Spring Pharmaceutical (CYIG) 10-Q 2017 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGECOMMISSION WASHINGTON, D.C.

20549

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

Commission file number: 0-53600

CHINA YCT INTERNATIONAL GROUP, INC.

(Exact name of registrant as specified in itscharter)

Delaware	65-2954561
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

c/o Shandong Spring Pharmaceutical Co., Ltd Economic Development Zone.
Gucheng Road Sishui County Shandong Province PR China 273200
(Address of principal executive offices)	(Zip Code)

Issuer's telephone number: 406-282-3188

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                 Yes      ☒   No      ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes     ☒   No     ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐        Accelerated filer ☐

Non-accelerated filer ☐     (Do not check if a smaller reporting company) Smaller reporting company ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ☒

The number of shares outstanding of the issuer's common stock on August 13, 2016 was 29,764,168.

CHINA YCT INTERNATIONAL GROUP, INC.

FORM 10-Q

June 30, 2016

Table of Contents

		Page
PART I - FINANCIAL INFORMATION
Item 1:	Financial Statements	3
Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4:	Controls and Procedures	19
PART II - OTHER INFORMATION
Item 1:	Legal Proceedings	19
Item 1A:	Risk Factors	19
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3:	Defaults Upon Senior Securities	19
Item 4:	Removed and Reserved	19
Item 5:	Other Information	19
Item 6:	Exhibits	20

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CHINA YCT INTERNATIONAL GROUP, INC.

FORM 10-Q

June 30, 2016

Table of Contents

	Page
Consolidated Balance Sheets as of June 30, 2016 and March 31, 2016 (Unaudited)	3
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended June 30, 2016 and 2015 (Unaudited)	4
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2016 and 2015 (Unaudited)	5
Notes to Consolidated Financial Statements (Unaudited)	6 - 13

2

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	JUNE 30, 2016			MARCH 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	9,006,665		$	7,639,084
Accounts receivable		432,048			533,262
Inventories		2,241,244			2,287,312
Prepaid leases – current portion		936,957			961,609
Total current assets		12,616,914			11,421,267
Prepaid leases		2,019,123			2,312,650
Development cost of acer truncatum bunge planting		41,553,022			42,166,533
Plant, property, and equipment, net		12,999,381			12,872,997
Intangible assets, net		11,701,216			12,295,147
Deferred tax assets		241,126			246,913
Total assets	$	81,130,782		$	81,315,507
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities:
Accounts payable and other accrued expenses	$	248,868		$	190,248
Taxes payable		912,487			739,068
Deferred tax liabilities		17,894			36,640
Total current liabilities		1,179,249			965,956
Stockholders' Equity
Preferred stock, par value $500 per share; 45 shares authorized, issued and outstanding at June 30, 2016 and March 31, 2016.		22,500			22,500
Common stock, par value $0.001 per share; 100,000,000 shares authorized;  29,764,168 and 29,720,690 shares issued and outstanding at June 30, 2016 and March 31, 2016, respectively.		29,764			29,721
Additional paid-in capital		4,760,053			4,648,461
Statutory reserve		1,828,504			1,828,504
Retained earnings		74,558,836			72,983,301
Accumulated other comprehensive income (loss)		(1,248,124	)		837,064
Total stockholders' equity		79,951,533			80,349,551
Total liabilities and stockholders' equity	$	81,130,782		$	81,315,507

The accompanying notes are an integral part of these financial statements.

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CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENTS

OF COMPREHENSIVE INCOME (LOSS)

(Unaudited) 

	THREE MONTHS ENDEDJUNE 30,
	2016			2015
Sales	$	9,712,495		$	11,485,752
Cost of Goods Sold		5,912,261			5,802,976
Gross Profit		3,800,234			5,682,776
Operating Expenses
Selling Expenses		747,880			769,845
General &Administrative Expenses		850,357			754,068
Research & Development Expenses		69,160			190,568
Total operating expenses		1,667,397			1,714,481
Income from operations		2,132,837			3,968,295
Interest income		15,422			12,855
Income before income tax provision		2,148,259			3,981,150
Income tax provision		572,724			976,705
Net income		1,575,535			3,004,445
Other comprehensive income (loss)
Foreign currency translation adjustment		(2,085,188	)		356,065
Comprehensive income (loss)	$	(509,653	)	$	3,360,510
Earnings per common share
Basic and Diluted	$	0.05		$	0.10
Weighted average number of common shares outstanding
Basic and Diluted		29,755,568			29,700,690

The accompanying notes are an integral part of these financial statements.

