China YCT International Group, Inc. ("China YCT") was incorporated in the State of Florida, in the United States of America (the "USA") in January 1989, and reincorporated in the State of Delaware on April 4, 2007. China YCT, through its 100% owned subsidiary Landway Nano Bio-Tech, Inc. ("Landway Nano"), incorporated in Delaware, owns 97% of Shandong Spring Pharmaceutical Co., Ltd. ("Shandong Spring"), incorporated in the People's Republic of China ("PRC"). China YCT International Group, Inc. and its subsidiaries are collectively referred to as the "Company". The Company, through its 97% owned subsidiary, Shandong Spring, engages in the business of research, developing, manufacturing, and selling traditional Chinese medicine and other healthcare products in China.
The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").
Certain amounts have been reclassified to conform to current year presentation.
The consolidated financial statements include the financial statements of China YCT, Landway Nano and its 97% owned subsidiary, Shandong Spring. All inter-company transactions and balances are eliminated in consolidation.
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant accounting estimates reflected in the Company's consolidated financial statements include: the valuation of inventory, the estimated useful lives and impairment of property, equipment, and intangible assets and the valuation of deferred tax assets.
Cash and cash equivalents including cash on hand and deposits placed with banks or other financial institutions, which are unrestricted as to withdrawal and use and with an original maturity of three months or less.
Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. The Company believes the probability of a bank failure, causing loss to the Company, is remote.
Accounts receivable are recognized and carried at the original invoice amounts less an allowance for any uncollectible amount. The Company extends credit to our customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for potential bad debts if required.
The Company determines whether an allowance for doubtful accounts is required by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. We may also record a general allowance as necessary.
Direct write-offs are taken in the period when we have exhausted our efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that we should abandon such efforts.
The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties being experienced by its major customers. No allowance for doubtful accounts receivable were recorded in the years ended March 31, 2017 and 2016, respectively.
Inventories are valued at the lower of cost or market with cost determined on a weighted average basis. Management compares the cost of inventory with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost.
Property and equipment are stated at cost. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and locations for its intended use. Leasehold improvements are stated at cost and amortized over the shorter of the useful life of the assets or the length of the lease in accordance to
ASC 840-10-35-6
. Depreciation and amortization are calculated using the straight-line method over the following useful lives:
Expenditures for maintenance and repairs are charged to expense as incurred. Additions, renewals and betterments are capitalized.
Intangible Assets
Purchased intangible assets are recognized and measured at fair value upon acquisition. Separately identifiable intangible assets that have determinable lives are amortized over their estimated useful lives using the straight-line method as follows:
Land use right
|
50 years
|
|
|
Patent (non-US No. ZL200610068850.0)
|
16.5 years
|
|
|
Patent (non-US No. ZL200510045001.9)
|
14 years
|
|
|
A group of intangible assets for acer truncatum industrial project
|
10 years
|
Development costs of acer truncatum bunge planting
The Company has developed the acer truncatum bunge planting bases and completed planting of 6,080Mu (1Mu is equal to approximately 666.67 square meters) as of March 31, 2017. The agricultural product (e.g., seeds, oil extract, etc.) derived from the planting is intended to be the supply for an integrated use including edible oil, protein, medicine and health care, tannin extract, industrial chemicals, nectar source, nervonic acid, and specialty lumber, as well as for landscaping and conservation of soil and water.
The Company accounts for the development costs of the planting in accordance to ASC 905. Pursuant to ASC 905-360-25-3, limited-life land development costs and direct and indirect development costs of orchards, groves, vineyards, and intermediate-life plants shall be capitalized during the development period. Pursuant to ASC 905-360-35-7, costs capitalized during the development period are depreciated over the estimated useful life of the land development or that of the tree, vine, or plant. The planting is currently in the development stage with production expected in the fall of 2018; therefore, no depreciation expenses were recognized as of March 31, 2017.
Development costs primarily include land development cost incurred for land leveling, irrigation, and fertilization, the purchase costs of acer truncatum bunge trees, and acer truncatum bunge planting fee.
Revenue recognition
The Company sells two types of products: non-medical products and medical products. Medical products are sold to certified medicine distributors. Non-medical products are sold directly to its customers through its internet sales channel. To order non-medical products, customers place orders on the Company's order system through internet. Customers who purchase through internet need to make payment when they place their orders. Goods are shipped to customers once the orders and payments were received.
The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin ("SAB") 104, included in the Codification as ASC 605, Revenue Recognition. Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured. According to the Company's policy, customers can exchange defective products, but not allowed to return products. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits.
