Spring Pharmaceutical (CYIG) 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

 For the quarterly period ended September 30, 2010

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

For the transition period from ______________ to _____________

Commission file number: 0-53600

CHINA YCT INTERNATIONAL GROUP, INC.

(Exact name of registrant as specified in its charter)

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

c/o Shandong Spring Pharmaceutical Co., Ltd Economic Development Zone.

Gucheng Road Sishui County Shandong Province PR China 273200

(Adreess of principal executive offices)

Issuer's telephone number: 406-282-3188

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

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 x

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

Large accelerated filer                           Accelerated filer

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨

The number of shares outstanding of the issuer’s common stock as of the latest practicable date, July 31, 2011, was 73,780,610.

CHINA YCT INTERNATIONAL GROUP, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

INDEX

	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	4
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	10
Item 4:	Controls and Procedures	10
	PART II - OTHER INFORMATION
Item 1:	Legal Proceedings	11
Item 1A:	Risk Factors	11
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 3:	Defaults Upon Senior Securities	11
Item 4:	Removed and Reserved	11
Item 5:	Other Information	12
Item 6:	Exhibits	12

2

Item 1. Financial Statement

	CHINA YCT INTERNATIONAL GROUP, INC.
	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
	Table of Contents
Page
	Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and March 31, 2010	F-1
	Consolidated Statements of Income for the 6 months ended September, 2010 and 2009 (Unaudited)	F-2
	Consolidated Statements of Cash Flows for the 6 months Ended September 30, 2010 and 2009 (Unaudited)	F-3
	Notes to Consolidated Financial Statement (Unaudited)	F-5-F-13

3

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

			UNIT: USD$
	September 30, 2010		March 31, 2010
	(Unaudited)		(Audited)
Assets
Current assets:
Cash and cash equivalent	$	5,576,125	$	11,911,933
Prepaid accounts		7,529,149		91,962
Inventory		37,663		324,855
Other receivable from related parties		-		-
Total current assets		13,142,937		12,328,750
Plant, property and equipment, net		5,021,202		5,033,596
Construction in progress		4,714,126		4,627,665
Intangible assets, net		8,057,306		8,093,111
Total assets		30,935,571		30,083,122
Liabilities and Stockholders’ Equity (Deficit)
Liabilities:
Current liabilities:
Accounts payable				2,299,928
Tax payable		1,021,094		1,204,097
Other payable		309,850		267,182
Total current liabilities		1,330,944		3,771,207
Stockholders’ Equity
Preferred stock, par value $500.00 per share; 45 shares authorized and issued at September 30, 2010 and March 31, 2010		22,500		22,500
Common stock, par value $0.001 per share; 29,476,274 and 29,461,304 shares authorized and issued at September 30, 2010 and March 31, 2010.		29,476		29,461
Additional paid-in capital		4,158,225		4,138,480
Statutory reserve		956,633.00		956,633.00
Retained earnings		22,748,840		20,012,077
Accumulated other comprehensive income		1,688,953		1,152,764
Total stockholders’ equity		29,604,627		26,311,915
Total liabilities and stockholders’ equity	$	30,935,571	$	30,083,122

F-1

 CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

								UNIT: USD$
	FOR THE THREE MONTHS ENDED					FOR THE SIX MONTHS ENDED
	September 30, 2010		September 30, 2009			September 30, 2010		September 30, 2009
Sales Revenue	$	5,752,798	$	8,000,675		$	11,414,317	$	14,145,007
Cost of Goods Sold		3,114,136		3,506,781			6,175,456		6,185,586
Gross Profit		2,638,662		4,493,894			5,238,861		7,959,421
Selling Expenses		430,682		795,362			933,395		2,381,906
G&A Expense		288,304					502,914
R&D Expenses		61,651		109,387			121,989		174,429
Total expense		780,637		904,749			1,558,298		2,556,335
Income from operation		1,858,025		3,589,145			3,680,563		5,403,086
Interest expense		-		-			-		-
Other income (Expense)				(19,186	)				(48,598	)
Profit before tax		1,858,025		3,569,959			3,680,563		5,354,488
Income tax		484,502		882,555			943,800		1,356,349
Net income		1,373,523		2,687,404			2,736,763		3,998,139
Other comprehensive income
Foreign currency translation adjustment		391,336		13,344			536,189		70,697
Compenhensive income	$	1,756,035	$	2,700,748		$	3,272,952	$	4,068,836
Basic and diluted income per common share
Basic and Diluted		0.05		0.09			0.09		0.14
Weighted average number of common shares outstanding
Basic and Diluted		29,471,503		29,425,073			29,473,902		29,423,844