4

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

	THREE MONTHS ENDEDJUNE 30,
	2016			2015
Cash Flows From Operating Activities:
Net income	$	1,575,535		$	3,004,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of plant, property and equipment		176,525			153,219
Amortization of intangible assets		282,974			336,462
Amortization of prepaid leases		237,807			172,097
Issuance of common shares for services		10,609			-
Stock-based compensation expenses		101,026			-
Deferred taxes		(18,630	)		-
Changes in operating assets and liabilities:
Inventory		(12,762	)		(1,421,332	)
Accounts receivable		88,876			(75,125	)
Taxes payable		195,296			(312,668	)
Accounts payable and other accrued expenses		64,465			(29,156	)
Net cash provided by operating activities		2,701,721			1,827,942
Cash flows from investing activities:
Acquisition of property, plant and equipment		(639,877	)		(409,806	)
Advance payment for construction		-			(241,818	)
Development cost of acer truncatum bunge planting		(474,608	)		(879,042	)
Net cash used in investing activities		(1,114,485	)		(1,530,666	)
Effect of exchange rate changes on cash and cash equivalents		(219,655	)		61,532
Net increase in cash and cash equivalents		1,367,581			358,808
Cash and cash equivalents at beginning of period		7,639,084			13,083,532
Cash and cash equivalents at end of period	$	9,006,665		$	13,442,340
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	-		$	-
Income taxes	$	531,488		$	1,023,018

The accompanying notes are an integral part of these financial statements.

5

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

China YCT International Group, Inc. ("China YCT") ("the Company") was incorporated in the State of Florida, in the United States of America (the "USA") in January 1989, and reincorporated in the State of Delaware on April 4, 2007.   China YCT, through its 100% owned subsidiary Landway Nano Bio-Tech, Inc. ("Landway Nano"), incorporated in Delaware, owns 100% of Shandong Spring Pharmaceutical Co., Ltd. ("Shandong Spring"), incorporated in the People's Republic of China ("PRC"). China YCT International Group, Inc. and its subsidiaries are collectively referred to as the "Company". Shandong Spring is engaged in the business of 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 June 30, 2016 and the results of operations and cash flows for the periods ended June 30, 2016 and 2015. 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 months ended June 30, 2016 are not necessarily indicative of the results to be expected for any subsequent periods or for the entire year ending March 31, 2017. The balance sheet on March 31, 2016 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, 2016 as included in our Annual Report on Form 10-K.

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

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Principles of consolidation

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

Use of estimates

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

Revenue recognition

The Company sells two types of products: non-medical products and medical products. Medical products are sold to certified medicine distributors. Non-medical products are sold directly to its customers through its internet sales channel. To order non-medical products, customers place orders on the Company's order system through internet. Customers need to make payment when they place their orders. Goods are shipped to customers once the orders and payments were received.

The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin ("SAB") 104, included in the Codification as ASC 605, Revenue Recognition. Sales revenue is recognized on the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured. According to the Company's policy, customers can exchange defective products, but not allowed to return products. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits.

Impairment of long-lived assets

The Company reviews and evaluates the net carrying value of its long-lived assets at least annually, or upon the occurrence of other events or changes in circumstances that indicate that the related carrying amounts may not be recoverable. Per ASC 360-10-35-21, a long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Per ASC 360-10-35-17, an impairment loss shall be recognized only if the carrying amount of the long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group).

7

Income taxes

The Company accounts for income tax under the asset and liability method as stipulated by ASC 740 "Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns.  Deferred Income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities.  Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Stock Based Compensation

The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. Share-based payments to consultants, service providers and other non-employees are accounted for under in accordance with ASC Topic 718, ASC Topic 505, "Equity Payments to Non-Employees" or other applicable authoritative guidance. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

Earnings per common share ("EPS")

Basic EPS is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted shares reflect the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, forward contracts, warrants to purchase common stock, contingently issuable shares, common stock options and warrants and their equivalents using the treasury stock method) were exercised or converted into common stock.

