Spring Pharmaceutical (CYIG) 10-Q 2009 Q1 Quarterly report

U. S. 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, 2008

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File No. 33-27610-A

CHINA YCT INTERNATIONAL GROUP, INC.

(Name of Small Business Issuer in its Charter)

Delaware	65-2954561
(State or Other Jurisdiction of	(I.R.S. Employer I.D. No.)
incorporation or organization)

c/o American Union Securities, Inc., 100 Wall Street, 15th Floor, New York, NY 10005

(Address of Principal Executive Offices)

Issuer's Telephone Number: (212) 232-0120

Indicate  by check mark  whether the  Registrant  (1) has filed all reports required to be filed by Sections 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  X                    No __

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 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. (Check One)

Large accelerated filer ___    Accelerated filer  ____   Non-accelerated filer  ___   Small reporting company _X_

APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:

August 18, 2008

Common Stock:  29,380,073 shares

CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
	June 30, 2008		March 31, 2008
	(Unaudited)		(Audited)
Current assets:
Cash and cash equivalents	$	4,516,901	$	1,614,336
Inventory		65,484		737,153
Advance to suppliers		484,029		834,284
Other receivable - related party		2,067,832		2,022,742
Total Current Assets		7,134,246		5,208,515
Property and equipment, net of accumulated depreciation of
$89,210 and $68,282, respectively		3,501,204		3,083,031
Land use right, net of accumulated amortization		1,428,595		1,404,803
Total Assets	$	12,064,046	$	9,696,349
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	-	$	59,688
Unearned Revenue		-		33,742
Tax payable		899,262		563,135
Accrued expenses		7,468		25,689
Other payables		-		7,305
Total Current Liabilities		906,730		689,560
Stockholders' Equity
Preferred stock series A, $500 par value, 45 shares authorized and outstanding		22,500		22,500
as of June 30,2008 and December 31, 2007 respectively
Preferred stock series B convertible, $0.001 par value, 5,000,000 shares authorized,
-0- shares issued and outstanding		-		-
Common stock, $0.001 par value, 100,000,000 shares authorized; 29,380,073
shares issued and outstanding as of June 30, 2008 and March 31, 2008		29,380		29,380
Additional paid-in capital		4,063,039		4,063,039
Accumulated other comprehensive income		1,086,135		857,763
Retained earnings		5,956,261		4,034,108
Total Stockholders' Equity		11,157,316		9,006,790
Total Liabilities and Stockholders' Equity	$	12,064,046	$	9,696,349

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

F - - 1 

CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
	Three Months Ended June 30,
	2008			2007
Revenues	$	6,018,588		$	1,915,769
Cost of Goods Sold		2,625,965			853,696
Gross Profit		3,392,623			1,062,073
Operating Expenses
Research and development expenses		66,222			-
Selling, general and administrative		739,103			359,526
Income before other Income and (Expenses)		2,587,298			702,547
Other Income and (Expenses)		(25,066	)		(1,907	)
Income Before Income Taxes		2,562,232			700,640
Provision for Income Taxes		640,079			201,733
Net Income	$	1,922,153		$	498,907
Other Comprehensive Income:
Foreign Currency Translation Adjustment		228,372			68,953
Comprehensive Income	$	2,150,525		$	567,860
Basic and diluted income per common share
Basic	$	0.07		$	0.04
Diluted	$	0.07		$	0.04
Weighted average number of common shares outstanding
Basic		29,380,073			12,724,438
Diluted		29,380,073			12,724,438

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

F - - 2 

CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
		Three Months Ended June 30,
		2008			2007
Cash Flows From Operating Activities:
Net income		$	1,922,153		$	498,907
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization			26,548			14,854
Changes in operating assets and liabilities:
Inventory			671,669			(50,064	)
Advance to suppliers			350,256			(45,004	)
Loan to related party			(45,090	)		(310,545	)
Accounts payable			(59,688	)		1,160
Unearned revenue			(33,742	)		-
Taxes payable			336,127			70,342
Accrued expenses and other payables			(25,526	)		(136,023	)
	Cash provided by operating activities		3,142,707			43,627
Cash Flows From Investing Activities:
Purchase of  plant and equipment			-			(22,271	)
Purchase of land use right			-			(299,505	)
Addition to construction in progress			(363,632	)		(209,789	)
	Cash used in investing activities		(363,632	)		(531,565	)
Cash Flows From Financing Activities
None
Effect of exchange rate changes on cash and cash equivalents			123,490			14,192
Increase/(decrease) in cash and cash equivalents			2,902,565			(473,746	)
Cash and Cash Equivalents - Beginning of period			1,614,336			679,770
Cash and Cash Equivalents - Ending of period		$	4,516,901		$	206,024
Supplemental disclosures of cash flow information:
Interest paid		$	-		$	-
Income Taxes paid		$	379,027		$	279,686

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

F - - 3 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)

1.  ORGANIZATION

China YCT International Group, Inc., formerly known as ItLinkz Group, Inc., Medical Technology & Innovations, Inc. and Southstar Productions, Inc. (the “Company” or “China YCT”), was incorporated in the State of Florida in January 1989.  