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).
Related Parties and Transactions
The Company identifies related parties, and accounts for, and discloses related party transactions in accordance with ASC 850, "Related Party Disclosures" and other relevant ASC standards.
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
Transactions between related parties commonly occurred in the normal course of business are considered to be related party transactions. Transactions between related parties are also considered to be related party transactions even though they may not be given accounting recognition. While ASC does not provide accounting or measurement guidance for such transactions, it requires their disclosure nonetheless.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigations, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Income taxes
The Company accounts for income tax under the asset and liability method as stipulated by ASC 740 "
Income Taxes
", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred Income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
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.
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 years ended March 31, 2017 and 2016 was $809,485 and $724,287, respectively.
Advertising costs
Advertising costs are expensed as incurred in accordance to the ASC 720-35 "Advertising Costs". Pursuant to ASC 720-35-25-5, costs of communication advertising are not incurred until the item or service has been received and shall not be reported as expenses before the item or service has been received, except as discussed in paragraph 340-20-25-2.
The Company incurred advertising costs of $2,972 and $601,133 for the years ended March 31, 2017 and 2016, respectively, which are included in selling expenses on the Company's consolidated financial statements.
Shipping 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
). Amounts incurred by the Company for freight are included in selling expenses. For the years ended March 31, 2017 and 2016, the Company incurred $2,070,029 and $1,795,796 shipping and handling costs, respectively.
Stock Based Compensation
The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. Share-based payments to consultants, service providers and other non-employees are accounted for under in accordance with ASC Topic 718, ASC Topic 505, "Equity Payments to Non-Employees" or other applicable authoritative guidance. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
Earnings per common share ("EPS")
Basic EPS is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted shares reflect the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, forward contracts, warrants to purchase common stock, contingently issuable shares, common stock options and warrants and their equivalents using the treasury stock method) were exercised or converted into common stock.
Fair Value of Financial Instruments
The Company has adopted the provisions of ASC Topic 820, "Fair Value Measurements and Disclosures", which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates fair values because of the short-term maturing of these instruments.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities.
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The Company has no financial assets or liabilities measured at fair value on a recurring basis.
Foreign currency translation
The accounts of the Company's Chinese subsidiary are maintained in RMB and the accounts of the U.S. companies are maintained in USD. The accounts of the Chinese subsidiary were translated into USD in accordance with Accounting Standards Codification ("ASC") Topic 830 "Foreign Currency Matters". According to Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders' equity is translated at historical rates and statement of comprehensive income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, "Comprehensive Income." Gains and losses resulting from the foreign currency transactions are reflected in the statements of comprehensive income.
The following exchange rates were used to translate the amounts from RMB into United States dollars ("USD$") for the respective periods:
|
March 31,
2017
|
|
March 31,
2016
|
|
|
|
|
|
|
Year End Exchange Rate (RMB/USD)
|
|
|
6.8993
|
|
|
|
6.4612
|
|
Average Period Exchange Rate (RMB/USD)
|
|
|
6.7287
|
|
|
|
6.3214
|
|
Recent accounting pronouncements
In January 2017, FASB issued ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business". The Board is issuing the amendments in this Update to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments in this Update affect all reporting entities that must determine whether they have acquired or sold a business. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. However, early application of the amendments in this Update if 1) For transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance 2) For transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in financials. The Company determined that its recent acquisition of the Acer Truncatum Industrial Project met the early application requirement and decided to account for the acquisition in accordance with the FASB issued ASU 2017-01 "Business Combinations (Topic 805) - Clarifying the Definition of a Business".
In October 2016, FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory". The core principle of this ASU is that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update align the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating the potential impact of adopting this new standard on its consolidated statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU supersedes most of the existing guidance on revenue recognition in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition and establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. The FASB has subsequently issued additional ASUs to clarify certain elements of the new revenue recognition guidance. The guidance is effective for fiscal years beginning after December 15, 2017, and is to be applied retrospectively using one of two transition methods at the entity's election. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application. Early adoption is permitted for fiscal years beginning after December 15, 2016.