Fair Value of Financial Instruments

The Company has adopted the provisions of ASC Topic 820, "Fair Value Measurements and Disclosures", which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

The estimated fair  value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates fair values because of the short-term maturing of these instruments.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC 820 describes three levels of inputs that may be used to measure fair value:

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Level 1 – quoted prices in active markets for identical assets or liabilities.

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

We have no financial assets or liabilities measured at fair value on a recurring basis.

Foreign currency translation

The accounts of the Company's Chinese subsidiary are maintained in RMB and the accounts of the U.S. parent company are maintained in USD. The accounts of the Chinese subsidiary were translated into USD in accordance with Accounting Standards Codification ("ASC") Topic 830 "Foreign Currency Matters". According to Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders' equity is translated at historical rates and statement of income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, "Comprehensive Income." Gains and losses resulting from the foreign currency transactions are reflected in the statements of income.

Translation adjustments resulting from this process amounted to ($2,085,188) and $356,065 for the three months ended June 30, 2016 and 2015, respectively.

The following exchange rates were used to translate the amounts from RMB into United States dollars ("USD") for the respective periods:

	June 30,		June 30,
	2016		2015
Period End Exchange Rate (RMB/USD)		6.6312		6.1136
Average Period Exchange Rate (RMB/USD)		6.5317		6.1203

Recent accounting pronouncements

The Company's management has evaluated all the recently issued accounting pronouncements during the quarter ended June 30, 2016 and does not believe that they will have a material effect on the Company's consolidated financial position and results of operations.

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NOTE 3 - INVENTORY

Inventory consists of finished goods, work-in-process, packaging materials, and raw materials. No allowance for inventory was made for the three months ended June 30, 2016 and 2015.

The components of inventories as of June 30, 2016 and March 31, 2016 were as follows:

	June 30,		March 31,
	2016		2016
Raw materials	$	682,123	$	998,342
Packaging materials		522,376		145,860
Work-in-process		238,234		639,342
Finished goods		798,511		503,768
Total Inventories	$	2,241,244	$	2,287,312

NOTE 4 – PLANT, PROPERTY, AND EQUIPMENT, NET

The components of property and equipment were as follows:

	June 30,			March 31,
	2016			2016
Machinery & Equipment	$	1,723,191		$	1,740,751
Office equipment and automobiles		474,300			486,779
Building		12,885,075			12,605,012
Leasehold Improvements		1,206,418			1,238,160
Subtotal		16,288,984			16,070,702
Less: Accumulated Depreciation & Amortization		(3,289,603	)		(3,197,705	)
Total plant, property and equipment, net	$	12,999,381		$	12,872,997

The depreciation and amortization expense for the three months ended June 30, 2016 and 2015 was $176,525 and $153,219, respectively.

NOTE 5 - MAJOR CUSTOMER AND VENDOR

The Company sold products through ten distributors during the three months ended June 30, 2016 and 2015. Sales to three distributors represented 23%, 16%, and 14% of total sales for the three months ended June 30, 2016. Sales to three distributors represented 32%, 25%, and 12% of total sales for the three months ended June 30, 2015.

10

The Company sold 6 and 11 products during the three months ended June 30, 2016 and 2015, respectively. Sales of three products represented 53%, 15% and 14% of total sales for the three months ended June 30, 2016.  Sales of one product represented 69% of total sales for the three months ended June 30, 2015.

The Company purchases its products from Shandong Yong Chun Tang ("Shandong YCT") according to the contract renewed on February 26, 2015 between the Company and Shandong YCT. Pursuant to the renewed two year contracts, for the period from February 26, 2015 to February 25, 2017, the Company can purchase 10 products from Shandong YCT on fixed prices.  On June 25, 2015, the Company made an amendment to the renewed Purchase and Sale Contract with Shandong YCT. Pursuant to the amended agreement, the Company no longer purchases and sells the 10 products included in the contract renewed on February 26, 2015 and agreed to purchase and sell four new products without changes in other terms of the previous contract. The Company can purchase these four new products from Shandong YCT at fixed prices. Total purchases from Shandong YCT represented 33% and 25% of our total purchases during the three months ended June 30, 2016 and 2015, respectively.  The purchases from three other vendors represented 23%, 18%, and 14% of the Company's total purchases for the three months ended June 30, 2016. The purchases from two other vendors represented 39% and 23% of the Company's total purchases for the three months ended June 30, 2015.

