ITEM 1. BUSINESS
The Structure of our Business
China YCT International Group, through its wholly-owned subsidiary, Landway Nano Bio-Tech Group, Inc., owns 100% of the registered capital of Shandong Spring Pharmaceutical Co., Ltd. (“Shandong Spring Pharmaceutical”), a corporation organized in 2005 under the laws of The People’s Republic of China. Shandong Spring Pharmaceutical is engaged in the business of developing, manufacturing and marketing gingko products in the People’s Republic of China.
From January 2006 until January 2007 management of Shandong Spring Pharmaceutical was engaged in developing the company’s manufacturing facility and distribution network. In January 2007 Shandong Spring Pharmaceutical commenced revenue-producing activities; specifically distributing products manufactured by Shandong Yong Chun Tang Bioengineering Co., Ltd. (“Shandong Yong Chun Tang”), which is owned by Yan Tinghe, the Chairman of Shandong Spring Pharmaceutical.
Shandong Spring Pharmaceutical was originally organized as a subsidiary of Shandong Yong Chun Tang for the purpose of focusing on advanced technology related to the use of gingko as an aide to health. Shandong Yong Chun Tang later transferred ownership of Shandong Spring Pharmaceutical to its equity-holders. Through the end of its 2009 fiscal year on March 31, 2009, Shandong Spring Pharmaceutical served solely as a distributor for Shandong Yong Chun Tang, pursuant to a distribution agreement that fixed the resale profit that would be earned by Shandong Spring Pharmaceutical.
The profits from our health and beauty aid distribution business are adequate to fund our ongoing operations. In order to fully implement its business plan, however, Shandong Spring Pharmaceutical will require a large capital infusion to finance the creation of state-of-the-art facilities for the extraction of compounds from gingko and the formulation of products based on those compounds.
The Market for Gingko
Traditional Chinese medicine recommends consumption of gingko tea to improve circulation and pulmonary function. Although scientific testing of the health benefits traditionally attributed to gingko has been inconclusive to date, there remains a widespread belief in the benefits of a regimen of gingko consumption. In particular, the potential use of gingko to alleviate symptoms of Alzheimer’s disease has recently attracted considerable attention. Today, therefore, the flavonoid aglycone, a compound derived from the gingko plant, is used throughout the world in pharmaceutical formulations as well as in food and cosmetic products.
The annual worldwide consumption of various gingko extracts exceeds 460 tons, of which over 80% is produced in China. A large portion of the Chinese production, however, is extracted from gingko biloba, and lacks aglycone. Ironically, the primary sources of aglycone-rich extracts are outside of China. Our business plan is to compete directly with these international competitors. The advantages that we bring to the competition will be a substantially lower cost of production and advanced extraction technology.
Research and Development: Our Products
Our goal is to utilize advanced biological technology to isolate and extract the beneficial compounds in plants that have traditionally been known to have medicinal benefits, primarily gingko. Toward that end, we have a staff of ten currently engaged in research and development of new technologies and resulting products. 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.
Through March 31, 2009 we have invested approximately $181,531 in research and development. The immediate result of our efforts has been three patents awarded by the Chinese government:
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Patent No. ZL00 2 54604.3 for a gingko regimen pillow.
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Patent No. ZL2005 20082190.2 for a health pillow.
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Patent No. ZL02 2 14022.0 for a medicated magnetic health pillow.
In addition, we currently have six pending patent applications:
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Application No. 03153489.9. Technology for flavonoids biotransformation and purification.
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Application No. 200610068680.6. Technology for purification of grapefruit glycoside.
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Application No. 200610068732.X. Technology to manufacture gingko regimen tea.
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Application No. 200610068731.5. Application of gingko flavonoids in cosmetics.
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Application No. 200610068728.3. Technology to manufacture gingko flavonoids capsule.
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Application No. 200610068733.4. Technology to extract and manufacture high purity gingko flavonoids compound.
Based on the results of our research activities, we have developed a line of health care products that isolate the primary beneficial qualities of gingko and other plants to allow our customers to focus their herbal self-treatment regimens. When we initiate production, our first products will be:
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Gingko Nutrient Tea. This tea combines gingko, fiveleaf gynostemma herb, ganoderma lucidem and green tea. Each of these ingredients is native to Shandong Province, which enables us to guarantee a tea of the highest quality, with minimal pre-production oxygenation.
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Red Sage Root Gingko Tea. This combination of gingko, red sage root, red sage root extract and other active ingredients offers the benefits of gingko along with the benefits of red sage, which is believed by practitioners of traditional Chinese medicine to improve cardiac function by relaxing arteries and dissolving obstructions.
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Ganoderma Lucidum Nutrient Capsule. This combination of ganoderma and spore powder is microprocessed to achieve optimal absorption into the circulatory system. Practitioners of traditional Chinese medicine believe ganoderma accelerates the production of immuno-function in the circulatory system, thus aiding in the prevention of tumors and cancers.
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Low Polyxylose Capsule. Practitioners of traditional Chinese medicine believe that low level doses of polyxylose aid the intestine in the generation of bifidobacterium, the digestive bacteria that line the human intestine. The proliferation of bifidobacterium aids in the prevention of intestinal infection and the alleviation of diarrhea.
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Tiancibao Soybean Capsule. Recent scientific research in the U.S., albeit inconclusive, has identified an association between soybean isoflavone and the suppression of development of cancer cells. Our Tiancibao capsules contain soybean isoflavone and protein polypeptide, which provides nutritional benefits.
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Medlar Essence Capsule. Medlar has long been considered one of the three treasures of traditional Chinese medicine, along with ginseng and fleece-flower root polygonum multiflorum thunb. Medlar contains a raft of nutrients known to be essential to health, including 14 kinds of aminophenols, carotene, niacin, selenium, lycine and Vitamin C. Medlar is believed to aid pulmonary function and improve haematogenesis.