F-2

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

															UNIT: USD$
CHINA YCT INTERNATIONAL GROUP, INC.	Preferred Stock Series A				Common shares				Additional
									paid		Statutory		Accumulated		Retained
	Shares		Amount		Shares		Amount		in capital		Reserve		OCI		Earnings			Total
Balance - March 31, 2008		45	$	22,500		81,231	$	29,380	$	4,063,039			$	857,763	$	4,034,108		$	9,006,790
Comprehensive income
Net income for the year																7,481,543			7,481,543
Foreign currency translation adjustment														272,813					272,813
Balance - March 31, 2009		45		22,500		29,380,073		29,380		4,063,039				1,130,576		11,515,651			16,761,146
Issuance of common shares to independent directors						81,231		81		75,441									75,522
Net income for the year																9,453,059			9,453,059
Statutory reserve												956,633				(956,633	)		-
Foreign currency translation adjustment														22,188					22,188
Balance - March 31, 2010		45		22,500		29,461,304		29,461		4,138,480		956,633		1,152,764		20,012,077			26,311,915
Issuance of common shares to  independent directors						14,970		15		19,745									19,760
Comprehensive income
Net income for the year																2,736,763			2,736,763
Other Comprehensive income, net of tax
Foreign currency translation adjustment														536,189					536,189
Balance - September 30, 2010		45	$	22,500		29,476,274	$	29,476	$	4,158,225	$	956,633	$	1,688,953	$	22,748,840		$	29,604,627

F-3

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW

(Unaudited)

				UNIT: USD$
	SIX MONTH ENDED
	September 30, 2010			September 30, 2009
Cash Flows From Operating Activities:
Net income	$	2,683,871		$	3,998,139
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		304,005			100,220
Issue of common shares as compensation		19,760			45,000
Changes in operating assets and liabilities:
Inventory		287,192			(327,726	)
Advance to suppliers
Other receivable from related parties
Accounts payable		(2,299,928	)		(456,778	)
Customer deposit
Taxes payable		(183,003	)		566,328
Accrued expenses and other payables		42,668			(62,056	)
Net cash provided by (used in) operating activities		854,565			3,863,127
Cash flows from investing activities:
Addition to plant and equipment		(188,590	)		(1,223,930	)
Loan repaid from (provided to) related party					1,169,926
Prepayment/deposit to 3rd party for potential purchase of Patent		(7,437,187	)		-
Net cash provided by (used in) investing activities		(7,625,777	)		(54,004	)
Effect of exchange rate changes on cash and cash equivalents		382,512			13,006
Net increase (decrease) in cash and cash equivalents		(6,388,700	)		3,822,129
Cash and cash equivalents at beginning of period		11,911,933			10,048,380
Cash and cash equivalents at ending of period	$	5,576,125		$	13,870,509
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest		-			-
Income taxes	$	1,697,382		$	919,165

F-4

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

China YCT International Group, Inc. (“China YCT”) was incorporated in the State of Florida, in the United States (the “US”) in January 1989.   China YCT principally operates through the following directly owned subsidiaries: Landway Nano Bio-Tech, Inc. (100% owned), incorporated in Delaware, in United States, and Shandong Spring Pharmaceutical Co., Ltd. (“Shandong Spring”), (100% owned), incorporated in the People’s Republic of China (“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 marketing gingko and other dietary supplement products in the PRC.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Principles of consolidation

The consolidated financial statements include the financial statements of China YCT, 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 could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include: the valuation of inventory, and estimated useful lives and impairment of property and equipment and intangible assets.

