 during the six months ended September
30, 2014, compared with $1,131,388 during the six months ended September 30, 2013, anincrease of $130,780 or
approximately 9.3%. The increase was due to increased professional fees and other
taxes.
Research
and Development Expenses
Research
and development expenses were $478,101 during the six months ended September 30, 2014
compared with $647,524 during the six months ended September 30, 2013, a decrease of $169,423,
or 26.2%. In prior year, we had increased expenses related to investments in future
new technologies and products that can be utilized to refine and extract the beneficial components from plants, primarily gingko.
Interest
Income
Interest income was $52,489 for the six
months ended September 30, 2014, increased by $23,757 or 82.7%, compared to $28,732 for the six months ended September 30, 2013.
The increase reflected the increased cash balance.
Income
Tax
Income tax was $1,283,163 during the six
months ended September 30, 2014, as compared to $1,480,861 for the same period of 2013, a decrease of $197,698, or approximately
13.4%. The decrease was primarily due to the decreased taxable income during the six months ended September 30, 2014.
Net
Income
As a result of the factors described above,
we generated net income of $4,125,969during the six months ended September 30, 2014, as compared with net income of $4,361,516
during the six months ended September 30, 2013.
Other
Comprehensive Income
As a result of a currency translation adjustment,
other comprehensive loss was $77,648during the six months ended September 30, 2014, compared with other comprehensive income of
$916,257 during the six months ended September 30, 2013; which is mainly attributable to the exchange rate fluctuations from Chinese
RMB, the functional currency used in our Chinese subsidiary, to US dollar, our reporting currency.
Liquidity
and Capital Resources
Our principal sources of liquidity were
primarily generated from our operations. As of September 30, 2014, we had $23,939,395 in working capital, an increase of $4,166,392
or 21% as compared to $19,773,003 in working capital onMarch 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. Our operations produced
positive cash flow of $3,846,717 during the six months ended September 30, 2014 due toan increase in cash and cash equivalent.
We did not have accounts receivable outstanding as of September 30, 2014 We expect our marketing activities to continue to help
generate positive cash flow. The investment in the acer truncatumbunge planting base and the advanced land lease payment
since July 2013 has 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 period as indicated:
| |
Six months ended | | |
| | |
| |
| |
September 30, 2014 | | |
September 30, 2013 | | |
Change in $ | | |
% | |
Net cash provided by operating activities | |
$ | 4,961,321 | | |
$ | 3,833,092 | | |
| 1,128,229 | | |
| 29.4 | % |
Net cash provided by(used in) investing activities | |
$ | (1,030,566 | ) | |
$ | (18,029,833 | ) | |
| 16,999,268 | | |
| -94.3 | % |
Net cash provided by financing activities | |
$ | - | | |
$ | - | | |
| - | | |
| 0.0 | % |
Effect of exchange rate change on cash and cash equivalents | |
$ | (84,038 | ) | |
$ | 501,695 | | |
| (585,734 | ) | |
| -116.8 | % |
Net increase in cash and cash equivalents | |
$ | 3,846,717 | | |
$ | (13,695,046 | ) | |
| 17,541,763 | | |
| -128.1 | % |
Cash and cash equivalents, beginning balance | |
$ | 18,624,644 | | |
$ | 29,924,188 | | |
| (11,299,544 | ) | |
| -37.8 | % |
Cash and cash equivalents, ending balance | |
$ | 22,471,361 | | |
$ | 16,229,142 | | |
| 6,242,219 | | |
| 38.5 | % |
| |
| | | |
| | | |
| | | |
| | |
Operating
Activities
For
the six months ended September 30, 2014, net cash provided by operating activities was $4,961,321,
compared to $3,833,092for the same period in 2013. We made prepaid land lease in the
amount of $1,545,218for the six months ended September 30, 2013. There was no lease
payment for the six months ended September 30, 2014.