In May 2016, FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients". The update is to address certain issues identified by the FASB/IASB Joint Transition Resource Group for Revenue Recognition (TRG) in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition, the Board decided to add a project to its technical agenda to improve Topic 606, Revenue from Contracts with Customers, by reducing: 1) The potential for diversity in practice at initial application 2) The cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The amendments in this Update affect entities with transactions included within the scope of Topic 606. The scope of that Topic includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity's ordinary activities) in exchange for consideration. The amendments to the recognition and measurement provisions of Topic 606 also affect entities with transactions included within the scope of Topic 610, Other Income. The amendments in this Update affect the guidance in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the potential impact of adopting this new standard on its consolidated statements and related disclosures.
In February 2016, FASB issued ASU 2016-02, "Leases". This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements and related disclosures.
NOTE 3 – OPERATING LEASES
On October 1, 2011, the Company entered into an agreement with Shandong Yongchuntang Bioengineering Co., Ltd. ("Shandong Yongchuntang") for the lease of one automobile. The lease term is from October 1, 2011 to September 30, 2021. The total lease payment of RMB131,468 (approximately USD19,055) was paid in full upon signing the lease agreement and is being amortized over the life of the lease.
On June 20, 2013, the Company entered into a Farmland Leasing Agreement with Shiqiao Village for the lease of 2,000Mu farmland for the development of the acer truncatum bunge planting bases. The lease term is from July 1, 2013 to June 30, 2043. The lease payment is RMB1, 000 (approximately USD 145) per Mu annually and is paid every five years in advance. The first lease payment was for the rents of the first five years in the amount of RMB10,000,000 (approximately USD 1.4 million), which was paid on July 10, 2013. On March 8, 2017, the Company returned 120Mu of the leased farmland to the lessor because the lessor needed to use the farmland for a strategic development project which is led by the local government. Based on the March 8, 2017 agreement between the Company and the lessor, the Company's remaining prepaid lease of RMB180,000 (approximately USD 26,090) for the 120Mu farmland will be used to reduce the next prepayment on the lease. The acer truncatum bunge plants on the 120Mu farmland were moved to a nearby location. As a result of this new agreement, the total leased farmland in Shiquiao Village is reduced to 1880Mu as of March 31, 2017.
On March 1, 2014, the Company entered into a Farmland Leasing Agreement with Zhongce No.4 Village for the lease of 200Mu farmland to the development of the acer truncatum bunge planting bases. The lease term is from March 1, 2014 to February 28, 2044. The lease payment is RMB1,000 (approximately USD 145) per Mu annually and is paid every five years in advance. The first lease payment was for the rents of the first five years in the amount of RMB1,000,000 (approximately USD140,000), which was paid on March 10, 2014. The lease was terminated on April 1, 2017. (See Note 15).
On January 7, 2015, the Company entered into a Farmland Leasing Agreement with a company, Shandong Wanziyuan Tourism Development Co. to lease 2,000Mu farmland for the development of the acer truncatum bunge planting bases. The lease term is from January 15, 2015 to December 31, 2029. The lease payment is RMB1, 000 (approximately USD 145) per Mu annually and is paid every five years in advance. The first lease payment was for the rents of the first five years in the amount of RMB10,000,000 (approximately USD1.4 million), which was paid on January 8, 2015.
On July 2, 2015, the Company entered into a Farmland Leasing Agreement with a Zhongce Shen Village for the lease of 2,000Mu farmland to the development of the acer truncatum bunge planting bases. The lease term is from July 2, 2015 to July 2, 2029. The lease payment is RMB1, 000 (approximately USD 145) per Mu annually and is paid every five years in advance. The first lease payment was for the rents of the first five years in the amount of RMB10,000,000 (approximately USD 1.4 million), which was paid on July 3, 2015.
The Company accounts for the lease agreements as operating leases in accordance to ASC 840-10-25-37, which requires, if land is the sole item of property leased and either the transfer-of-ownership criterion in paragraph 840-10-25-1(a) or the bargain-purchase-option criterion in paragraph 840-10-25-1(b) is met, the lessee shall account for the lease as a capital lease. Otherwise, the lessee shall account for the lease as an operating lease. Per ASC 840-2-25-1, rent is charged to expense by lessees over the lease term.