Cash and cash equivalents

For 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.

F-5

Accounts receivable

Accounts receivable are stated at net realizable value. An allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables. A considerable 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 had no accounts receivable as of September 30, 2010 and March 31, 2010.

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-line 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.

Intangible Assets

(i) Land Use Rights:

All land in the PRC is owned by the government and cannot be sold to any individual or company.  However, the government may grant a “land use right” to occupy, develop and use land. The Company records land use rights obtained as intangible assets at cost, which is amortized evenly over the grant period of 50 years.

(ii) Patent:

The patent is the Company’s exclusive right to use an aglycone type and purification method of biotransformation in the gingko product manufacturing process for a period of 20 years from the patent application date, and was purchased from Shandong YCT in March 2010.  The patent was recorded at cost when purchased, and is being amortized over the shorter of its remaining legal life, 16.5 years, or its useful life, on a straight-line basis.

F-6

Revenue recognition

The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104, included in the Codification as ASC 605, Revenue Recognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.

Unearned revenue

Revenue from the sale of goods or services is recognized at the time that goods are delivered or services are rendered. Receipts in advance for goods to be delivered or services to be rendered in a subsequent period are carried forward as unearned revenue.

Impairment of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. An impairment loss, measured based on the fair value of the asset, is recognized if expected future undiscounted cash flows are less than the carrying amount of the assets.

Income taxes

The Company accounts for income tax under the asset and liability method as stipulated by Accounting Standards Codification (“ASC”) 740 formerly Statement of Financial Accounting Standards (”SFAS”) No. 109, “Accounting for Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns.  Deferred Income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities.  Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. There were no deferred tax amounts at September 30, 2010 and March 31, 2010, 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 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.

The Company recorded net VAT Payable in amount of $531,683 as of September 30, 2010.

Research and development

Research and development costs are related primarily to the Company’s developing its intellectual property. Research and development costs are expensed as incurred. The costs of material and equipment that are acquired or constructed for research and development activities and have alternative future uses are classified as plant and equipment and depreciated over their estimated useful lives.

The research and development expense for the six months ended September 30, 2010 and 2009 was $121,989 and $174,429, respectively.

F-7

Advertising costs

Advertising costs for newspaper and television are expensed as incurred.  The Company incurred advertising costs of $168 and $790,150 for the six months ended September 30, 2010 and 2009, respectively.

Mailing and handling costs

The Company accounts for mailing and handling fees in accordance with the FASB ASC 605-45 (Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs). The Company includes shipping and handling fees billed to customers in net revenues. Amounts incurred by the Company for freight are included in cost of goods sold. For the six months ended September 30, 2010 and 2009, the Company incurred $460,735 and $633,289 mailing and handling costs, respectively.

Net income (loss) per share (“EPS”)

Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, forward contracts, warrants to purchase common stock, contingently issuable shares, common stock options and warrants and their equivalents using the treasury stock method) were exercised or converted into common stock. There are no common stock equivalents available for dilution purposes as of September 30, 2010 and 2009.

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.

F-8

Foreign currency translation

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

Translation adjustments resulting from this process amounted to $536,189 and $70,697 as of September 30, 2010 and 2009, respectively.

The following exchange rates were adopted to translate the amounts from RMB into United States dollars (“USD$”) for the respective periods:

	Sept. 30,  2010		March 31, 2010		Sept. 30,  2009
Three Months  End RMB Exchange Rate (RMB/USD$)		6.7011		6.8263		6.8263
Average Period RMB Exchange Rate (RMB/USD$)		6.7974		6.8290		6.8305

Recent accounting pronouncements

In April 2010, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require an entity to provide disclosures about the fair value of financial instruments in interim financial information. This FSP also amends Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  Effective April 1, 2009, the Company adopted this pronouncement.  The adoption of this pronouncement did not have any significant impact on the Company’s financial condition or results of operations.

F-9

In January 2010, the FASB issued authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.

 NOTE 3 - INVENTORY

Inventory consists of finished goods, work-in-process, and raw materials. No allowance for inventory was made for the six months ended September 30, 2010 and 2009.