NOTE 6 - TAXES PAYABLE

Taxes payable at June 30, 2016 and March 31, 2016 were as follows:

	As of
	June 30,			March 31,
	2016			2016
Corporate Income Tax		$	483,483		$	435,686
Value-Added Tax			389,257			273,317
Other Tax & Fees			39,747			30,065
Total Tax Payable		$	912,487		$	739,068

NOTE 7 - INCOME TAXES

The Company is incorporated in the United States of America and is subject to United States federal taxation. No provisions for income taxes have been made, as the Company had no U.S. taxable income for the three months ended June 30, 2016 and 2015.

The Company's Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning the privately run and foreign invested enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

11

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

	Three Months Ended June 30,
	2016				2015
U.S. Statutory rate		$	751,891			$	1,393,403
Tax rate difference between China and U.S.			(214,826	)			(398,115	)
Permanent difference			35,659				(18,583	)
Effective tax rate		$	572,724			$	976,705

The provisions for income taxes are summarized as follows:

	Three Months Ended June 30,
	2016			2015
Current	$	591,354		$	976,705
Deferred		(18,630	)		-
Total	$	572,724		$	976,705

NOTE 8 - STOCKHOLDERS' EQUITY

Stock Issued for compensation and service

On April 19, 2016, in accordance with the Company's agreement with the independent director, the Company issued 43,478 shares of common stock to one independent director, which were valued at $10,609 based on the quoted price at issuance.

Stock Option Plan 

On July 23, 2015, the Company adopted a stock option plan that was approved by its Board of Directors on June 15, 2015.  This plan was intended to retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests.  Under this stock option plan, the participants of the plan include the Company's directors, officers and some employees who were previously determined by the Board of Directors.  On July 23, 2015, the Company signed stock option agreements with each participant and granted options to purchase a total of 2.6 million shares of Common Stock to the participants.  The vesting period of the stock options was ten months from July 23, 2015, the grant date of the stock options.  Immediately following the date when the stock options were vested, the participants would have five consecutive business days to exercise the stock options at an exercise price of $0.40 per share.  Stock options not exercised within the five consecutive business days would expire.  The Company assessed the fair value of the total granted stock options on the grant date using a Black-Scholes Stock Option Pricing Model. Significant assumptions used in calculating fair value of options are as follows:

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· Expected volatility 92.03%;

· Risk-free interest rate 0.33%;

· Expected term (year) 0.85;

· Exercise price $0.4.

The estimated fair value of the total granted stock options on the grant date was $529,100 which was being amortized over ten months period.  For the quarter ended June 30, 2016, the amortization of stock-based compensation expense was $101,026. As of June 30, 2016, the total estimated fair value of the stock options in amount of $529,100 had been fully amortized. All stock options expired on May 30, 2016 and none of the vested stock options were exercised by the end of the option exercise date.

A summary of the changes in stock options outstanding under the Company's stock option plan during the quarter ended June 30, 2016 is presented below:  

	Shares		Weighted Average  Grant Date Fair  Value
Options outstanding at April 1, 2016		2,600,000	$	529,100
Granted		-		-
Exercised		-		-
Canceled		-		-
Expired		2,600,000	$	529,100
Options outstanding at June 30, 2016		-	$	-

NOTE 9 – SUBSEQUENT EVENTS

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.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

 You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K. This discussion contains forward-looking statements. These forward-looking statements are based on information available at the time the statements are made and/or management's belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein and in other filings made by the company with the Securities and Exchange Commission. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date this Form 10-Q is filed with the Securities and Exchange Commission.

Overview

China YCT International Group, Inc. ("China YCT") was incorporated in the State of Florida in January 1989, and reincorporated in the State of Delaware on April 4, 2007. China YCT principally operates through two of its wholly-owned subsidiaries: Landway Nano Bio-Tech, Inc. ("Landway Nano"), incorporated in Delaware, and Shandong Spring Pharmaceutical Co., Ltd. ("Shandong Spring"), incorporated in the People's Republic of China (the "PRC"). China YCT International Group, Inc. and its subsidiaries are collectively referred to as the "Company". China YCT, through its wholly-owned subsidiary, Shandong Spring, is engaged in the business of developing, manufacturing, and selling its own medicine made primarily from gingko extract, development of the acer truncatum bunge planting bases, and distributing health care supplement products manufactured by another company in the PRC. Since July 2015, the Company has produced Acer truncatum Bunge Seed Oil and sold the product to customers through its distributors.  The Acer truncatum Bunge Seed Oil was extracted from the acer truncatum pods that were purchased from third party vendors.  The Company's self-grown acer truncatum pods will not be ready to be used for production until approximately the fourth quarter of 2017.