The components of prepaid lease were as follows:
|
|
As of March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Current portion
|
|
|
Long-term
|
|
|
Current portion
|
|
|
Long-term
|
|
Shiqiao Village – 1880Mu
|
|
$
|
289,884
|
|
|
$
|
72,471
|
|
|
$
|
309,540
|
|
|
$
|
386,925
|
|
Shandong Wanziyuan – 2000Mu
|
|
|
289,884
|
|
|
|
507,298
|
|
|
|
309,540
|
|
|
|
851,235
|
|
Zhongce No. 4 Village – 200Mu
|
|
|
28,989
|
|
|
|
26,573
|
|
|
|
30,954
|
|
|
|
59,329
|
|
Zhongce Shen Village - 2000Mu
|
|
|
289,884
|
|
|
|
652,240
|
|
|
|
309,540
|
|
|
|
1,006,005
|
|
Total prepaid land lease
|
|
|
898,641
|
|
|
|
1,258,582
|
|
|
|
959,574
|
|
|
|
2,303,494
|
|
Shandong Yongchuntang - Automobile
|
|
|
1,906
|
|
|
|
6,670
|
|
|
|
2,035
|
|
|
|
9,156
|
|
Total prepaid lease
|
|
$
|
900,547
|
|
|
$
|
1,265,252
|
|
|
$
|
961,609
|
|
|
$
|
2,312,650
|
|
The prepaid lease is amortized over prepaid period based on straight-line method. The lease expenses for the years ended March 31, 2017 and 2016 were $923,380 and $903,778, respectively.
NOTE 4 - INVENTORIES
The components of inventories were as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
1,276,254
|
|
|
$
|
998,342
|
|
Packaging materials
|
|
|
476,803
|
|
|
|
145,860
|
|
Work-in-process
|
|
|
1,373,919
|
|
|
|
639,342
|
|
Finished goods
|
|
|
2,356,064
|
|
|
|
503,768
|
|
Total Inventories
|
|
$
|
5,483,040
|
|
|
$
|
2,287,312
|
|
No allowances for obsolete or unsalable inventories were made for the years ended March 31, 2017 and 2016.
NOTE 5 – PLANT, PROPERTY, AND EQUIPMENT, NET
The components of property and equipment were as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Machinery and equipment
|
|
$
|
2,254,813
|
|
|
$
|
1,740,751
|
|
Office equipment
|
|
|
717,259
|
|
|
|
486,779
|
|
Building
|
|
|
12,401,320
|
|
|
|
12,605,012
|
|
Leasehold improvements
|
|
|
2,803,052
|
|
|
|
1,238,160
|
|
Subtotal
|
|
|
18,176,444
|
|
|
|
16,070,702
|
|
Less: Accumulated depreciation and amortization
|
|
|
(3,689,309
|
)
|
|
|
(3,197,705
|
)
|
Total plant, property and equipment, net
|
|
$
|
14,487,135
|
|
|
$
|
12,872,997
|
|
The depreciation and amortization expense of plant, property and equipment for the years ended March 31, 2017 and 2016 was $746,931 and $652,123, respectively.
NOTE 6 – DEVELOPMENT OF
ACER TRUNCATUM BUNGE
Since July 2013, the Company has developed the acer truncatum bunge planting bases. As of March 31, 2017, the Company has completed planting of 6,080 Mu (1Mu is equal to approximately 666.67 square meters) at four leased farmlands. The Company accounts for the development costs of the planting in accordance to ASC 905. Pursuant to ASC 905-360-25-3, limited-life land development costs, direct and indirect development costs of orchards, groves, vineyards, and intermediate-life plants shall be capitalized during the development period. Development costs primarily include land development cost incurred for land leveling, irrigation, and fertilization, the purchase costs of acer truncatum bunge trees, and acer truncatum bunge planting fee. During the year ended March 31, 2017, approximately 2.2% of the acer truncatum bunge plants were dead or lost due to the weather, replanting of trees, relocating of trees, and other natural or technical reasons as per management's estimation. An impairment of $986,406 was recorded during the year ended March 31, 2017.
NOTE 7 - INTANGIBLE ASSETS, NET
The intangible assets consist of the following:
|
|
As of
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Land use right
|
|
$
|
1,470,875
|
|
|
$
|
1,570,605
|
|
Patent (non-US No. ZL200610068850.0)
|
|
|
6,667,343
|
|
|
|
7,119,421
|
|
Patent (non-US No. ZL200510045001.9)
|
|
|
8,986,419
|
|
|
|
9,595,741
|
|
Intangible assets for production and marketing of Yuanbaofen product
|
|
|
1,599,930
|
|
|
|
-
|
|
Less: Accumulated amortization
|
|
|
(6,681,809
|
)
|
|
|
(5,990,620
|
)
|
Intangible assets, net
|
|
$
|
12,042,758
|
|
|
$
|
12,295,147
|
|
All land in the PRC is owned by the government and cannot be sold to any individual or company. However, the government may grant a "land use right" for occupying, developing and using land. The Company records land use rights obtained as intangible assets at cost, which is amortized on the straight line method over the grant period of 50 years.