The components of inventories as of September 30, 2010, and March 31, 2010 were as follows:

	Period Ended ,
	Sept. 30, 2010		March 31, 2010
Raw materials	$	8,512	$	8,355
Work-in-progress		6,395		77,333
Finished goods		22,756		239,166
Total Inventories	$	37,663	$	324,855

F-10

NOTE 4 - PLANT, PROPERTY AND EQUIPMENT, NET

The components of property and equipment as of September 30, 2010 and March 31, 2010 were as follows:

	Period Ended,
	September 30, 2010			March 31, 2010
Machinery & Equipment	$	486,003		$	477,089
Furniture & Fixture		94,080			92,355
Building		5,299,624			4,896,857
Subtotal		5,568,430			5,466,301
Less: Accumulated Depreciation		(547,228	)		(432,705	)
Total plant, property and equipment, net	$	5,021,202		$	5,033,596

The depreciation expense for the six months ended September 30, 2010 and 2009 was $114,523 and $85,111, respectively.

NOTE 5 – CONSTRUCTION IN PROGRESS

Construction in progress represents direct costs of construction or acquisition and design fees incurred for the Company’s new plant and equipment. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is made until construction is completed and put into use.

NOTE 6 - MAJOR CUSTOMER AND VENDOR

For the year ended March 31, 2010, the Company mainly sells products to individual retail customers through eight major distributors.

The Company purchases the majority of its products from Shandong YCT based on the contract signed on December 26, 2006 between the Company and Shandong YCT. For the six months ended September 31, 2009, Shandong YCT was the sole vendor to the Company. For the 6 months ended September 31, 2010, the purchase from Shandong YCT was $3,778,473, representing 67% of the Company’s total purchase in the 6 months.

F-11

NOTE 7 - INTANGIBLE ASSETS, NET

The intangible assets of the Company consist of land use right and purchased patent.

Net land use right and purchased patent were as follows:

		As of,
	Amortization Period	September 30, 2010			March 31, 2010
Land use right	50 years	$	1,514,378		$	1,486,603
Less: Accumulated amortization			(121,401	)		(104,057	)
Land use right, net			1,392,977			1,382,546
Patent	16.5 years		6,864,545			6,738,643
Less: Accumulated amortization			(200,216	)		(28,078	)
Patent, net			6,664,329			6,710,565
Intangible assets, net		$	8,057,306		$	8,093,111

The amortization expense of land use right for the six months ended September 30, 2010 and 2009 was $17,344 and $15,109, respectively.

The amortization expense of patent for the six months ended September 30, 2010 was $172,138.

NOTE 8 - TAX PAYABLE

Tax payable at September 30, 2010 and March 31, 2010 were as follows:

	As of
	September 30, 2010		March 31, 2010
Corporate Income Tax	$	446,876	$	993,804
Value-Added Tax		531,683		194,715
Other Tax & Fees		42,535		15,577
Total Tax Payable	$	1,021,094	$	1,204,097

F-12

NOTE 9 - INCOME TAXES

(i) United States

China YCT International Group, Inc. is subject to the United States of America Tax law at tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the six months ended September 30, 2010, and 2009, and management believes that its earnings from the operating company in PRC are permanently invested in the PRC.

(ii) PRC

Shandong Spring Pharmaceutical Co., Ltd is subject to the Enterprise income tax (“EIT”) at a statutory rate of 25%.

For the six months ended September 30, 2010 and 2009, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $943,800 and $1,356,349, respectively.

NOTE 10 - STOCKHOLDERS’ EQUITY

Stock Issued to Independent Directors

On April 29, 2010, the Company issued 14,970 shares of common stock in the form of restricted shares to Mr.Robert J. Fanella, the independent director and chairman of audit committee as compensation for his services. The shares were valued at the average closing market price of the common stock for the five trading days preceding and including the date stock was issued.

The total amount of the compensation in the form of issuing shares of common stock to the independent directors was $19,760 for the six months ended September 30, 2010.  There was no common stock compensation to the independent directors for the six months ended September 30, 2009.

