Spring Pharmaceutical (CYIG) 10-Q 2013 Q1 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 June 30, 2013

o 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	(IRS Employer Identification No.)
organization)
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 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. Yesx 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 x   No o

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 o No x

The number of shares outstanding of the issuer’s common stock on August 6, 2013 was 29,663,023.

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012

(UNAUDITED)

Table of Contents
	Page
Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and March 31, 2013	3
Consolidated Statements of Income for the three months ended June 30, 2013 and 2012 (Unaudited)	4
Condensed Consolidated Statements of Stockholders' Equity as of June 30, 2013 (Unaudited) and March 31, 2013	5
Consolidated Statements of Cash Flows for the three months Ended June 30, 2013 and 2012 (Unaudited)	6
Notes to Consolidated Financial Statement	7-11

2

CHINA YCT INTERNATIONAL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

			UNIT: USD$
	June 30, 2013		March 31, 2013
	(Unaudited)
Assets
Current assets:
Cash and cash equivalent	$	27,170,517	$	29,924,188
Accounts receivable		-		135,237
Prepaid accounts		21,278		20,972
Inventory		3,138,716		1,296,550
Total current assets		30,330,511		31,376,947
Plant, property and equipment, net		12,461,444		9,409,916
Construction in progress		-		220,874
Intangible assets, net		17,582,370		17,656,561
Total assets		60,374,325		58,664,298
Liabilities and Stockholders’ Equity (Deficit)
Liabilities:
Current liabilities:
Tax payable		424,560		886,706
Other payable		8,290		366,818
Total current liabilities		432,850		1,253,524
Total liabilities		432,850		1,253,524
Stockholders’ Equity
Preferred stock, par value $500.00 per share; 45 shares authorized and issued at June 30, 2013 and March 31, 2013		22,500		22,500
Common stock, par value $0.001 per share; 500,000,000 and 100,000,000 shares authorized, 29,663,023 shares issued and outstanding at June 30, 2013 and March 31, 2013, respectively		29,663		29,663
Additional paid-in capital		4,180,095		4,180,095
Statutory reserve		956,633		956,633
Retained earnings		50,348,572		48,426,955
Accumulated other comprehensive income		4,404,012		3,794,929
Total stockholders’ equity		59,941,475		57,410,775
Total liabilities and stockholders’ equity	$	60,374,325	$	58,664,298

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CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

UNIT: USD$
	FOR THE THREE MONTHS ENDED
	June 30, 2013		June 30, 2012
Sales Revenue	$	8,220,587	$	8,916,979
Cost of Goods Sold		3,976,310		4,368,921
Gross Profit		4,244,277		4,548,058
Selling Expenses		543,686		870,204
G&A Expense		579,908		487,383
R&D Expenses		587,259		222,566
Total expense		1,710,853		1,580,153
Income from operation		2,533,424		2,967,905
Interest income (Expense)		28,732		28,031
Profit before tax		2,562,156		2,995,936
Income tax		640,539		743,226
Net income		1,921,617		2,252,710
Other comprehensive income:
Foreign currency translation adjustment		609,083		(40,878	)
Comprehensive income	$	2,530,700		2,211,832
Basic and diluted income per common share
Basic and Diluted		0.06		0.03
Weighted average number of common shares outstanding
Basic and Diluted		29,663,023		73,782,832

4

CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)

				UNIT: USD$
	THREE MONTHS ENDED
	June 30, 2013			June 30, 2012
Cash Flows From Operating Activities:
Net income	$	1,921,617		$	2,252,710
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		335,123			398,887
Issue of common shares as compensation		-			5,000
Changes in operating assets and liabilities:
Inventory		(1,842,166	)		(781,616	)
Accounts receivable		135,238			115,938
Taxes payable		(462,146	)		(623,353	)
Accrued expenses and other payables		(358,530	)		(72,654	)
Net cash provided by (used in) operating activities		(270,864	)		1,294,912
Cash flows from investing activities:
Addition to plant and equipment		(3,029,360	)		(1,914	)
Reduction of construction in progress		220,874
Net cash provided by (used in) investing activities		(2,808,486	)		(1,914	)
Effect of exchange rate changes on cash and cash equivalents		325,678			111,099
Net increase (decrease) in cash and cash equivalents		(2,753,671	)		1,404,097
Cash and cash equivalents at beginning of period		29,924,188			22,146,240
Cash and cash equivalents at ending of period		27,170,517		$	23,550,337
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	128		$	28,031
Income taxes	$	1,651,089		$	1,366,579
Non-cash financing activities:
Stock issued for services				$	5,000