Results of Operations

The following table sets forth information from our statements of comprehensive income (loss) for the three months ended June 30, 2016 and 2015, in dollars:

	Three Months Ended
	June 30,						$			%
	2016			2015			Change			Change
Sales		9,712,495			11,485,752			(1,773,257	)		(15.4	)%
Cost of Goods Sold		(5,912,261	)		(5,802,976	)		(109,285	)		1.9	%
Gross Profit		3,800,234			5,682,776			(1,882,542	)		(33.1	)%
Operating Expenses		(1,667,397	)		(1,714,481	)		47,084			(2.7	)%
Operating Income		2,132,837			3,968,295			(1,835,458	)		(46.3	)%
Interest Income		15,422			12,855			2,567			20.0	%
Income Tax Provision		(572,724	)		(976,705	)		403,981			(41.4	)%
Net Income		1,575,535			3,004,445			(1,428,910	)		(47.6	)%
Comprehensive Income (Loss)		(509,653	)		3,360,510			(3,870,163	)		(115.2	)%

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Revenue

During the three months ended June 30, 2016, we realized $9,712,495 in revenue, representing a decrease of 15.4% or $1,773,257 as compared to $11,485,752 for the same period in 2015.  Of the 15.4% decrease in revenue, 9.8% was due to the decreased sales of both the Huoliyuan capsules and the health care products offset by the increased sales of acer truncatum bunge seed oil, and 5.6% was due to fewer  USD converted from RMB because a significant RMB depreciation occurred during the quarter ended June 30, 2016 compared with the same period in 2015.

Part of our revenues was generated by us as the distributor for the products manufactured by Shandong YCT.  The Company purchases its products from Shandong YCT according to the contract renewed on February 26, 2015 between the Company and Shandong YCT. Pursuant to the renewed two year contracts, for the period from February 26, 2015 to February 25, 2017, the Company can purchase 10 products from Shandong YCT on fixed prices.  On June 25, 2015, the Company made an amendment to the renewed Purchase and Sale Contract with Shandong YCT. Pursuant to the amended agreement, the Company no longer purchases and sells the 10 products included in the contract renewed on February 26, 2015 and agreed to purchase and sell four new products without changes in other terms of the previous contract. The Company can purchase these four new products from Shandong YCT at fixed prices. During the three months ended June 30, 2016, 32.8% of our total revenue was generated as the distributor of Shandong YCT, as compared to 31.8% during the three months ended June 30, 2015.

The sale of Huoliyuan Capsule accounted for 52.7% of our revenue during the three months ended June 30, 2016, compared to 68.2% during the three months ended June 30, 2015. Since July 2010, the Company has become not only a distributor of Shandong YCT's products but also a manufacturer and distributor of our own product, Huoliyuan Capsule. The sales of the Huoliyuan capsules experienced the fastest growth in the years ended March 31, 2012 and 2011. Since the fourth quarter of the last fiscal year, the sales of the Huoliyuan capsules have showed a decreasing trend. The decrease in the sales of Huoliyuan Capsule is primarily due to the increasing competition from other companies who produce and sell the same type of the medicine in the market and overall recent slowing of the Chinese economy.

Since July 2015, the Company has produced Acer truncatum Bunge Seed Oil and sold the product to customers through its distributors.  The Acer truncatum Bunge Seed Oil was extracted from the acer truncatum pods that were purchased from third party vendors.  The Company's self-grown acer truncatum pods will not be ready to be used for production until approximately the fourth quarter of 2017. During the three months ended June 30, 2016, the sales of acer truncatum bunge seed oil was $1,409,137, which accounted for 14.5% of our revenue for the three months ended June 30, 2016.

