NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

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

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of presentation

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

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

Certain amounts have been reclassified to conform to current year presentation.

Principles of consolidation

The consolidated financial statements include the financial statements of China YCT, Landway Nano and its 97% owned subsidiary, Shandong Spring.  All inter-company transactions and balances are eliminated in consolidation.

  Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant accounting estimates reflected in the Company's consolidated financial statements include: the valuation of inventory, the estimated useful lives and impairment of property, equipment, intangible assets, and the valuation of deferred tax assets.

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:

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 – PREPAID EXPENSES

The prepaid expenses consist of the payments that the Company has made in advance for the advertising services to be received in the future. On September 19, 2017, the Company signed an advertising contract with Shenzhen Henghe Media Co., Ltd.  In pursuant to the contract, in September 2017, the Company made approximately $450,000 (RMB 3 Million) advance payment to Shenzhen Henghe Media Co., Ltd for the advertising services to be received within the period from September 2017 to December 31, 2018.  The prepaid expenses are amortized over the service period and unamortized balance as of December 31, 2017 was $180,473.

The depreciation and amortization expense for the three months ended December 31, 2017 and 2016 was $336,599 and $176,755, respectively.

The depreciation and amortization expense for the nine months ended December 31, 2017 and 2016 was $951,711 and $534,567, respectively.

NOTE 6 – DEVELOPMENT OF ACER TRUNCATUM BUNGE

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

Since July 2013, the Company has developed the acer truncatum bunge planting bases. As of March 31, 2017, the Company had completed planting of 6,080 Mu (1Mu is equal to approximately 666.67 square meters) at four leased farmlands. On April 1, 2017, the Company entered an agreement with Zhongce No.4 Village to terminate the lease for the 200 Mu farmland because the parcel of farmland was recalled by the local government to build a new urban district. Based on the agreement, the Company received the refund of the remaining prepaid lease payments of approximately $56,000 (RMB383,333) and compensation of approximately $350,000 (RMB2,400,000) from the government for the early termination of the lease.  On May 1, 2017, the Company signed two contracts with third parties to sell all of the plants from the farmland for approximately $1,974,000 (RMB13,527,000). The total capitalized cost of the acer truncatum bunge planting in Zhongce No.4 Village farmland was approximately $1,512,000 (RMB10,360,000). In addition, the Company incurred approximately $239,000 (RMB1,639,260) in  expenses to pack the plants for sale. The gain from disposal of the acer truncatum bunge plants was approximately $573,000. As a result of the lease termination, the Company's acer truncatum bunge planting acreage was reduced to 5,880 Mu at December 31, 2017 from 6,080 Mu at March 31, 2017.

NOTE 8 - INCOME TAXES

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

The Company's Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning 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 $9,188,426 and $8,306,160 as of December 31, 2017 and March 31, 2017, respectively.

Prior to the new Tax Cut and Jobs Act (the "New Law"), 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. Under the "#1703. Treatment of deferred foreign income upon transition to new participation exemption system-deemed repatriation" of the New Law, U.S. shareholders owning at least 10% of foreign subsidiary general must include in income, for the subsidiary's last tax year beginning before 2018, the shareholder's pro rata share of the accumulated post-'86 historical E&P of the foreign subsidiary as of the "measurement date" to the extent such E&P has not been previously subject to U.S. tax.  The measurement date" is November 2, 2017, or December 31, 2017, whichever date produces a greater result. The portion of the E&P comprising cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8%. At the election of the U.S. shareholder, the tax liability is payable over a period of up to eight years. The payments for each of the first five years equal 8% of the net tax liability. The amount of the sixth installment is 15% of the net tax liability, increasing to 20% for the seventh installment and the remaining balance of 25% in the eighth year. The Company is still estimating the tax liability as result of the New Law being effective on December 22, 2017.  If such liability is determined, the Company will make adjustments to its liabilities at the year ended March 31, 2018 in accordance with the provisions of ASC Topic 740, Income Taxes.

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

The provisions for income taxes are summarized as follows: 

NOTE 9 - RELATED PARTY TRANSACTIONS AND BALANCES

  Balances:

  (i)      Security deposit to related party:

The security deposit - related party of $1,530,409 represents the deposit paid to Shandong Yongchuntang Bioengineering Co. Ltd. ("Shandong Yongchuntang") on January 4, 2017 for using the direct-sales license issued to Shandong Yongchuntang. The amount is non-interest bearing and not secured. Shandong Yongchuntang owns 3% of the common stock of Shandong Spring.

  (ii)     Trade related balance with related party:

On December 31, 2017, the purchase deposit to related party of $1,304,919 pertains to purchase deposit paid in respect of the purchase of healthcare products from Shandong Yongchuntang.

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

(iii)    Sales to related party:

During the three and nine months ended December 31, 2017, the Company sold acer truncatum oil product to Shandong Yongchuntang for $131,906.

(iv)    Purchase from related party:

See Note 10 for details.

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 increase sales 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 $1.5 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 $1.5 million in one or more subsequent years.

NOTE 10 - MAJOR CUSTOMER AND VENDOR

The Company sold products through ten distributors during the three and nine months ended December 31, 2017 and 2016. Sales to five distributors represented 17%, 14%, 12%, 11%, and 11% of total sales for the three months ended December 31, 2017 and sales to three distributors represented 19%, 15%, and 12% of total sales for the three months ended December 31, 2016, respectively.

The Company's sales through four distributors represented 17%, 16%, 13%, and 12% of total sales for the nine months ended December 31, 2017. Sales to three distributors represented 20%, 15%, and 13% of total sales for the nine months ended December 31, 2016.

The Company sold 11 and 7 products during the three months ended December 31, 2017 and 2016, respectively. Sales of two products represented 38% and 24% of total sales for the three months ended December 31, 2017. Sales of three products represented 46%, 20%, and 14% of total sales for the three months ended December 31, 2016.

The Company sold 11 and 7 products during the nine months ended December 31, 2017 and 2016, respectively. Sales of three products represented 41%, 17% and 10% of total sales for the nine months ended December 31, 2017.  Sales of three products represented 48%, 17%, and 16% of total sales for the nine months ended December 31, 2016.

The Company purchases its products from Shandong Yongchuntang, a related party, according to the purchase contract signed between the Company and Shandong Yongchuntang. Pursuant to the renewed one year contract dated February 20, 2017, the Company agreed to purchase nine products from Shandong Yongchuntang at fixed prices. Total purchases from Shandong Yongchuntang represented 33% and 30% of our total purchases during the three months ended December 31, 2017 and 2016, respectively.  The purchases from three other vendors represented 33%, 13%, and 11% of the Company's total purchases for the three months ended December 31, 2017. The purchases from three other vendors represented 33%, 16%, and 10% of the Company's total purchases for the three months ended December 31, 2016.

Total purchases from Shandong Yongchuntang represented 42% and 32% of our total purchases during the nine months ended December 31, 2017 and 2016, respectively.  The purchases from two other vendors represented 25% and 14% of the Company's total purchases for the nine months ended December 31, 2017. The purchases from two other vendors represented 25% and 17% of the Company's total purchases for the nine months ended December 31, 2016.The Company has evaluated subsequent events that have occurred after the date of the balance sheet through the date of issuance of these consolidated financial statements and determined that no subsequent event requires recognition or disclosure to the consolidated financial statements.