5

CHINA YCT INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

UNIT: USD$
	Preferred Stock Series A				Common shares				Additional paid-in capital		Statutory Reserve		Accumulated OCI		Retained Earnings		Total
	Shares		Amount		Shares		Amount
Balance - March 31, 2013		45	$	22,500		29,663,023	$	29,663	$	4,180,095	$	956,633	$	3,794,929	$	48,426,955	$	57,410,775
Net income for the year																1,921,617		1,921,617
Foreign currency translation adjustment														609,083				609,083
Balance - June 30, 2013		45	$	22,500		29,663,023	$	29,663	$	4,180,095	$	956,633	$	4,404,012	$	50,348,572	$	59,941,475

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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 the 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 its own medicine from gingko extract, 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 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.

Cash and cash equivalents

For the purposes of the statement of cash flow, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Accounts receivable

The Company recognizes as accounts receivable any products shipped where payments have not been rendered. As of June 30, 2013, the Company considers all its accounts receivable to be collectable and no provision for doubtful accounts has been made in the consolidated financial statements.

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	30-35 years
Machinery, equipment and automobiles	7-15 years
Furniture and fixtures	7-10 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” for occupying, developing and using land. The Company records land use rights obtained as intangible assets at cost, which is amortized evenly over the grant period of 50 years.

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(ii) Patents:

In March 2010, the Company purchased one patent from Shandong YCT Corp.  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.  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.

In October 2011, two patents were transferred to the Company based on a purchase agreement signed with Jining Tianruitong Technology development Company, Limited on October 26, 2010; which are “Treatment to ischemic encephalopathy and its preparation method” (ZL200510045001.9) and “Chinese herbal medicine compound to treat renal insufficiency and its preparation” (ZL200710013301.8). The patents were recorded at cost when purchased, and are being amortized over the shorter of the remaining legal lives, 13.75 years and 14.95 years, respectively; or their useful lives, on a straight-line basis.

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 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. Payments received before all of the relevant criteria for revenue recognition 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).

Income taxes

The Company accounts for income tax under the asset and liability method as stipulated by 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. The Company didn’t recognize any deferred tax amount at June 30, 2013 and March 31, 2013.

China YCT International, Inc. is a holding company of Shandong Spring Pharmaceutical Co., Ltd and does not have any operating activities. Although the contract of the acquisition of the US patent was executed by the holding company, in substance, the patent was acquired and is used by the Company’s operating entity in China. For the same reason, the amortization of the patent was a deduction to the Chinese operating entity’s tax liability. Therefore, the Company does not incur any US income tax liabilities.

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 receivable in the amount of $242,095 as of June 30, 2013 and net VAT payable in the amount of $349,994 as of March 31, 2013

Research and development

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

The research and development expense for the three months ended June 30, 2013 and 2012 was $587,259 and $222,566, respectively.

Advertising costs

Advertising costs for newspaper and television are expensed as incurred.  The Company incurred advertising costs of $0 and $285,279 for the three months ended June 30, 2013 and 2012, respectively.

Mailing and handling costs

The Company accounts for mailing and handling fees in accordance with theFASB Accounting Standards Codification (“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 three months ended June 30, 2013 and 2012, the Company incurred $305,619 and $278,608 mailing and handling costs, respectively.

8

Stock Based Compensation

The Company measures compensation expense for its non-employee stock-based compensation under FASB ASC 718. The fair value of the stock issued is used to measure the transaction, as this is more reliable than the fair value of the services received. Fair value is measured as the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense.

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 were nil shares common stock equivalents available for dilution purposes as of June 30, 2013 and March 31, 2013, respectively.

Risks and uncertainties

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Fair Value of Financial Instruments

For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.

As of June 30, 2013 and March 31, 2013, the Company did not identify any financial instruments that are required to be presented on the balance sheet at fair value other than those whose carrying amounts approximate fair value due to their short maturities.