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Protein Essence Capsule. These capsules contain a combination of aminophenols and microelements that are believed to aid the body’s natural collagen in maintaining skin moisture and texture.
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Cactus Healthy Tablet. We manufacture this tablet by extracting the active compounds from cactus and combining them with other nutrients. The tablets contain more magnesium, autunite and iron than one would obtain in an ordinary diet, and provide a supplement for these essential nutrients.
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Spirulina Platensis Tablet. Spirulina, a multicell algae, has been consumed in the Americas since Pre-Columbian times for both nutrition and health. Spirulina contains aminophenol, amylase, and vitamins and minerals. It is also high in protein and unsaturated fats, which are useful for reducing cholesterol.
Facilities
Through March 31, 2009 we have invested $4,570,587 in the development of our manufacturing and R&D facilities. We have invested an additional $1,454,592 in the acquisition of our campus and farm.
Our plan is to develop a state of the art enzyme extraction facility for the utilization of gingko compounds. Achievement of that goal will depend on our ability to obtain substantial additional funds.
Shandong Spring Pharmaceutical operates on a property of approximately 1,700 acres that it occupies under a 50 year lease. Besides housing our executive offices, the property is home to a manufacturing facility measuring 17,200 m2 and a research facility measuring 3,000 m2. When completed, our manufacturing facility will have the capacity to process 100 tons of gingko extract annually.
The greater portion of the property, 1,647 acres, is dedicated to agricultural use, primarily the production of gingko. For the fiscal year 2009, we produced 2,300 tons of gingko leaves on our farm. In addition we have reached cooperative agreements with gingko growers in Shandong Province who control approximately 33,000 acres.
The manufacturing facility developed by Shandong Spring Pharmaceutical has received GMP (good manufacturing practices) certification by the Chinese government. The company has also achieved ISO9000 certification of its management processes.
The farm operated by Shandong Spring Pharmaceutical is operated in a manner consistent with the requirements for organic certification by the Organic Foods Development Center. The farm has been certified as “green” by the Chinese Ministry of Agriculture, which reflects the company’s dedication to organic agricultural methods. Currently Shandong Spring Pharmaceutical incurs approximately $150,000 in expenses annually to comply with government environmental regulations. It expects this expense to increase in the future, as its operations expand and as the government of China adopts more restrictive environmental regulations.
Marketing
Our current operations consist of distributing 34 products manufactured by Shandong Yong Chun Tang. Through March 31, 2009 we conducted the distribution business pursuant to a Purchase and Sale Contract that we signed on December 26, 2006. The Contract sets forth the wholesale prices at which we purchase products from Shandong Yong Chun Tang.
The products that we are currently distributing are primarily pills and teas that offer a variety of health benefits. The product line also includes moisturizing creams, masques and cosmetics, as well as various toiletries such as shampoo and toothpaste. The largest selling product is a “magnetic pillow.” No product dominates sales, although the magnetic pillow accounted for 11.3% of sales in fiscal year 2009.
We market through a network of approximately 2000 dealers. Our in-house marketing staff supervises independent primary dealers, who sub-distribute through networks of supermarkets, beauty parlors and other retail sites. This network allows us to accomplish broad geographic distribution with a marketing staff of only eight, thus keeping our overhead to a minimum.
When we commence marketing our proprietary gingko products, we intend to use our distribution network as the backbone for a multi-dimensional marketing program. The key overlay onto our established marketing network will be an Internet distribution program designed to both promote local sales by our distribution network and enable customers to purchase our products online. Our goal will be to establish worldwide online distribution of our products. Towards that end we have established a strategic distribution agreement with China National Post Logistics, a subsidiary of China Post, which has 31 provincial offices located throughout China.
Employees
Shandong Spring Pharmaceutical currently employs 54 individuals, each on a full-time basis. 11 employees are involved in administration; 8 are dedicated to marketing, 8 to research and development. The remainder of its employees are involved in agriculture.
ITEM 1A
ITEM 1A RISK FACTORS
You should carefully consider the risks described below before buying our common stock. If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.
Because we have not yet commenced our gingko production operations, unexpected factors may hamper our efforts to implement our business plan.
Our business plan contemplates that we will become a fully-integrated grower, manufacturer and marketer of products derived from gingko. At the present time, however, our entire business consists of distributing health and beauty aids manufactured by Shandong Yong Chun Tang. In order to fully implement our business plan, we will have to successfully complete the development of an agricultural facility and an industrial facility. The complexity of this undertaking means that we are likely to face many challenges, some of which are not yet foreseeable. Problems may occur with our raw material production and with the roll-out of efficient manufacturing processes. If we are not able to minimize the costs and delays that result, our business plan may fall short of its goals, and the current profitability or our distribution activities may be offset by losses from the new gingko business.
The capital investments that we plan may result in dilution of the equity of our present shareholders.
Our business plan contemplates that we will invest approximately $40 million in capital improvements during the next five years. At very least, we estimate that we will be unable to achieve profitable operations as an independent producer of gingko products unless we invest over $10 million in our facility. We intend to raise the largest portion of the necessary funds by selling equity in our company. At present we have no commitment from any source for those funds. We cannot determine, therefore, the terms on which we will be able to raise the necessary funds. It is possible that we will be required to dilute the value of our current shareholders’ equity in order to obtain the funds. If, however, we are unable to raise the necessary funds, our growth will be limited, as will our ability to compete effectively.
We are subject to the risk of natural disasters.
We intend to produce the greater portion of our raw materials. In particular, we intend to produce our own gingko. Gingko is a very sensitive crop, which can be readily damaged by harsh weather, by disease, and by pests. If our crops are destroyed by drought, flood, storm, blight, or the other woes of farming, we will not be able to meet the demands of our manufacturing facility, which will then become inefficient and unprofitable. In addition, if we are unable to produce sufficient products to meet demand, our distribution network is likely to atrophy. This could have a long-term negative effect on our ability to grow our business, in addition to the near-term loss of income.