The following is the sales breakdown by products during the three months ended June 30, 2016 and 2015:

	For the Three Months Ended June 30,
	2016				2015
Health care supplements		3,184,339	32.8	%		3,648,586	31.8	%
Drugs (Huoliyuan Capsule)		5,119,019	52.7	%		7,837,166	68.2	%
Acer truncatum oil		1,409,137	14.5	%		-	-	%
Total		9,712,495	100	%		11,485,752	100	%

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Cost of Goods Sold and Gross Margin

Our costs of revenue were comprised primarily of the cost of finished goods we purchased from Shandong YCT, the raw materials we purchased from third party vendors, and the manufacturing costs of Acer Truncatum Bunge Seed Oil, and our own product, Huoliyuan Capsule. The cost of manufacturing Huoliyuan Capsule was approximately 56.6% and 71.1% of the total cost of goods sold during the three months ended June 30, 2016 and 2015, respectively.

During the three months ended June 30, 2016, our cost of goods sold totaled $5,912,261, representing an increase of $109,285 or 1.9% as compared to $5,802,976 during the three months ended June 30, 2015. The cost of goods sold, in fact, increased by 8.7%, in which 6.8% was offset by fewer  USD converted from RMB due to a significant RMB depreciation during the three months ended June 30, 2016 compared with the same period in 2015. The percentages of the costs of goods sold to total revenues increased from 50.5% for the three months ended June 30, 2015 to 60.9% for the three months ended June 30, 2016 primarily due to the increase in material costs for Huoliyuan and the sales of new healthcare products that have higher costs but a bigger market. 

Gross Profit

Gross profit for the three months ended June 30, 2016 was $3,800,234, a decrease of 33.1% or $1,882,542 as compared to the same period for the prior year. Gross profit as a percentage of net revenues was approximately 39.1% for the three months ended June 30, 2016, a decrease from 49.5% for the same period of 2015. Our cost for production of Huoliyuan increased compared with the same period of the prior year. In addition, the cost of new healthcare products that were sold during the three month ended June 30, 2016 was higher than the healthcare products that were sold during the same period of the prior year.

The comparison of the profits for the three months ended June 30, 2016 and 2015 as follows:

	June 30, 2016		June 30, 2015		Change  in $			Variance
Health care supplements		1,414,571		1,972,246		(557,675	)		(28.3	)%
Drugs (Huoliyuan Capsules)		1,720,074		3,710,530		(1,990,456	)		(53.6	)%
Acer truncatum oil		665,589		-		665,589			100.0	%
Total		3,800,234		5,682,776		(1,882,542	)		(33.1	)%

Research and Development Expenses

Our R&D expenses for the three months ended June 30, 2016 were $69,160 or approximate 0.7% of total corresponding revenue, a decrease of $121,408 or 63.7%, as compared to $190,568 or approximately 1.7% of total corresponding revenue for the three months ended June 30, 2015.  For the three months ended June 30, 2016, we have further reduced our effort related to making investments in research and development of new technologies and products that can be utilized to refine and extract the beneficial components from plants, primarily gingko, due to other focus, such as development of our own acer trunkatum bunge planting bases.

Our long-term goal is to utilize advanced biological technology to refine and extract the beneficial compounds in plants that have traditionally been known to have medicinal benefits, primarily gingko and acer trunkatum bunge plants. As of June 30, 2016, we had 27 staff in R&D department.

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Selling, General and Administrative Expenses

Our selling expenses consist primarily of sales commissions, advertising and promotion expenses, freight charges and related compensation. Our selling expenses for the three months ended June 30, 2016 were $747,880 or 7.7% of our total revenue for the period, representing slight increase on the percentage of total revenue from 6.7% for the prior year's quarter ended June 30, 2015.

Our G&A expenses for the three months ended June 30, 2016 were $850,357 or 8.8% of our total revenue for the period, representing an increase on the percentage of total revenue from 6.6% for the prior year's quarter ended June 30, 2015.  The increase on the percentage of G&A over total revenue compared with the three months ended June 30, 2015 mainly due to amortization of stock-based compensation expenses, and increase in the amortization of prepaid leases. 

Net Income

As a result of above, during the three months ended June 30, 2016, we realized net income of $1,575,535,  representing a 47.6% or $1,428,910 decrease, compared to $3,004,445 during the three months ended June 30, 2015. The decrease was mainly due to the lower revenue from sales of both Huoliyuan Capsule and health care products, the higher manufactory costs of Huoliyuan, the higher cost of the new healthcare products, and higher G&A expenses caused by amortization of stock option cost and amortization of prepaid leases in the three months ended June 30, 2016.