Statutory Reserve

Subsidiaries incorporated in China are required to make appropriations to reserve funds, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (“PRC GAAP”).  Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum, and any contributions are not to exceed 50% of the respective companies’ registered capital.

As of September 30, 2010, the Company appropriated $956,633 to the statutory reserve.

F-13

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Results of Operations – Three months Ended September 30, 2010 compared to the Three months Ended September 30, 2009

Net Sales

 Starting from April 2010, we restructured our product distribution line due to profitability considerations. We discontinued the distribution of 24 cosmetic and daily necessities products due to increase of advertisement, transportation costs resulted from the new government regulations issued by SFDA of China. Meanwhile we continued the distribution of our 10 types of health care supplement products which are not affected by the government regulations. Furthermore, since September 2009, we have started to engage in production and distribution of our own patented drug – Huoliyuan Capsule and develop the distribution channels for the drug. As the result of the restructure of our businesses and product distribution lines, we adjusted our sales policies and marketing efforts, which caused the slight slowing down of our overall sales during the three and six months ended September 30, 2010.As a result, during the three months ended September 30, 2010, we realized $5,752,798 in revenue, representing a decrease of 28% or $2,247,877 as compared to $8,000,675 for the same period of 2009.

The following table set forth a sales breakdown comparison by product for the period as indicated.

	September 30, 2010		September 30, 2009		Change in $			Variance
Revenue from :
Health care supplements	$	3,534,755	$	4,800,674	$	(1,265,919	)		(26	)%
Cosmetics and toiletries		0		2,433,025		(2,433,025	)		(100	)%
Daily necessities		0		766,976		(766,976	)		(100	)%
Drugs		2,218,043		0		2,218,043
Total	$	5,752,798	$	8,000,675	$	(2,247,877	)		(28	)%

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During the quarter ended September 30, 2010, our health care supplements products and the drug accounted for about 64% and 36% of our revenue, respectively. Each of the total 11 products under these two categories contributed to our sales revenue.

Cost of Goods Sold

Our costs of revenue was 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 cost of our own patented drug, – Huoliyuan Capsule. During the three months ended September 30, 2010, our cost of goods sold totaled $3,114,136, representing a decrease of $392,645 or 11% as compared to $3,506,781 for the same period of 2009.  The percentages of the costs of goods sold to total revenues during the three months ended September 30, 2010 increased to 54%  from 44% as compared to the same quarter of the previous year.

Prior to April 2010, all of our resale products purchased from Shandong Yong Chun Tang were subject to a favorable 3% valued added tax rate.  Since April 2010, we no longer had this tax benefit, and all of our products including our self-manufactured drug have been subjected to a 17% value added tax rate.  However, we were not able to adjust our sales prices to our distributors accordingly and to net off the increased output VAT in the quarter ended September 30, 2010.  As the result, our overall cost ratio for the quarter ended September 30, 2010 increased by 10% as compared with the same period of 2009.

Gross Profit

Gross profit during the three months ended September 30, 2010 was $2,638,662, a decrease of 41% or $1,855,232 as compared to $4,493,894 during the same period for the previous year. Gross profit as a percentage of net revenues was 46% for the six months ended September 30, 2010, a decrease of 10% as compared to the same period of the prior year.  The decrease in gross profit and gross profit percentage are primarily due to the lower sales revenue and the higher cost of goods sold for the quarter.

The following table sets forth a breakdown of our gross margin by different products:

	Gross profit for the quarter ended  September 30,						Gross Margin for the quarter ended September 30,
	2010			2009			2010			2009
Product
Health care supplements		$	1,591,014		$	2,595,854		45	%		54	%
Cosmetics and toiletries			0			1,454,285					60	%
Daily necessities			0			443,755					58	%
Drugs			1,047,648			0		47	%
Overall		$	2,638,662		$	4,493,894		46	%		56	%

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Research and Development Expenses. 