If we lost control of our distribution network, our business would fail.
We depend on our distribution network for the success of our business. Competitors may seek to pull our distribution network away from us. In addition, if dominant members of our distribution network become dissatisfied with their relationship with Shandong Spring Pharmaceutical, a concerted effort by the distribution network could force us to accept less favorable financial terms from the distribution network. Either of these possibilities, if realized, would have an adverse effect on our business.
Increased government regulation of our production and/or marketing operations could diminish our profits.
At present, there is no significant government regulation of the health claims that participants in our industry make regarding their products. In addition, there is only limited government regulation of the conditions under which we will manufacture our products. Other developed countries, such as the United States and, in particular, members of the European Community, have far more extensive regulation of the operations of nutraceuticals and plant-based cosmetics, including strict limitations on the health-related claims that can be made without scientifically-tested evidence. It is not unlikely, therefore, that China will increase its regulation of our activities in the future. To the extent that new regulations required us to conduct a regimen of scientific tests of the efficacy of our products, the expense of such testing would reduce our profitability. In addition, to the extent that the health benefits of some of our products could not be fully supported by scientific evidence, our sales might be reduced.
Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.
Our future success depends on our ability to attract and retain highly skilled agronomists, biologists, chemists, industrial technicians, production supervisors, and marketing personnel. In general, qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand. In a specialized scientific field, such as ours, the demand for qualified individuals is even greater. If we are unable to successfully attract or retain the personnel we need to succeed, we will be unable to implement our business plan.
We may have difficulty establishing adequate management and financial controls in China.
The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with. We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company. If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.
Government regulation may hinder our ability to function efficiently.
The national, provincial and local governments in the People’s Republic of China are highly bureaucratized. The day-to-day operations of our business will require frequent interaction with representatives of the Chinese government institutions. The effort to obtain the registrations, licenses and permits necessary to carry out our business activities can be daunting. Significant delays can result from the need to obtain governmental approval of our activities. These delays can have an adverse effect on the profitability of our operations. In addition, compliance with regulatory requirements applicable to agriculture and to nutraceutical manufacturing and marketing may increase the cost of our operations, which would adversely affect our profitability.
Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.
The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to pay dividends to our shareholders.
Currency fluctuations may adversely affect our operating results.
Shandong Spring Pharmaceutical generates revenues and incurs expenses and liabilities in Renminbi, the currency of the People’s Republic of China. However, as a subsidiary of China YCT International Group, it reports its financial results in the United States in U.S. Dollars. As a result, our financial results will be subject to the effects of exchange rate fluctuations between these currencies. From time to time, the government of China may take action to stimulate the Chinese economy that will have the effect of reducing the value of Renminbi. In addition, international currency markets may cause significant adjustments to occur in the value of the Renminbi. Any such events that result in a devaluation of the Renminbi versus the U.S. Dollar will have an adverse effect on our reported results. We have not entered into agreements or purchased instruments to hedge our exchange rate risks.
We have limited business insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.
China YCT International Group is not likely to hold annual shareholder meetings in the next few years.
Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved. The current members of the Board of Directors were appointed to that position by the previous directors. If other directors are added to the Board in the future, it is likely that the current directors will appoint them. As a result, the shareholders of China YCT International Group will have no effective means of exercising control over the operations of China YCT International Group.
ITEM 1B
ITEM 1B UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
Shandong Spring Pharmaceutical operates on a property of approximately 1700 acres that it occupies under a 50 year lease. Besides housing our executive offices, the property is home to a manufacturing facility measuring 17,200 m2 and a research facility measuring 3,000 m2.
China YCT International Group maintains a mail-drop at the offices of American Union Securities, Inc. in New York City. We do not compensate American Union Securities for this concession.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the fourth quarter of fiscal 2009.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information.
Our common stock has been listed for quotation on the OTC Bulletin Board since February 23, 2007. It is currently listed under the trading symbol “CYIG.” Set forth below are the high and low bid prices for each of the fiscal quarters since April 1, 2007. The reported bid quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions. The prices reflect the effect of a 1-for-28 reverse split of our common stock (which occurred on November 23, 2007) as if it occurred on April 1, 2007.
(b) Holders. Our shareholders list contains the names of 769 registered stockholders of record of the Company’s Common Stock.
(c) Dividend Policy. China YCT International Group has not declared or paid cash dividends or made distributions in the past, and we do not anticipate that we will pay cash dividends or make distributions in the foreseeable future. We currently intend to retain and reinvest future earnings, if any, to finance our operations.
(d) Equity Compensation Plan Information
The information set forth in the table below regarding equity compensation plans (which include individual compensation arrangements) was determined as of March 31, 2009.
(e) Recent Sales of Unregistered Securities.
None.
(f) Repurchase of Equity Securities. The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the 4th quarter of fiscal 2009.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Results of Operations
In fiscal year 2009, Shandong Spring Pharmaceutical continued to grow as a marketing force. During fiscal year 2008, which ended on March 31, 2008, Shandong Spring Pharmaceutical realized $16,586,741 in revenue. For fiscal year 2009, which ended on March 31, 2009, the Company realized $25,817,447 in revenue, including $3,844,009 in the quarter ended March 31, 2009 and $8,634,345 in the quarter ended December 31, 2008, an overall 55.6% year on year increase compared to fiscal year 2008.
During those periods, no single product accounted for more than 20% of our revenue and a total of 34 products each contributed to revenue, including both health care supplements, cosmetics and toiletries.
All of the business reflected in the financial statements filed with this Report consisted of resale of products purchased by Shandong Spring Pharmaceutical from Shandong Yong Chun Tang. The purchases were made pursuant to a Purchase & Sale Contract dated December 26, 2006, which sets forth the wholesale price that Shandong Spring Pharmaceutical pays to Shandong Yong Chun Tang for each of the 34 products governed by the Contract.