Comprehensive Income

Our business operates entirely in Chinese RMB, 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 "other comprehensive income (loss)," since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the three months ended June 30, 2016, the effect of converting our financial results to Dollars was a loss of $2,085,188 to our other comprehensive income, as compared to income of $356,065 during the three months ended June 30, 2015 as a result of the currency exchange rate fluctuation.

Liquidity and Capital Resources

Our principal sources of liquidity were generated from our operations. As of June 30, 2016, we had $11,437,665 in working capital, an increase of $982,354 or 9.4% as compared to $10,455,311 in working capital as of March 31, 2016. Based on our current operating plan, we believe that existing cash and cash equivalents balances, and the funds to be generated by operations will be sufficient to meet our working capital and capital requirements for our current operations for at least the next 12 months. Our operations produced positive cash flow of $2,701,721 during the three months ended June 30, 2016. We had accounts receivable of $432,048 outstanding as of June 30, 2016. We expect our marketing activities to continue to help generate positive cash flow.  The operations of our own manufacturing since fiscal year 2010 and the development of our own acer truncatum bunge planting bases have put some pressure on our cash flow. We may be required to seek additional capital and reduce certain spending as needed on an on-going basis. There can be no assurance that any additional financing will be available on acceptable terms.

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 $5 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 need. At present we have no commitment from any source for additional funds and there can be no assurance that the funds will be available on terms acceptable to us.

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The following table sets forth a summary of our cash flows for the periods indicated:

	For the Three Months Ended June 30,
	2016			2015			Change in $			Change in %
Net cash provided by operating activities	$	2,701,721		$	1,827,942			873,779			47.8	%
Net cash used in investing activities	$	(1,114,485	)	$	(1,530,666	)		416,181			(27.2	)%
Effect of exchange rate change on cash and cash equivalents	$	(219,655	)	$	61,532			(281,187	)		(457.0	)%
Net increase in cash and cash equivalents	$	1,367,581		$	358,808			1,008,773			281.1	%
Cash and cash equivalents, beginning balance	$	7,639,084		$	13,083,532			(5,444,448	)		(41.6	)%
Cash and cash equivalents, ending balance	$	9,006,665		$	13,442,340			(4,435,675	)		(33.0	)%

Operating Activities

Net cash provided by operating activities was $2,701,721 for the three months ended June 30, 2016, which was an increase of 47.8% or $873,779 from the $1,827,942 net cash provided by operating activities for the same period of the prior year. The increase was mainly due to the decrease from cash out flow from inventory and tax payable.

Investing Activities

During the three months ended June 30, 2016, our net cash used by investing activities was $1,114,485, as compared to $1,530,666 of net cash used for the three months ended June 30, 2015. The cash used in investing activities for the three months ended June 30, 2016 of $1,114,485 was primarily attributable to the acquisition of office and production equipment of $27,479, landscaping cost of $612,398, and capital expenditures of $474,608 in acer truncatum bunge planting.

Financing Activities

No net cash was generated or used by financing activities over the three months ended June 30, 2016 and 2015.

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

We have made no material changes to our critical accounting policies in connection with the preparation of financial statements for the three months ended June 30, 2016.

New Accounting Pronouncements

The Company's management has evaluated all the recently issued accounting pronouncements through the filing date of the consolidated financial statements and does not believe that they will have a material effect of the Company's consolidated financial position and results of operations. 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

A smaller reporting company is not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term "disclosure controls and procedures" (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within required time periods. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q (the "Evaluation Date"). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were not effective.

Changes in internal controls.

The term "internal control over financial reporting" (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2016, and they have concluded that there was no change to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 

PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company is a party.

Item 1A. Risk Factors

A smaller reporting company is not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities.

None

Item 4. Removed and Reserved

Item 5. Other Information

None

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 Item 6. Exhibits

31.1	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
32	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.  INS	XBRL Instance Document.
101.  SCH	XBRL Taxonomy Extension Schema Document.
101.  CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.  DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.  LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.  PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CHINA YCT INTERNATIONAL GROUP, LTD.

Date: August 15, 2016

/s/ Yan Tinghe

Yan Tinghe Chief Executive Officer 

(Principal Executive Officer)

/s/ Li Chuanmin

Li Chuanmin Chief Financial Officer 

(Principal Financial Officer)

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