Investing
Activities
Net
cash used in investing activities was $1,030,566for the six months ended September
30, 2014 as compared to $18,029,833 for the six months ended September 30, 2013. We made investment to construct our own acer truncatumbunge
planting base and planted 6,670,000 trees during the six months ended September 30, 2013.
Financing
Activities
There
were no financing activities for the six months ended September 30, 2014 and 2013.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial
condition or results of operations.
Critical
Accounting Policies
This
section should be read together with the Summary of Significant Accounting Policies included as Note 2 to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended March 31, 2014 and 10-Q for the period ended June 30,
2014 filed with the SEC.
We
prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect
our reporting of, among other things, assets and liabilities, contingent liabilities and revenues and expenses. We continually
evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and other
factors that we believe to be relevant under the circumstances. Since our financial reporting process inherently relies on the
use of estimates and assumptions, our actual results could differ from our expectations. This is especially true with some accounting
policies that require higher degrees of judgment than others in their application. We consider the policies discussed below to
be critical to an understanding of our audited and unaudited consolidated financial statements because they involve the greatest
reliance on our management’s judgment.
Principles
of consolidation
The
consolidated financial statements for the six months ended September 30, 2014 and 2013 include the accounts of China YCT International
Group, Inc. and Shandong Spring Pharmaceutical Company. Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America (“US GAAP”). All significant
inter-company balances and transactions are eliminated in consolidation.
Revenue
recognition
Our
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 at 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.
Inventories
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 to write down the inventory to market value, if lower than cost.
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.
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.
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 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 September 30, 2014, 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
None
Item 3. Defaults Upon Senior Securities.
None
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 |
XBRL Exhibit
101. |
INS XBRL Instance Document. |
101. |
SCH XBRL Taxonomy Extension Schema Document. |
101. |
CALXBRL 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. |
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: November 14, 2014
/s/ Yan Tinghe |
|
Yan Tinghe Chief Executive Officer |
|
(Principal Executive Officer) |
|
|
|
/s/ Li Chuanmin |
|
Li Chuanmin Chief Financial Officer |
|
(Principal Financial Officer) |
|
EXHIBIT 31.1: Rule 13a -14(a) Certification
I, Yan Tinghe, certify that:
1. I have reviewed this quarterly report on Form10-Q
of China YCT International Group, Inc.;
2. Based on my knowledge, this report does not
contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other
certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules13a-15(e)and15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and15d-15(f)
for the registrant and have:
a. designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c. evaluated the effectiveness
of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report
any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. Registrant’s other
certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: November 14, 2014
By: |
/s/ Yan Tinghe |
|
|
Yan Tinghe, Chief Executive Officer |
|
EXHIBIT31.2: Rule13a-14(a) Certification
I, Li Chuanmin, certify that:
1. I have reviewed this quarterly report on Form10-Q
of China YCT International Group, Inc.;
2. Based on my knowledge, this report doe not
contain any untrue statement o f a material factor omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other
certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and15d-15(f))
for the registrant and have:
a. designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c. evaluated the effectiveness
of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report
any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. registrant’s other certifying officer
and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date:
November 14, 2014 |
By: |
/s/Li
Chuanmin |
|
|
|
Li Chuanmin, Chief Financial
Officer |
|
EXHIBIT 32: Rule13a-14(b) Certification
In connection with the Quarterly Report of China
YCT International Group, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2014 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and
on the dates indicated below, hereby certifies, pursuant to 18U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to his knowledge:
(1) The Report fully
complies with the requirements of Section13(a) or15(d)of the Securities Exchange Act of 1934; and
(2) The information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
November
14, 2014 | |
By:
/s/Yan Tinghe |
|
| |
Yan Tinghe, Chief Executive
Officer |
|
| |
|
|
November
14, 2014 | |
By:
/s/Li Chuanmin |
|
| |
Li Chuanmin, Chief Financial
Officer |
|
Assigned original of this written statement required
by Section 906 has been provided to China YCT International Group, Inc. and will be retained by China YCT International Group,
Inc. and furnished to the Securities and Exchange Commission or its staff upon request.