Since Shandong Spring Pharmaceutical was not an exclusive distributor for Shandong Yong Chun Tang during this period, its resale prices are determined in large part by competition. For that reason, the gross margin realized by Shandong Spring Pharmaceutical was nearly identical in each quarter of this fiscal year, averaging 56%, despite the significant growth in sales from quarter to quarter.
Our selling, general and administrative expenses in the year ended March 31, 2009 were equal to 16.1% of our revenue as compared to 21.6% in the year ended March 31, 2008. This difference is due to the fact that during the fiscal year ended March 31, 2008, our selling, general and administrative expenses included an one time charge of $683,987 related to our going public expenses. Excluding this one time expenese, our selling, general and administrative expenses as a percent of revenue for the fiscal year ended March 31, 2008 would have been 18.3%. We have been able to lower our selling, general and administrative expenses as a percentage of sales year on year as a result of our management's abililty to lower costs while maximizing the efficiencies of our business.
Our operations produced net pre-tax income of $10,061,209 or an increase of 85.6% compared to the pre-tax income of $5,420,962 in fiscal year 2008. In fiscal year 2009, we incurred an effective tax rate of 25% as compared to 28.3% in fiscal year 2008.
The tax provisions left us with $7,481,543 net income for fiscal year 2009 ($.25 per share), compared to $3,886,342 ($.13 per share) in fiscal year 2008.
Our business operates entirely in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income. The net income is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our balance sheet labeled “accumulated other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. In year ended March 31, 2009, the effect of converting our financial results to Dollars was to add $272,813 to our accumulated other comprehensive income.
Liquidity and Capital Resources
At March 31, 2009 Shandong Spring Pharmaceutical had $11,000,379 in working capital, an increase of $6,481,423 since the beginning of the fiscal year on April 1, 2008.
In addition to $10,048,380 in cash, our current working capital included a debt of $1,124,366 due to us from Shandong Yong Chun Tang, our supplier. We expect that debt to be liquidated in the future by delivery to us of products for resale, which will correspondingly increase the cash flow from our operations.
Our current level of working capital is sufficient to fund our current operations. Ever since we commenced marketing activity in January, 2007, our operations produced positive cash flow, including $9,614,495 in fiscal year 2009 and $1,356,006 in fiscal year 2008. Because we carry relatively little inventory and no accounts receivable, we expect our marketing activities to continue to operate cash-positive.
To this point the development of Shandong Spring Pharmaceutical and its initial operations have been funded by capital contributions from its shareholders and by occasional loans from management and their associates, all of which have been repaid. As a result, at March 31, 2009 Shandong Spring Pharmaceutical had over $5.7 million in fixed assets and no debt. This situation provides an opportunity to fund future development and an expansion of operations through bank debt by pledging the company’s fixed assets as collateral. We expect that financing of this variety will be readily available to us, when our manufacturing facility approaches completion.
In order to fully implement our business plan, however, we will require capital contributions far in excess of our current asset value. Our budget for bringing our manufacturing facility to an operating level that assures profitability is $10 million. To fully implement our business plan - including development of a facility to utilize our proprietary method of extracting flavones from ginkgo by using enzyme technology - we expect to need $40 million. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds we require. At the present time, however, we do not have commitments of funds from any source.
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 our financial condition or results of operations.
Critical Accounting Policies and Estimates
In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for fiscal year 2009, there was one estimate made which was (a) subject to a high degree of uncertainty and (b) material to our results. This estimate was:
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Our decision, described in Note 5 to the Consolidated Financial Statements, to record no provision for uncollectible accounts, against total related party receivables of $2,075,549. This decision was based on our relationship with the debtors and our knowledge of their capacity to repay the debts.
We have made no material changes to our critical accounting policies in connection with the preparation of financial statements for fiscal year 2009.
Impact of Accounting Pronouncements
There were no recent accounting pronouncements that have had a material effect on the Company’s financial position or results of operations. There were nine recent accounting pronouncement that may have a material effect on the Company’s financial position or results of operations.
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective on January 1, 2009. The company does not expect SFAS No. 161 to have a material impact on the preparation of its consolidated financial statements.
In April 2008, FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”) was issued. This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company has not determined the impact on its financial statements of this accounting standard.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The company is evaluating the impact the adoption of FSP APB 14-1 will have on its consolidated financial position and results of operations.
In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The company does not expect SFAS No. 162 to have a material impact on the preparation of its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60.” SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of SFAS 163 will have a material impact on its financial condition or results of operation.
In June 2008, the FASB ratified EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”. EITF 07-5 addresses how an entity should evaluate whether an instrument or embedded feature is indexed to its own stock, carrying forward the guidance in EITF 01-6 and superseding EITF 01-6. Other issues addressed in EITF 07-5 include addressing situations where the currency of the linked instrument differs from the host instrument and how to account for market-based employee stock options. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and early adoption is not permitted. The Company has evaluated this statement and estimated that it is not expected to have an impact on its financial position and results of operations.
On June 16, 2008, the FASB issued Final Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determines that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of EITF 03-6-1 will have a material impact on its financial condition or results of operation.
On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on the company’s financial position or results.
In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99“Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on the company’s consolidated financial statements.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 7. FINANCIAL STATEMENTS
China YCT International Group, Inc.
Consolidated Financial Statements
March 31, 2009 and 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
China YCT International Group, Inc.
We have audited the accompanying balance sheets of China YCT International Group, Inc. as of March 31, 2009 and 2008, and the related statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended March 31, 2009. China YCT International Group, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China YCT International Group, Inc. as of March 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
/s/Bagell Josephs, Levine & Company, LLC
Bagell Josephs, Levine & Company, LLC
Marlton, New Jersey
June 15,
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
CHINA YCT INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
1. BASIS OF PRESENTATION AND ORGANIZATION
China YCT International Group, Inc., formerly known as ItLinkz Group, Inc., Medical Technology & Innovations, Inc. and Southstar Productions, Inc. (the “Company” or “China YCT”), was incorporated in the State of Florida in January 1989.