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,” 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 $609,083 and $(40,878) for the three months ended June 30, 2013 and 2012, respectively.

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

	June 30, 2013		June 30, 2012
Year End RMB Exchange Rate (RMB/USD$)		6.1787		6.3249
Average Period RMB Exchange Rate (RMB/USD$)		6.2053		6.3074

Recent accounting pronouncements

In July 2012, FASB issued an amendment to the FASB Codification Topic 350 – Testing Indefinite-Lived Intangible Assets for Impairment. The objective of the amendments in this Update is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. The more likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company decided to adopt the amendment for the year starting with April 1, 2013. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.

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NOTE 3 – PREPAID ACCOUNTS

The prepaid account in the amount of $21,278 and $20,972 as of June 30, 2013 and March 31, 2013, respectively, is a prepayment to Shandong YCT for purchase of its health products.

NOTE 4 - INVENTORY

Inventory consists of finished goods, work-in-process, and raw materials. No allowance for inventory was made for the three months ended June 30, 2013 and 2012.

The components of inventories as of June 30, 2013 and March 31, 2013 were as follows:

	As of
	June 30, 2013		March 31, 2013
Raw materials	$	678,396	$	864,956
Work-in-progress		203,549		391,711
Finished goods		2,256,771		39,883
Total Inventories	$	3,138,716	$	1,296,550

NOTE 5 – PLANT, PROPERTY AND EQUIPMENT, NET

The components of property and equipment as of June 30, 2013 and March 31, 2013 were as follows:

	As of
	June 30, 2013			March 31, 2013
Machinery & Equipment	$	1,456,051		$	638,221
Furniture & Fixture		167,615			165,203
Building		12,500,047			10,150,522
Subtotal		14,123,713			10,953,946
Less: Accumulated Depreciation		(1,662,269	)		(1,544,030	))
Total plant, property and equipment, net	$	12,461,444		$	9,409,916

The depreciation expense for the three months ended June 30, 2013 and 2012 was $118,240 and $87,996, respectively.

NOTE 6 – 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 7 - MAJOR CUSTOMER AND VENDOR

In the three months ended June 30, 2013, the Company mainly sells products to individual retail customers through nine major distributors.

The Company purchases its products from Shandong Yong Chun Tang (“Shandong YCT”) according to the contract signed on December 26, 2006, as renewed on February 9, 2010, between the Company and Shandong Yuan Chun Tang.

For the three months ended June 30, 2013, the purchase from the four major vendors, including Shandong YCT, was $5,418,783, representing 93% of the Company’s annual total purchase.

For the three months ended June 30, 2012, the purchase from the three major vendors, including Shandong YCT, was $4,744,384, representing 92% of the Company’s annual total purchase.

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NOTE 8 - INTANGIBLE ASSETS, NET

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

Net land use right and purchased patents were as follows:

	Amortization	As of
	Period	June 30, 2013			March 31, 2013
Land use right	50 years		1,642,417		$	1,618,785
Less: Accumulated amortization			(222,503	)		(211,149	)
Land use right, net			1,419,914			1,407,636
Patent 1	16.5 years		7,444,932			7,337,810
Patent (non-US No. ZL200510045001.9)	13.75 years		9,852,736			9,890,092
Patent (non-US No. ZL200710013301.8)	14.95 years		1,618,463			1,569,168
Less: Accumulated amortization			(2,753,675	)		(2,548,146	)
Patents, net		$	16,162,456		$	16,248,925

The amortization expense of land use right for the three months ended June 30, 2013 and 2012 was $13,191 and $7,172, respectively.

The amortization expense of patent for the three months ended June 30, 2013 and 2012 was $734,169 and $303,718, respectively.

NOTE 9 - TAX PAYABLE

Tax payable at June 30, 2013 and March 31, 2013 were as follows:

	As of
	June 30, 2013			March 31, 2013
Corporate Income Tax	$	666,655		$	508,024
Value-Added Tax		(242,095	)		349,994
Other Tax & Fees		-			28,688
Total Tax Payable	$	424,560		$	886,706

NOTE 10 - INCOME TAXES

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

For the three months ended June 30, 2013 and 2012, Shandong Spring Pharmaceutical Co., Ltd. recorded income tax provisions of $640,539 and $743,226, respectively.