Our R&D expenses for the three months ended September 30, 2010 and 2009 were $61,651 or approximate 1% of total corresponding revenue and $109,387 or approximately 1% of total corresponding revenue, respectively. We have not incurred any significant R&D expenses since September 30, 2010June 30. However, 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. Toward this end, we have a staff of eight 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.

Selling, General and Administrative Expenses(SG&A Expenses).

During the quarter ended September 30, 2010, our SG&A expenses consist primarily of sales commissions, promotion expenses, freight charges and related compensations. Our overall SG&A expenses for three months ended September 30, 2010 were $718,986  or 12% of our net sales for the period, representing a decrease of 10% or $76,376 as compared with the SG&A expenses for the same period of the previous year.. The decrease in our overall SG&A expenses was primarily due to the reduction of selling expenses, advertising expense, and professional expenses.

Net Income

For the quarter ended September 30, 2010, we realized $1,373,523 in net income, representing a 49% or $1,313,881 decrease as compared to $2,687,404 for the quarter ended September 30, 2009. The decrease of our net income was a result of the lower sales revenue and the higher cost of goods sold during the periods under review.

Results of Operations – Six Months Ended September 30, 2010 compared to the Six Months Ended September 30, 2009

Net Sales

For the same reason discussed above, during the six months ended September 30, 2010, we realized $11,414,317 in revenue, representing a decrease of 2,730,690 or 19.3%, compared to $14,145,007 during the six months ended September 30, 2009. Our sales breakdown by product line for the period indicated are as follows.

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	For six months ended September 30
	2010		2009		Change in $				Variance
Revenue from :
Health care supplements	$	7,167,088	$	8,833,152		$	(1,666,064	)		(19	)%
Cosmetics and toiletries		0		3,720,137			(3,720,137	)		(100	)%
Daily necessities		0		1,591,718			(1,591,718	)		(100	)%
Drugs		4,247,229		0			4,247,229
Total	$	11,414,317	$	14,145,007		$	(2,730,690	)		(19	)%

Cost of Goods Sold

During the six months ended September 30, 2010, our cost of goods sold totaled $6,175,456, representing a slight decrease of $10,130 as compared to $6,185,586 for the same period of 2009. The percentages of the costs of goods sold to total revenues during the six months ended September 30, 2010 increased to 54.1% from 43.7% during the six months ended September 30, 2009.

Gross Margin

Our gross margin during the six months ended September 30, 2010 was $5,238,861 or 46%, a decrease of 10% as compared to the same period of the previous fiscal year.  The decrease of the gross margin is mainly the combination of the reduced sales revenue and increased cost of goods sold.

Below is the gross margin breakdown by product line for the period.

	Gross profit for 6 months ended September 30,						Gross Margin for 6 months ended  September 30,
	2010			2009			2010			2009
Products
Health care supplements		$	3,232,767		$	4,797,970		45	%		54	%
Cosmetics and toiletries			0			2,223,975					60	%
Daily necessities			0			937,476					59	%
Drugs			2,006,094			0		47	%
Overall		$	5,238,861		$	7,959,421		46	%		56	%

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Operating expenses

Our operating expenses for the six months ended September 30, 2010 were equal to 14% of our revenue as compared to 18% in the prior year. This was a decrease of $998,037 or 39% over the six month period ended September 30, 2009. These decreases were primarily a result of reduced selling expenses, travel expenses, and R&D expenses.

Pre-tax Income

Our operations produced net pre-tax income of $3,680,563 for the six months ended September 30, 2010, a decrease of $1,673,925 or 31% as compared to $5,354,488 for the same time period in 2009. The decrease of the pre-tax income is the result of the lower sales revenue and the higher cost of goods sold.  

Other Comprehensive Income

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 comprehensive income below the line of net 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,” 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 six months ended September 30, 2010, the effect of converting our financial results to Dollars was an addition of $536,189 to our other comprehensive income. In the six months ended September 30, 2010, the effect of converting our financial results to Dollars was to add $391,336.