On June 4, 2007 the Company entered into a Share Purchase and Merger Agreement dated June 1, 2007 with Landway Nano Bio-Tech, Inc., a Delaware corporation (“Landway Nano”), and with Huaqin Zhou and Xiaojin Wang, two investors associated with Landway Nano. Landway Nano is a holding company that owns 100% of the registered capital of Shandong Spring Pharmaceutical Co., Ltd. (“Shandong Spring”), a corporation organized under the laws of The People’s Republic of China (“PRC”). On July 31, 2007, pursuant to the Share Purchase and Merger Agreement, Huaqin Zhou and Xiaojin Wang purchased 500 shares of the Company’s Series B Preferred Stock for $530,000. On September 28, 2007, the Company acquired all of the outstanding capital stock of Landway Nano by issuing to the shareholders of Landway Nano an additional 500 shares of Series B Preferred Stock. The 1,000 shares of Series B Preferred Stock were subsequently converted into 28,925,629 shares of common stock, representing 98.4% of the outstanding common shares. The Board of Directors of the Company also elected Mr.Yan Tinghe and Mr. Zhang Jirui, the executive officers of Shandong Spring Pharmaceutical, to serve as members of the Board, and they together elected Yan Tinghe to serve as the Chief Executive Officer and Zhang Jirui to serve as Chief Financial Officer of the Company.
As a result of these transactions, there was a change in control of the Company as the shareholders of Landway Nano became the majority shareholders of the Company.
For accounting purposes, the transaction has been accounted for as a reverse acquisition under the purchase method of accounting. Accordingly, Landway Nano was treated as the continuing entity for accounting purposes.
On November 23, 2007, the Company changed the name of the corporation from “Itlinkz Group, Inc.” to “China YCT International Group, Inc.”
China YCT, through its wholly owned subsidiary, Shandong Spring, is engaged in the business of developing, manufacturing and marketing gingko and other dietary supplement products in the PRC.
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principle of consolidation
The consolidated financial statements include the financial statements of the Company, Landway Nano and its wholly owned subsidiary, Shandong Spring. All significant inter-company transactions and balances among the Company and its subsidiaries are eliminated upon consolidation.
Use of estimates
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.
Cash and cash equivalents
For 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 receivables
Accounts receivables are stated at net realizable value. Any allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables. A considerate amount of judgment is required in assessing the realization of these receivables, including the current credit worthiness of each customer and the related aging analysis. The Company has no account receivables as of March 31, 2009 and 2008.
Inventory
Inventory is primarily composed of raw materials and packing materials for manufacturing, work in process, and finished goods. Inventories are valued at the lower of cost or market with cost determined on a weighted average basis. Management compares the cost of inventory with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost.
Property and equipment
Property and equipment are stated at cost. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and locations for its intended use. Depreciation is calculated using the straight-like method over the following useful lives:
Buildings and improvements
30-35 years
Machinery, equipment and automobiles 7-15 years
Expenditures for maintenance and repairs are charged to expense as incurred. Additions, renewals and betterments are capitalized.
Advance to suppliers
Advance to suppliers represent the payments made and recorded in advance for goods and services received. The Company makes advances to certain vendors’ inventory purchases, construction projects and equipment purchases. The advance to suppliers totaled $-0- and $834,284 as of March 31, 2009 and 2008, respectively.
Revenue recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104. 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
Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
Income taxes
The Company accounts for income tax under the provisions of 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. There were no deferred tax amounts at March 31, 2009 and 2008, respectively.
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 4% 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 did not have any recorded VAT Payable or VAT receivable net of payments in the financial statements. The VAT tax return is usually filed offsetting the payables against the receivables.
Research and development
Research and development costs are related primarily to the Company developing its intellectual property. Research and development costs are expenses 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, 2009 and 2008 was $181,531 and $141,241, respectively.
Advertising costs
Advertising costs in newspaper and televisions are expensed as incurred. The Company incurred advertising costs of $1,372,580 and $501,729 for the years ended March 31, 2009 and 2008, respectively.
Mailing and handling costs
The Company accounts for mailing and handling fees in accordance with the Financial Accounting Standards Board Emerging Issues Task Force Issue No. 00-10 “Accounting for Shipping and Handling Fees and Costs” (EITF Issue No. 00-10). For the years ended March 31, 2009 and 2008, the Company incurred $1,123,018 and $716,646 mailing and handling costs, respectively.
Earnings per share
Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There are no common stock equivalents available for dilution purposes as of March 31, 2009 and 2008.
Risks and uncertainties
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Fair value of financial instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, account receivables, other receivables, accounts payable, accrued expenses, tax payable, and other payable approximate fair value due to the short-term nature of these items.
Foreign currency translation
The Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB has been translated into United States dollars ("USD") as the currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. The equity accounts were stated at their historical rate. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income". Gains and losses resulting from foreign currency translations are included in accumulated other comprehensive. There is no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.
Translation adjustments resulting from this process amounted to $1,130,576 and $857,763 as of March 31, 2009 and 2008, respectively. The balance sheet amounts with the exception of equity at March 31, 2009 were translated at 6.8336 RMB to 1.00 US$ as compared to 7.012 RMB to 1.00 US$ at March 31, 2008. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the years ended March 31, 2009 and 2008 were 6.8678 RMB and 7.4566 RMB, respectively.
New accounting pronouncements
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective on January 1, 2009. The company does not expect SFAS No. 161 to have a material impact on the preparation of its consolidated financial statements.
In April 2008, FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”) was issued. This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company has not determined the impact on its financial statements of this accounting standard.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The company is evaluating the impact the adoption of FSP APB 14-1 will have on its consolidated financial position and results of operations.