In March 2010, the Company purchased one patent use right from Shandong Yongchuntang. The Company has exclusive right to use an aglycone type and purification method of biotransformation in the gingko product manufacturing process for a period of 20 years from the patent application date. The patent was recorded at cost when purchased, and is being amortized over its remaining legal life, 16.5 years, which is shorter than its remaining useful life, on a straight-line basis.
In October 2011, two patents were transferred to the Company based on a purchase agreement signed with Jining Tianruitong Technology development Company, Limited on October 26, 2010; which are "Treatment to ischemic encephalopathy and its preparation method" (ZL200510045001.9) and "Chinese herbal medicine compound to treat renal insufficiency and its preparation" (ZL200710013301.8). The patents were recorded at cost when purchased, and are being amortized over its legal lives, 14 years and 15 years, respectively; on a straight-line basis. Both patents' legal lives are considered shorter than their remaining useful lives.
One of the patents acquired in October 2011 is a Chinese herbal medicine compound to treat renal insufficiency and its preparation (ZL200710013301.8). The purpose of the acquisition was to increase the variety of the products which were made of pure Chinese herbals. The product was targeted to cure chronic renal insufficiency through strengthening the spleen, kidney and promoting blood circulation to dispel blood stasis. Lately, however, the same type of medicines with the similar therapeutic effect were also produced by other companies and appeared to be over supplied in the market. In addition, due to the short supply of one core component – Sanqi, the cost of the production has been increasing. The Company also found out certain deficiency in its product formulation which is needed to be improved. However, the Company does not have plan to invest in such improvement because, since late 2014, it has shifted manufacturing focus from producing Chinese medicines for curing regular diseases to producing these for curing highly incidence of diseases such as cardiovascular disease. Due to the reasons stated above, the Company decided to cease the further development of the product using this patent and the production of the medicine that uses this patent.
Pursuant to FASB ASC 350-30-50-3, the Company conducted its annual test for impairment on patent as of March 31, 2017 and 2016. At March 31, 2016, the Company estimated the future net undiscounted cash flows that are expected to be generated from the use of the patent and its eventual disposal. The Company determined that the fair value of one patent (ZL200710013301.8) is nil with no disposal cash inflow. Accordingly, the Company recorded the full impairment of the patent of $1,114,942 in the year ended March 31, 2016. No impairment of patents was recorded in the year ended March 31, 2017.
|
(iii)
|
A group of intangible assets for AcerTruncatum Industrial Project:
|
On March 18, 2017, the Company entered into an acquisition agreement (the "Agreement") with Shandong Yongchuntang to acquire a group of tangible and intangible assets for producing and marketing acer truncatum products. Pursuant to the Agreement, the Company agreed to transfer 3% equity of Shandong Spring to Shandong Yongchuntang in exchange for a group of research equipment and a group of intangible assets related to Acer Truncatum Industrial Project (the "Project). The group of the intangible assets includes a patent on the refinery process of the Acer Truncatum's seed oils, a trademark with the name of "Bao Feng San Yi", and certain related certifications. The fair value of assets acquired is approximately $2,135,000. Approximately $532,000 was allocated to research equipment acquired and approximately $1,603,000 was allocated to intangible assets acquired. This acquisition is considered as an asset acquisition as per ASU 2017-01, "Business Combinations (Topic 805). The excess amount of consideration paid over the fair market value of assets acquired was $448,690 which was recorded as a reduction to the Company's equity. The tangible and intangible assets acquired related to the Project are being depreciated or amortized over the useful life of 3 to 10 years on a straight-line basis.
The amortization expense of land use right for the years ended March 31, 2017 and 2016 was $30,163 and $32,107, respectively.
The amortization expense of patent for the years ended March 31, 2017 and 2016 was $1,068,594 and $1,242,794, respectively.
NOTE 8 – SECURITY DEPOSIT
The security deposit – related party represents the deposit paid to Shandong Yongchuntang for using the direct-sales license issued to Shandong Yongchuntang.
The Company was permitted by Shandong Yongchuntang to sell Shandong Yongchuntang's products using the direct-sales license issued to Shandong Yongchuntang from July 1, 2015 to June 30, 2020. To ensure the appropriate use of the direct-sales license in the market, the Company provided a deposit of approximately $1,449,422 to Shandong Yongchuntang as a marketing deposit based on an agreement between the Company and Shandong Yongchuntang, which was signed on January 4, 2017. If no violations of rules or regulations related to the direct-sales occur during the contract period, the security deposit will be fully returned to the Company at the end of the contract period. The amount of security deposit is non-interest bearing and is not secured.