NOTE 11 - STOCKHOLDERS’ EQUITY

Stock Issued to Independent Directors

The total amount of the compensation in the form of issuing shares of common stocks to the independent directors was nil and $5,000 for the three months ended June 30, 2013 and 2012, respectively.

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 June 30, 2013 and March 31, 2013, the Company appropriated $956,633 to the statutory reserve, respectively.

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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., 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 marketing gingko and distributing other dietary supplement products in the PRC.

Results of Operations – Three Months ended June 30, 2013 and June 30, 2012

The following table sets forth information from our statements of operations for the three months ended June 30, 2013 and 2012, in dollars:

	Three Months Ended June 30
	2013			2012			$ Change			% Change
Revenues		8,220,587			8,916,979			(696,392	)		-7.8	%
Cost of Sales		(3,976,310	)		(4,368,921	)		392,611			-9.0	%
Gross Profit		4,244,277			4,548,058			(303,781	)		-6.7	%
Operating Expenses		(1,710,853	)		(1,580,153	)		(130,700	)		8.3	%
Operating Income		2,533,424			2,967,905			(434,481	)		-14.6	%
Interest Income, net		28,732			28,031			701			2.5	%
Income Tax Provision		(640,539	)		(743,226	)		102,687			-13.8	%
Net Income		1,921,617			2,252,710			(331,093	)		-14.7	%
Comprehensive Income (Loss)		2,530,700			2,211,832			318,868			14.4	%

Net Sales

During the three months ended June 30, 2013, we realized $8,220,587 of sales revenue, a decrease of 7.8% or $696,392 as compared to $8,916,979 for the same period in 2012.

We entered into a Purchase & Sale Contract with Shandong Yong Chun Tang (“Shandong YCT”) on December 26, 2006, which sets forth the wholesale price that we pay to Shandong YCT for distributing their products. On February 9, 2010, we renewed the Purchase and Sale Contract with Shandong YCT for a term of five years ending on February 28, 2015. Pursuant to the renewed contract, we can purchase 10 products from Shandong YCT on a fixed price, which were selected according to the sales volume and profit margin. For the three months ended June 30, 2013, 33.6% of our revenues were from the sale of the 10 types of health care supplement products, compared to 31.0% in the three months ended June 30, 2012.

Since September 2009, we started to engage in the production and distribution of our own patented drug, i.e., Huoliyuan Capsule, and developed distribution channels for the drug. Our sales have increased since September 2009 as a result of the establishment of our manufacturing and distribution of Huoliyuan Capsule. Starting from July 2010, the Company changed from being a distributor of Shandong YCT to both a manufacturer and distributor of our own products, the Huoliyuan Capsules. As a result, we obtained new customers and expanded our sales of Huoliyuann Capsules. The Huoliyuan Capsule product accounted for 66.4% of our revenue for the three months ended June 30, 2013, compared to 64.3% for the three months ended June 30, 2012. Sales for encapsulated health supplements, such as Huoliyuan, were adversed affected since late 2012, as a result of public concerns about toxic capsules circulated on Chinese market by other manufacturers and distributors.

With respect to the decline in revenue from the sale of other products from $420,074 during the three months ended June 30, 2012 to $0 during the three months ended June 30, 2013, the Company stopped the outside production contract since the last quarter of 2012; therefore, no revenue was generated.

The following table sets forth a sales breakdown comparison by product for the periods under review:

	Three months ended
	June 30, 2013		June 30, 2012		Change in $			Variance
Health care supplements		2,766,193		2,764,932		1,260			0.0	%
Drugs		5,454,394		5,731,973		(277,579	)		-4.8	%
Others		-		420,074		(420,074	)		-100.0	%
Total		8,220,587		8,916,979		(696,392	)		-7.8	%

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Cost of Goods Sold

Our costs of revenue were comprised primarily of the cost of finished goods we purchased from Shandong YCT, the manufacturing cost of Huoliyuan Capsules, and the raw materials we purchased from third party vendors. During the three months ended June 30, 2013, our cost of goods sold totaled $3,976,310, representing a decrease of $392,611 or 9.0% as compared to $4,368,921 during the same period of 2012. The percentages of the costs of goods sold to total revenues increased to 48.4% from 49.0%, as compared to the same quarter of the previous year.