In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The company does not expect SFAS No. 162 to have a material impact on the preparation of its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60.” SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of SFAS 163 will have a material impact on its financial condition or results of operation.
In June 2008, the FASB ratified EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”. EITF 07-5 addresses how an entity should evaluate whether an instrument or embedded feature is indexed to its own stock, carrying forward the guidance in EITF 01-6 and superseding EITF 01-6. Other issues addressed in EITF 07-5 include addressing situations where the currency of the linked instrument differs from the host instrument and how to account for market-based employee stock options. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and early adoption is not permitted. The Company has evaluated this statement and estimated that it is not expected to have an impact on its financial position and results of operations.
On June 16, 2008, the FASB issued Final Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determines that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of EITF 03-6-1 will have a material impact on its financial condition or results of operation.
On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on the company’s financial position or results.
In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99“Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on the company’s consolidated financial statements.
3. INVENTORY
Inventory primarily consists of finished goods. The Company purchased all of its goods from Shandong Yong Chun Tang Bioengineering Co., Ltd. (“Shandong YCT??, an affiliated company owned by the Chairman of the Company (See Note 5). No allowance for inventory was made for the year ended March 31, 2009 and 2008.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment at March 31, 2009 and 2008 consist of the following:
The depreciation expense for the year ended March 31, 2009 and 2008 was $150,279 and $46,493, respectively.
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 provided until it is completed and ready for its intended use.
The costs involved with construction in progress amounted to the total of $211,377 and $1,096,882 as of March 31, 2009 and 2008, respectively.
5. RELATED PARTY TRANSACTIONS
As of March 31, 2009 and 2008, the Company has loan to related party in the amount of $2,075,549 and $2,022,742, respectively, representing loans receivables from two affiliates as stated below.
Shandong YCT is an affiliated company owned by the chairman and controlling shareholder Mr. Yan Tinghe. Prior to the completion of the Company’s own plant, Shandong YCT provides products to the Company for resale and makes settlement upon sales of goods. The purpose of the loan is to finance Shandong YCT’s production. The loan bears no interests and is unsecured and due upon demand.
Changqing Paper Co., Ltd is an affiliated company also owned by the chairman and controlling shareholder Mr. Yan Tinghe. This loan is also unsecured and interest free with an original maturity date of August 20, 2008. But the loan demands 0.08% monthly late payment penalty on any unpaid due amount after the maturity date. On October 27, 2008, the Company extended the loan with Changqing Paper Co., Ltd. for an additional year. All other terms remain unchanged.
6. MAJOR CUSTOMER AND VENDOR
The Company sells products to individual retail customers and does not have major customer due to the high level competition within the industry.
The Company purchases its products from its affiliate company, Shandong YCT, according to the contract signed on December 26, 2006 between the Company and Shandong YCT. For the years ended March 31, 2009 and 2008, Shandong YCT is the sole vendor to the Company.
7. LAND USE RIGHT
All land in the People’s Republic of China is government owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” (the “Right”) to use the land. The Company has total land use right of RMB10,199,600 (equivalent to $1,454,592) to use for 50 years and amortizes the Right on a straight line basis over 50 years.
Net intangible assets were as follows:
The amortization expense for the years ended March 31, 2009 and 2008 was $30,053 and $25,623, respectively.
8. TAX PAYABLE
The Company has tax payable as below:
9. INCOME TAXES
The Company is governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are subject to tax at a statutory rate of 25% and were, until January 2008, subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax) on its income reported in the statutory financial statements after appropriate tax adjustments.
On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”), which is effective from January 1, 2008. Under the new law, the corporate income tax rate applicable to all Companies, including both domestic and foreign-invested companies, will be 25%, replacing the current applicable tax rate of 33%. However, tax concession granted to eligible companies prior to the new CIT laws will be grand fathered.
For the years ended March 31, 2009 and 2008, the company recorded income tax provisions of $2,579,666 and $1,534,620, respectively.
10. STOCKHOLDERS’ EQUITY
Before the share exchange agreement in June 2007, the Company has 12,724,438 shares of common stock issued and outstanding.
On July 30, 2007, in accordance with the Share Exchange Agreement with Landway Nano, the Company issued 500 shares of its newly-designated Series B Convertible Preferred Stock to two individual investors for $530,000.
On September 28, 2007, the Company issued additional 500 shares of Series B Convertible Preferred Stock to the shareholders of Landway Nano.
On November 23, 2007, the Company effected a reverse stock split of the corporation’s common stock in the ratio o-f 1:28. At the same time, the 1,000 shares of the Company’s Series B Preferred Stock was converted into common stock and simultaneously reversed split into 28,915,629 shares of common stock. All stock amounts have been retroactively restated for the effect of the reverse stock split.
As of March 31, 2009 and 2008, there were 45 shares of Series A Preferred Stock and 29,380,073 shares of Common Stock issued and outstanding. There was no Series B Preferred Stock issued and outstanding.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) 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 annual report (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.
(b) 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 fourth quarter of the year covered by this annual report, 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.
(c)
Management’s Report on Internal Control over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of those internal controls as of March 31, 2009, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control - Integrated Framework as a basis for our assessment.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified one material weaknesses in our internal control over financial reporting. This material weakness consisted of:
Lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters. Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in Shandong Province in the People’s Republic of China. Few of our employees have experience or familiarity with U.S accounting principles. The lack of personnel in our Shandong office who are trained in U.S. accounting principles is a weakness because it could lead to improper classification of items and other failures to make the entries and adjustments necessary to comply with U.S. GAAP.
Management is currently reviewing its staffing and their training in order to remedy the weaknesses identified in this assessment. To date, we are not aware of significant accounting problems resulting from these weaknesses; so we have to weigh the cost of improvement against the benefit of strengthened controls. However, because of the above conditions, management’s assessment is that the Company’s internal controls over financial reporting were not effective as of March 31, 2009.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following individuals are the members of China YCT International Group’s Board of Directors and its executive officers.