NOTE 9 - TAXES PAYABLE
Tax payable at March 31, 2017 and 2016 were as follows:
|
As of
|
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
Corporate Income Tax
|
|
$
|
1,382,382
|
|
|
$
|
435,686
|
|
Value-Added Tax
|
|
|
576,086
|
|
|
|
273,317
|
|
Other Tax & Fees
|
|
|
69,722
|
|
|
|
30,065
|
|
Total Tax Payable
|
|
$
|
2,028,190
|
|
|
$
|
739,068
|
|
NOTE 10 - INCOME TAXES
China YCT and Landway Nano were incorporated in the United States of America and are subject to United States federal taxation. No provisions for income taxes have been made, as there was no taxable income from U.S. operations for the years ended March 31, 2017 and 2016. The Company has net loss carryforward of approximately $22,000 which will be expired in 2047. The Company has set up 100% valuation allowance on deferred tax assets resulting from net operation loss incurred in the U.S.
The Company's Chinese subsidiary is governed by the Income Tax Law of the PRC concerning the privately run and foreign invested enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
The Company has not provided deferred taxes on undistributed earnings attributable to its PRC subsidiaries as they are to be permanently reinvested. On February 22, 2008, MOF, and SAT, jointly issued Cai Shui 2008 Circular 1, "Circular 1." According to Article 4 of Circular 1, distributions of accumulated profits earned by foreign investment enterprises, ("FIE") prior to January 1, 2008 to their foreign investors will be exempt from withholding tax, ("WHT") while distribution of the profits earned by a FIE after January 1, 2008 to its foreign investors shall be subject to WHT.
Dividend payments by PRC subsidiaries are limited by certain statutory regulations in the PRC. No dividends may be paid by PRC subsidiaries without first receiving prior approval from SAFE. Dividend payments are restricted to 90% of after tax profits.
Should the Company's PRC subsidiaries distribute all their profits generated after December 31, 2007, the aggregate withholding tax amount will be $8,306,160 and $7,298,330 as of March 31, 2017 and 2016, respectively.
The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of ASC Topic 740,
Income Taxes
. Since Shandong Spring intends to reinvest its earnings to further expand its businesses in mainland China, it does not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, the Company has not recorded any deferred taxes in relation to US tax on the cumulative amount of undistributed retained earnings since January 1, 2008.
The reconciliation of income tax expense at the U.S. statutory rate of 35% to the Company's effective tax rate is as follows:
|
Years Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
U.S. Statutory rate
|
|
$
|
4,639,348
|
|
|
$
|
3,940,231
|
|
Tax rate difference between China and U.S.
|
|
|
(1,327,739
|
)
|
|
|
(1,125,780
|
)
|
Change in valuation allowance
|
|
|
7,738
|
|
|
|
-
|
|
Permanent difference
|
|
|
(118,722
|
)
|
|
|
26,584
|
|
Effective tax rate
|
|
$
|
3,200,625
|
|
|
$
|
2,841,035
|
|
The provisions for income taxes are summarized as follows:
|
Years Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
Current
|
|
$
|
3,520,126
|
|
|
$
|
3,055,958
|
|
Deferred
|
|
|
(319,501
|
)
|
|
|
(214,923
|
)
|
Total
|
|
$
|
3,200,625
|
|
|
$
|
2,841,035
|
|
The tax effects of temporary differences that give rise to the Company's net deferred tax assets as of March 31, 2017 and 2016 are as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Impairment loss
|
|
$
|
240,504
|
|
|
$
|
272,705
|
|
Revenue
|
|
|
181,166
|
|
|
|
-
|
|
Depreciation
|
|
|
50,514
|
|
|
|
-
|
|
Others
|
|
|
36,337
|
|
|
|
-
|
|
Loss carry forward
|
|
|
7,738
|
|
|
|
-
|
|
Less valuation allowance
|
|
|
(7,738
|
)
|
|
|
-
|
|
Total net deferred tax assets
|
|
|
508,521
|
|
|
|
272,705
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
-
|
|
|
|
(62,432
|
)
|
Total deferred tax liabilities
|
|
|
-
|
|
|
|
(62,432
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
508,521
|
|
|
$
|
210,273
|
|
NOTE 11 - STOCKHOLDERS' EQUITY
Stock Issued for compensation and service
On October 19, 2015, in accordance with the Company's agreement with an independent director, the Company issued 20,000 shares of common stock to one independent director, which were valued at $10,000 based on the quoted market price at issuance.