Gross Profit

As a result of decreased sales revenue and cost of goods sold, gross profit during the three months ended June 30, 2012 was $4,244,277, a decrease of 6.7% or $303,781 as compared to the same period in the previous year. Gross profit as a percentage of net revenues was 51.6% during the three months ended June 30, 2013, an increase of 0.6% as compared to the same period of prior year.

The following table sets forth a breakdown of our gross profits of different products during the three months ended June 30, 2013 and 2012:

	Three months ended
	June 30, 2013		June 30, 2012		Change in $			Variance
Health care supplements		1,466,372		1,476,705		(10,334	)		-0.7	%
Drugs		2,777,906		2,855,413		(77,507	)		-2.7	%
Others		-		215,940		(215,940	)		-100.0	%
Total		4,244,277		4,548,058		(303,781	)		-6.7	%

Research and Development Expenses

Our R&D expenses during the three months ended June 30, 2013 and 2012 were $587,259 and $222,566, respectively. 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. As of June 30, 2013, we have 27 employees working on R&D. 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 Expenses

Our selling expenses decreased by $326,518 or 37.5% to $543,686 for the three months ended June 30, 2013, from $870,204 for the same period of 2012. As a percentage of sales, selling expenses decreased to 6.6% for the three months ended June 30, 2013 from 9.8% for the same period in 2012. The decrease of selling expenses as a percentage of sales was primarily due to decrease in advertising and promotion expenses.

General and Administrative Expenses

Our general and administrative expenses were $579,908 during the three months ended June 30, 2013, compared with $487,383 during the three months ended June 30, 2012, an increase of $92,525 or approximately 19.0%. The increase was due to increased professional fees and other taxes.

Net Income

During the quarter ended June 30, 2013, we realized in net income $1,921,617, representing a 14.7% or $331,093 decrease as compared to $2,252,710 during the quarter ended June 30, 2012. The decrease of our net income was a result of the decrease in the sales revenue and the increase in operating expenses.

Liquidity and Capital Resources

Our principal sources of liquidity were primarily generated from our operations. As of June 30, 2013, Shandong Spring Pharmaceutical had $29,897,661 in working capital, a decrease of $225,762 or 1% as compared to $30,123,423 in working capital at March 31, 2013. The decrease was mainly due to decrease in cash and cash equivalent.

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. We expect our marketing activities to help generate positive cash flow.  The operations of our own manufacturing since fiscal year 2010 has 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.

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

	Three months ended
	June 30, 2013			June 30, 2012
Net cash provided by operating activities	$	(270,864	)	$	1,294,912
Net cash provided by(used in) investing activities	$	(2,808,486	)	$	(1,914	)
Net cash provided by financing activities	$	-		$	-
Effect of exchange rate change on cash and cash equivalents	$	325,678		$	111,099
Net increase in cash and cash equivalents	$	(2,753,671	)	$	1,404,097
Cash and cash equivalents, beginning balance	$	29,924,188		$	22,146,240
Cash and cash equivalents, ending balance	$	27,170,517		$	23,550,337

Operating Activities

Net cash used by operating activities was $270,864 for the three month period ended June 30, 2013, an decrease of 120.9% or $1,565,776 from the $1,294,912 net cash provided by operating activities during the three month ended June 30, 2012. The decrease was attributable to the decrease in the net sales and increase in inventory.

Investing Activities

During the three months ended June 30, 2013, our net cash used by investing activities was $2,808,486, as compared to $1,914 during the same period ended June 30, 2012. The change was primarily due to addition of machinery and equipment, and plant.

Financing Activities

No net cash was provided or used by financing activities over the three months ended June 30, 2013 and 2012.

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.

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 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, 2013, 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.

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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

Item 5. Other Information

None

Item 6. Exhibits

10.1	Termination Agreement, dated as of October 29, 2012, by China YCT International Group, Inc. and L.Y. Research Corporation, filed as an exhibit to the Company’s Current Report on Form 8-K on January 16, 2013
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

XBRL Exhibit

101.INS XBRL Instance Document.

101.SCH XBRL Taxonomy Extension Schema Document.

101.CALXBRL 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.

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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.

Date: August 13, 2013

/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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