All directors hold office until the next annual meeting of our shareholders and until their successors have been elected and qualify. Officers serve at the pleasure of the Board of Directors.
Yan Tinghe has over twenty years of experience in corporate management within the food and food supplements industries. Having founded Shandong Spring Pharmaceuticals, he has served as its Chairman since January 2006. During the eight years prior to founding Shandong Spring Pharmaceutical, Mr. Yan was employed as Chairman and General Manager of Shandong Yong Chun Tang Bioengineering Co., Ltd., which manufactures a wide variety of food supplements and is currently the exclusive supplier for Shandong Spring Pharmaceutical. During the period from 1988 to 1997 Mr. Yan served as Executive Vice President of Shishui Sanyin Company, and from 1985 to 1987 as Factory Director of Beijing Shishui Lianhe Preserved Fruits, both of which were multi-facility enterprises in the food industry.
Zhang Jirui brings over twenty years of technical training to Shandong Spring Pharmaceutical, where he has been employed as Director since January 2006. During 2005 Mr. Zhang was the Manager of the International Market Department for Shandong Yong Chun Tang Bioengineering Co., Ltd., which manufactures a wide variety of food supplements and is currently the exclusive supplier for Shandong Spring Pharmaceutical. During the 22 years prior to joining Shandong Yong Chun Tang Bioengineering Co., Ltd., Mr. Zhang was employed as an Instructor in the Shandong Chemical Engineering Vocational School.
Robert J. Fanella, CPA was appointed to the post of the company’s independent directors effective from April 6, 2009. During Mr. Fanella’s more than 35 year career specializing in corporate finance and accounting, he was responsible for audit and financial service oversight for both private and public traded companies world-wide, national and regional accounting and financial analysis and service. From 2008 to the present, Mr. Fanella has served as a senior consultant to an Illinois based LED Lighting Manufacturer, providing advice regarding capital raising affairs, capitalization at both the subsidiary and corporate level, and day-to-day financial operations. From 2006 to 2007, Mr. Fanella served as a senior consultant at Chicago Industrial Plating Manufacturer, a more than 100 year old family owned company. In that position, Mr. Fanella was responsible for the resolving company’s short-term gap financing issues and working with external auditors to finalize the annual financial report. Prior to that, from 2001 to 2006, Mr. Fanella was co-owner and CFO of Tru-Way, Inc. During his tenure, Mr. Fanella successfully conducted some acquisition deals and helped the company achieve annual revenue growth. From 1983 to 2001, Mr. Fanella was a co-founder and CFO of Microenergy, Inc. At Microenergy, Inc., Mr. Fanella shared with the President total responsibility for all operations of the organization. As the CFO, Mr. Fanella was also responsible for all accounting and SEC filings. Mr. Fanella earned his Bachelor Degree in Finance from North Illinois University in 1972, and he became a Certified Public Accountant in 1975. In 1979, Mr. Fanella received his MBA from the University of Chicago, specializing in Finance & Marketing.
Bai Junying, Ph.D. in Pharmacy was appointed as an independent director of China YCT International Group on April 6, 2009. Over the last twenty years, Dr. Bai has held senior management roles in several companies, including as CEO of Shandong Dong-e E-jiao Group, CEO of Shandong Xinhua Pharmaceutical Co., Ltd., and head of the research and development department and subsequently vice executive manager of Lukang Pharmaceutical Group Co., Ltd. Dr. Bai is currently the CEO of Shandong Dong E-jiao Group, a national well-know pharmaceutical and health care group. From 2000 to 2005, while Dr. Bai served at Shandong Xinhua Pharmaceutical Group Co., Ltd, where he was responsible for the daily operation of the company. Dr. Bai successfully brought the company public and helped develop the company into one of the leading pharmaceutical companies in China. As Head of the R&D Department at Lukang Pharmaceutical Group from 1987 to 2000, Dr. Bai played a central role in the integration and development of an antibiotic injection agent, which made Lukang Pharmaceutical Group a national research center for antibiotics. In 1990, Dr. Bai obtained his Ph.D. in Pharmacy from Beijing University Health Science Center.
Zhang Wengao was appointed as an independent director of China YCT International Group on April 6, 2009. Mr. Zhang has over 30 years of experience in pharmaceutical, Chinese traditional medicine and diagnostic industries. Mr. Zhang is currently a full time professor of Shandong University of Traditional Chinese Medicine, specializing in clinical treatment via both Chinese and western methods. From 1985 to 1998 Professor Zhang was a dean of the research and development department of Shandong University of Traditional Chinese Medicine. Professor Zhang has received various awards within the clinical medicine field, including awards for combining western clinical treatment with traditional Chinese medicine methods, and the 20th Geneva Invention Silver Award. Professor Zhang has published more than 200 papers concerning the advantages of Chinese traditional medicine in clinical treatment. Among his other engagements, Mr. Zhang is an associate commissioner of the International Chinese Medicine Association and director of the International Chinese Medicine Association Cardiovascular Committee. In 1968, Mr. Zhang received his bachelor degree majoring in Pharmacy from Shandong University of Traditional Chinese Medicine.
Nominating, Compensation and Audit Committees
The Board of Directors has not appointed either a nominating committee or a compensation committee, due to the small number of officers in the Company.
The Board of Directors has appointed an audit committee, which consists of Mr. Robert J. Fanella as the Chairman, and Dr. Bai and Mr. Zhang as members. Mr. Fanella is qualified to serve as an “audit committee financial expert,” as defined in the Regulations of the Securities and Exchange Commission, by reason of his experience in public accounting and as a principal financial officer. Mr. Fanella, Dr. Bai, and Mr. Zhang are “independent” directors, as defined in the listing standards of NASDAQ.