 Liquidity and Capital Resources

Our principal sources of liquidity were generated from our operations. As of September 30, 2010, our company had $11,811,933 in working capital, an increase of $3,254,390 or 38% as compared to $8,557,543as of March 31, 2010. The increase in the working capital at September 30, 2010 was primarily due to increased funds generated from operation during the six months ended September 30, 2010 and the decrease in accounts payable to 0 from $2,299,928 caused by the acquisition of manufacturing equipment for Huoliyuan Capsule operation on March 31, 2010.

As of September 30, 2010, cash and cash equivalents were $5,576,125, a decrease of $6,335,808 or 53% as compared to $11,911,933 as of March 31, 2010. The decrease in our cash was primarily caused by a prepayment of $7,355,192 to a third party credit agency as a deposit for an on-going negotiation of a business acquisition. According to a mutual agreement among the targeting company, the third party credit agency, and our company, the third party credit agency will have to fully refund the deposit to us if the deal is not closed. The prepayment was fully refunded to us in December, 2010 because the transaction was canceled.

Based on our current operating plan, we believe that existing cash and cash equivalents balances and the funds generated by operations will be sufficient to meet with our working capital and capital requirements for our current operations for at least 12 months. Our operations have produced positive cash flow, with $854,565 provided by operating activities for the six months ended September 30, 2010. We did not have accounts receivable outstanding as of September 30, 2010. We expect our marketing activities to continue to operate cash-positively. However, once we commence our own manufacturing operations, the working capital requirements of manufacturing may put pressure on our cash flow, and we may be required to seek additional capital and reduce certain spending as needed. There can be no assurance that any additional financing will be available on acceptable terms.

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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 is more likely to 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 will 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.

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

	Six months ended Sept 30,
	2010			2009
Net cash provided by operating activities	$	854,565		$	3,863,127
Net cash provided by(used in)  investing activities	$	(7,625,777	)	$	(54,004	))
Net cash provided by financing activities	$	0		$	0
Effect of exchange rate change on cash and cash equivalents	$			$	13,006
Net increase in cash and cash equivalents	$	382,512		$	3,822,129
Cash and cash equivalents, beginning balance	$	11,911,933		$	10,048,308
Cash and cash equivalents, ending balance	$	5,576,125		$	13,870,509

Operating Activities

Net cash provided by operating activities was $854,565 during the six months ended September 30, 2010, which was a decrease of 78% or $3,008,562 from $3,863,127 net cash provided by operating activities for the same period of 2009.  The decrease was mainly attributable to the decrease of our net income and payment made to reduce the balance of account payable.

Investing Activities

During the six months ended September 30, 2010, our net cash used in investing activities was $7,625,777, as compared to $54,004 of net cash used in investing activities for the six months ended September 30, 2009.  We prepaid $7,437,187 to a third party as a deposit for an on-going negotiation of a business acquisition. According to a mutual agreement among the targeting company, the third party credit agency, and our company, the third party credit agency will have to fully refund the deposit to us if the deal cannot be closed. 

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Financing Activities

No net cash was generated or used by financing activities during the six months ended September 30, 2010 and 2009.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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.

Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2010. Pursuant to Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, “disclosure controls and procedures” means controls and other procedures that are designed to insure that information required to be disclosed by China YCT International Group in the reports that it files with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time limits specified in the Commission’s rules.  “Disclosure controls and procedures” include, without limitation, controls and procedures designed to insure that information China YCT International Group is required to disclose in the reports it files with the Commission is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that China YCT International Group’s system of disclosure controls and procedures was effective as of September 30, 2010 for the purposes described in this paragraph.

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 Changes in Internal Controls.

There was no change in internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation described in the preceding paragraph that occurred during the six months ended September 30, 2010 that has materially affected or is reasonably likely to materially affect China YCT International Group’s internal control over financial reporting. Pursuant to Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, the term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, 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 and includes those policies and procedures that:

· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Removed and Reserved

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Item 5. Other Information

None

Item 6. Exhibits

31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer

31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer

32.1 Section 1350 Certification of Chief Executive Officer

32.2 Section 1350 Certification of Chief Financial Officer

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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/ Li Chuanmin,

Li Chuanmin, Chief Financial Officer

Date: July 31, 2011

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