On April 19, 2016, in accordance with the Company's agreement with an independent director, the Company issued 43,478 shares of common stock to one independent director, which were valued at $10,609 based on the quoted market price at issuance date.
On March 10, 2017, in accordance with the Company's service agreement with an investor relations firm, the Company issued 25,000 shares of common stock to the firm for the services
provided, which were valued at $11,500 based on the quoted market price at issuance date.
Noncontrolling interest
On March 18, 2017, the Company entered into an Acquisition Agreement on Acer Truncatum Industrial Project (the "Agreement") with Shandong Yongchuntang. Pursuant to the Agreement, the Company agreed to transfer 3% equity of Shandong Spring in exchange for tangible and intangible assets related to the Acer Truncatum Industrial Project (the "Project"), which was owned by Shandong Yongchuntang. The assets acquired include research equipment, a patent on the refinery process of the Acer Truncatum's seed oils, a trademark with the name of "Bao Feng San Yi", and some relevant certifications issued to Shandong Yongchuntang. (See NOTE 7).
Statutory Reserve
Subsidiaries incorporated in China are required to make appropriations to reserve funds, based on after-tax net income determined in accordance with generally accepted accounting principles of the People's Republic of China ("PRC GAAP"). Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum, and any contributions are not to exceed 50% of the respective companies' registered capital.
The Company appropriated nil to the statutory reserve for the years ended March 31, 2017 and 2016, respectively.
Stock Option Plan
On July 23, 2015, the Company adopted a stock option plan that was approved by its Board of Directors on June 15, 2015. This plan was intended to retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Under this stock option plan, the participants of the plan include the Company's directors, officers and some employees who were previously determined by the Board of Directors. On July 23, 2015, the Company signed stock option agreements with each participant and granted options to purchase a total of 2.6 million shares of Common Stock to the participants. The vesting period of the stock options was ten months from July 23, 2015, the grant date of the stock options. Immediately following the date when the stock options were vested, the participants would have five consecutive business days to exercise the stock options at an exercise price of $0.40 per share. Stock options not exercised within the five consecutive business days would expire. The Company assessed the fair value of the total granted stock options on the grant date using a Black-Scholes Stock Option Pricing Model. Significant assumptions used in calculating fair value of options are as follows:
·
|
Expected volatility 92.03%;
|
|
|
·
|
Risk-free interest rate 0.33%;
|
|
|
·
|
Expected term (year) 0.85;
|
|
|
·
|
Exercise price $0.4.
|
The estimated fair value of the total granted stock options on the grant date was $529,100 which is being amortized over ten months period. For the years ended March 31, 2017 and 2016, the amortization of stock-based compensation expense was $101,026 and $428,074, respectively. As of March 31, 2017, the total estimated fair value of the stock options in amount of $529,100 had been fully amortized. All stock options expired on May 30, 2016 and none of the vested stock options were exercised by the end of the option exercise date.
A summary of the changes in stock options outstanding under the Company's stock option plan for the years ended March
31
, 2017 and 2016 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
2,600,000
|
|
|
|
529,100
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Options outstanding at March 31, 2016
|
|
|
2,600,000
|
|
|
$
|
529,100
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
2,600,000
|
|
|
|
529,100
|
|
Options outstanding at March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
NOTE 12 - RELATED PARTY TRANSACTIONS AND BALANCES
Balances:
(i)
|
Security deposit - related party:
|
On January 4, 2017, the Company signed a supplemental agreement with Shandong Yongchuntang to make security deposit of $1,449,422. The amount is non-interest bearing and not secured. (See Note 8.)
(ii)
|
Amounts due to related party:
|
|
As of March 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Trade related balance
|
|
$
|
706,048
|
|
|
$
|
63,241
|
|
Trade related balance pertains to payable in respect of purchase of healthcare products from Shandong Yongchuntang. (See Note 13.)
Transactions:
(i)
|
Acquisition of assets
|
On March 18, 2017, 3% equity of Shandong Spring was transferred to Shandong Yongchuntang in exchange for tangible and intangible assets related to Acer Truncatum Industrial Project. (See Note 7 and Note 11.)
(ii)
|
Sales to related party
|
During the year ended March 31, 2017, the Company sold acer truncatum oil product to Shandong Yongchuntang for $134,413.