Code of Ethics
The Board of Directors has not adopted a code of ethics applicable to the Company’s executive officers. The Board believes that the small number of individuals involved in the Company’s management makes such a code unnecessary.
Section 16(a) Beneficial Ownership Reporting Compliance
None of the officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended March 31, 2009, except that Yan Tinghe and Zhang Jirui each failed to file a Form 3 when due.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or paid by China YCT International Group, Ltd. and its subsidiaries to Yan Tinghe, its Chief Executive Officer, during the past three fiscal years. There were no executive officers whose total salary and bonus for the fiscal year ended March 31, 2009 exceeded $100,000.
Equity Awards
The following tables set forth certain information regarding the stock options acquired by the executive officer named in the table above during the year ended March 31, 2009 and those options held by him on March 31, 2009.
Remuneration of Directors
The Board of Directors has agreed that it will issue to Dr. Bai Junying and Zhang Wengao, upon commencement of his service and on each anniversary of his commencement date, common shares with a market value equal to $10,000 cash plus $25,000 in the form of restricted shares of common stock.
The Board of Directors has agreed that it will issue to Mr. Robert J. Fanella, upon commencement of his service and on each anniversary of his commencement date, common shares with a market value equal to $15,000 cash plus $40,000 in the form of restricted shares of common stock.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of the date of this prospectus by the following:
·
each shareholder known by us to own beneficially more than 5% of our common stock;
·
Yan Tinghe, our Chief Executive Officer
·
each of our directors; and
·
all directors and executive officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below have sole voting power and investment power with respect to their shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission.
(1)
Except as otherwise noted, each shareholder’s address is c/o Shandong Spring Pharmaceutical Co., Ltd., Economic Development Zone, Gucheng Road, Sishui County, Shandong Province, P.R. China.
(2) Except as otherwise noted, all shares are owned of record and beneficially.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain Relationships
Our Chairman, Yan Tinghe, owns the registered capital of Shandong Yong Chun Tang. Since January 2007 the exclusive business activity of Shandong Spring Pharmaceutical has been the distribution of products manufactured by Shandong Yong Chun Tang. In addition, Shandong Yong Chun Tang contributed the initial funds for the development of our manufacturing facility. Currently Shandong Spring Pharmaceutical advances funds to Shandong Yong Chun Tang ($1,124,366 at March 31, 2009) in anticipation of future deliveries of products. In addition, during the year ended March 31, 2009, Shandong Spring Pharmaceutical loaned $951,182 to Changqing Paper Co., Ltd., a company owned by Yan Tinghe.
Other than the aforesaid relationship, neither Yan Tinghe nor Zhang Jirui has engaged in any transaction with China YCT International Group or Shandong Spring Pharmaceutical during the past two fiscal years that had a transaction value in excess of $60,000.
Director Independence
The following members of our Board of Directors are independent, as “independent” is defined in the rules of the NASDAQ STOCK MARKET: Robert J. Fanella, Dr. Bai Junying, and Zhang Wengao.
ITEM 14
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Bagell, Josephs, Levine & Company, LLC billed $65,000 to the Company for professional services rendered for the audit of fiscal 2009 financial statements and review of the financial statements included in the 10-Q filings for fiscal 2009. Bagell, Josephs, Levine & Company, LLC billed $55,000 to the Company for professional services rendered for the audit of fiscal 2008 financial statements and review of the financial statements included in the 10-Q filings for the second and third quarters of fiscal 2008.
Audit-Related Fees
Bagell, Josephs, Levine & Company, LLC billed $0 to the Company during fiscal 2009 for assurance and related services that are reasonably related to the performance of the fiscal 2009 audit or review of the quarterly financial statements. Bagell, Josephs, Levine & Company, LLC billed $0 to the Company during fiscal 2008 for assurance and related services that are reasonably related to the performance of the fiscal 2008 audit or review of the quarterly financial statements.
Tax Fees
Bagell, Josephs, Levine & Company, LLC billed $0 to the Company during fiscal 2009 and fiscal 2008 for professional services rendered for tax compliance, tax advice and tax planning.
All Other Fees
Bagell, Josephs, Levine & Company, LLC billed $0 to the Company in fiscal 2009 and fiscal 2008 for services not described above.
It is the policy of the Company that all services other than audit, review or attest services must be pre-approved by the Board of Directors. No such services have been performed by Bagell, Josephs, Levine & Company, LLC.
ITEM 15.
ITEM 15. EXHIBITS
3-a
Certificate of Incorporation - filed as an exhibit to the Company's Registration Statement on Form 8-A (SEC File No. 000-53600) and incorporated herein by reference.
3-a(1)
Certificate of Amendment to Certificate of Incorporation - filed as an exhibit to the Company's Registration Statement on Form 8-A (SEC File No. 000-53600) and incorporated herein by reference.
3-b
By-laws- filed as an exhibit to the Company's Registration Statement on Form 8-A (SEC File No. 000-53600) and incorporated herein by reference.
Subsidiaries: Landway Nano Bio-Tech Group, Inc., a Delaware corporation;
Shandong Spring Pharmaceutical Co., Ltd, a People's Republic of China corporation
31.1
Rule 13a-14(a) Certification - CEO
31.2
Rule 13a-14(a) Certification - CFO
Rule 13a-14(a) Certification
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.
By:
/s/ Yan Tinghe
Yan Tinghe Chief Executive Officer
/s/ Zhang Jirui
Zhang Jirui,
Chief Financial Officer
In accordance with the Exchange Act, this Report has been signed below on June 29, 2009 by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Yan Tinghe
Yan Tinghe, Director
Chief Executive Officer
/s/ Zhang Jirui
Zhang Jirui,
Chief Financial Officer
/s/ Robert J. Fanella
Robert J. Fanella
Director
/s/ Dr. Bai Junying
Dr. Bai Junying
Director
/s/ Zhang Wengao
Zhang Wengao
Director