Contingency:
The Company is authorized by Shandong Yongchuntang to sell Shandong Yongchuntang's products using the direct-sales license issued to Shandong Yongchuntang. As a condition for using the direct-sales license, the Company needs to make 20% sales increase each year based on the 95% of sales of the year 2014. If the Company cannot meet this sales target in any year from April 1, 2017 to June 30, 2020, the Company needs to pay approximately $1.4 million as an annual fee for using the direct-sales license. There is risk that the Company may fail to meet the sales target and may need to pay approximate $1.4 million in the subsequent years.
NOTE 13 - MAJOR CUSTOMERS AND VENDORS
The Company sold products mostly through ten distributors during the years ended March 31, 2017 and 2016. Sales to four distributors represented 18%, 13%, 12%, and 11% of total sales for the year ended March 31, 2017. Sales to two distributors represented 26% and 21% of total sales for the year ended March 31, 2016.
The Company sold 14 and 16 products during the years ended March 31, 2017 and 2016. Sales of three products represented 44%, 19%, and 14% of total sales for the year ended March 31, 2017. Sales of three products represented 56%, 12%, and 10% of total sales for the year ended March 31, 2016.
The Company purchase products from Shandong Yongchuntang according to the purchase contract signed between the Company and Shandong Yongchuntang. Pursuant to the two year contract signed on February 26, 2015, the Company can purchase 10 products from Shandong Yongchuntang at fixed prices. On June 25, 2015, the Company made an amendment to the two year contract. Pursuant to the amended contract, the Company no longer purchases the 10 products included in the contract signed on February 26, 2015 and agreed to purchase 4 new products at fixed prices without changes in other terms of the previous contract. On February 20, 2017, the Company renewed the purchase contract with Shandong Yongchuntang for a term of one year ending on February 25, 2018. Pursuant to the renewed one year contract, the Company no longer purchases the 4 products included in the amended contract signed on June 25, 2015 and agreed to purchase 9 new products from Shandong Yongchuntang at fixed prices. Total purchases from Shandong Yongchuntang represented 36% and 35% of our total purchases during the years ended March 31, 2017 and 2016, respectively. The revenue from sale of products purchased from Shandong Yongchuntang represented 36% and 34% of total revenue for the years ended March 31, 2017 and 2016, respectively. The purchases from three other vendors represented 24%, 15%, and 12% of the Company's total purchases for the year ended March 31, 2017. The purchases from two other vendors represented 31% and 19% of the Company's total purchases for the year ended March 31, 2016.
NOTE 14 – FUTURE MINIMUM LEASE PAYMENTS
As of March 31, 2017, future minimum lease payments under the operating lease pursuant to the four Farmland Leasing Agreements were as follows:
Fiscal year ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
2019
|
|
|
1,336,367
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,336,367
|
|
2020
|
|
|
-
|
|
|
|
1,449,422
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,449,422
|
|
2021
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,449,422
|
|
|
|
1,449,422
|
|
2022
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2023 and thereafter
|
|
|
5,449,828
|
|
|
|
1,159,538
|
|
|
|
-
|
|
|
|
1,159,538
|
|
|
|
7,768,904
|
|
Total minimum lease payments
|
|
$
|
6,786,195
|
|
|
$
|
2,608,960
|
|
|
$
|
-
|
|
|
$
|
2,608,960
|
|
|
$
|
12,004,115
|
|
The lease of Zhongce No.4 Village farmland was terminated by the lessor on April 1, 2017. Therefore, there are no more future payments for the canceled lease of Zhongce No.4 Village farmland. (See Note 15.)
NOTE 15 – SUBSEQUENT EVENTS
On April 1, 2017, the Company entered an agreement with Zhongce No.4 Village to terminate the lease for the 200 Mu farmland because the parcel of farmland was recalled by local government for building a new urban district. Base on the agreement, the Company will (1) receive the refund of all the remaining prepaid lease payment of approximately $55,000 (2) receive a compensation of approximately $348,000 from the government for the early termination of the lease; (3) the Company can sell all of the acer truncatum bunge plants in this parcel of farmland.
On May 1, 2017, the Company signed two contracts with the third parties to sell all of the plants from the farmland for approximately $2 million. The total capitalized cost of the acer truncatum bunge planting in Zhongce No.4 Village farmland was approximately $1,490,000 as of March 31, 2017. In addition, the Company incurred approximately $238,000 expense to pack the plants for sale. The estimated net income from sale of acer truncatum bunge plants is approximately $272,000.