On June 4, 2007 the Company entered into a Share Purchase and Merger Agreement dated June 1, 2007 with Landway Nano Bio-Tech, Inc., a Delaware corporation (“Landway Nano”), and with Huaqin Zhou and Xiaojin Wang, two investors associated with Landway Nano.  Landway Nano is a holding company that owns 100% of the registered capital of Shandong Spring Pharmaceutical Co., Ltd. (“Shandong Spring”), a corporation organized under the laws of The People’s Republic of China (“PRC”). On July 31, 2007, pursuant to the Share Purchase and Merger Agreement, Huaqin Zhou and Xiaojin Wang purchased 500 shares of the Company’s Series B Preferred Stock for $530,000. On September 28, 2007, the Company acquired all of the outstanding capital stock of Landway Nano by issuing to the shareholders of Landway Nano an additional 500 shares of Series B Preferred Stock. The 1,000 shares of Series B Preferred Stock were subsequently converted into 28,925,629 shares of common stock, representing 98.4% of the outstanding common shares.  The Board of Directors of the Company also elected Mr.Yan Tinghe and Mr. Zhang Jirui, the executive officers of Shandong Spring Pharmaceutical, to serve as members of the Board, and they together elected Yan Tinghe to serve as the Chief Executive Officer and Zhang Jirui to serve as Chief Financial Officer of the Company.

As a result of these transactions, there was a change in control of the Company as the shareholders of Landway Nano became the majority shareholders of the Company.

For accounting purposes, the transaction has been accounted for as a reverse acquisition under the purchase method of accounting. Accordingly, Landway Nano was treated as the continuing entity for accounting purposes.

On November 23, 2007, the Company changed the name of the corporation from “Itlinkz Group, Inc.” to “China YCT International Group, Inc.”

China YCT, through its wholly owned subsidiary, Shandong Spring, is engaged in the business of developing, manufacturing and marketing gingko and other dietary supplement products in the PRC.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The condensed unaudited interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and may not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the March 31, 2008 audited consolidated financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

The accompanying condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.

Principle of consolidation

The condensed consolidated financial statements include the financial statements of the Company, Landway Nano and its wholly owned subsidiary, Shandong Spring.  All significant inter-company transactions and balances among the Company and its subsidiaries are eliminated upon consolidation.

Use of estimates

In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories.  Actual results could differ from those estimates.

F - - 4 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash and cash equivalents

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

Accounts receivables

Accounts receivables are stated at net realizable value. Any allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables. A considerate amount of judgment is required in assessing the realization of these receivables, including the current credit worthiness of each customer and the related aging analysis. The Company has no account receivables as of June 30, 2008 and March 31, 2008.

Inventories

Inventories are composed of raw materials and packing materials for manufacturing, work in process, and finished goods. Inventories are valued at the lower of cost or market with cost determined on a weighted average basis. Management compares the

cost of inventory with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost.

Property and equipment

Property and equipment are stated at cost. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and locations for its intended use. Depreciation is calculated using the straight-like method over the following useful lives:

Buildings and improvements                                                                                     30-35 years

Machinery, equipment and automobiles                                                                    7-15 years

Expenditures for maintenance and repairs are charged to expense as incurred. Additions, renewals and betterments are capitalized.

Advance to suppliers

Advance to suppliers represent the payments made and recorded in advance for goods and services received. The Company makes advances to certain vendors’ inventory purchases, construction projects and equipment purchases. The advance to suppliers totaled $484,029 and $834,284 as of June 30, 2008 and March 31, 2008, respectively.

Revenue recognition

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

Unearned revenue

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

Impairment of long-lived assets

Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset.   If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.

Income taxes

The Company accounts for income tax under the provisions of SFAS No.109 "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns.  Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities.  Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. There were no deferred tax amounts at June 30, 2008 and 2007.

F - - 5 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company is governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are subject to tax at a statutory rate of 25% and were, until January 2008, subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax) on its taxable income. The company recorded income tax provisions of $640,079 and $201,733 for the three months ended June 30, 2008 and 2007, respectively.

Value-added tax

Sales revenue represents the invoiced value of goods, net of a Value-Added Tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 4% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. The Company did not have any recorded VAT Payable or VAT receivable net of payments in the financial statements. The VAT tax return is usually filed offsetting the payables against the receivables.

Research and development

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

The research and development expense for the three months ended June 30, 2008 and 2007 was $66,222 and $-0-, respectively.

Advertising costs

Advertising costs in newspaper and televisions are expensed as incurred.  The Company incurred advertising costs of $196,763 and $106,929 for the three months ended June 30, 2008 and 2007, respectively.

Mailing and handling costs

The Company accounts for mailing and handling fees in accordance with the Financial Accounting Standards Board Emerging Issues Task Force Issue No. 00-10 “Accounting for  Shipping and Handling Fees and Costs” (EITF Issue No. 00-10).  For the three months ended June 30, 2008 and 2007, the Company incurred $157,424 and $124,076 mailing and handling costs.

Earnings (loss) per share

Basic earnings (loss) per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There are no common stock equivalents available for dilution purposes as of June 30, 2008 and 2007.

 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.

      Foreign currency translation

The Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB has been translated into United States dollars ("USD") as the currency.  Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. The equity accounts were stated at their historical rate. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income". Gains and losses resulting from foreign currency translations are included in accumulated other comprehensive income.  There is no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.

Translation adjustments resulting from this process amounted to $228,372 and $68,953 as of June 30, 2008 and 2007, respectively.

F - - 6 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair value of financial instruments

The carrying amounts of certain financial instruments, including cash and cash    equivalents, account receivables, other receivables, accounts payable, accrued expenses, tax payable, and other payable approximate fair value due to the short-term nature of these items.

New accounting pronouncements

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115 (FAS 159). FAS 159 will become effective for the company on January 1, 2008. This standard permits companies to choose to measure many financial instruments and certain other items at fair value and report unrealized gains and losses in earnings. Such accounting is optional and is generally to be applied instrument by instrument. The Company does not anticipate that the election, if any, of this fair-value option will have a material effect on results or operations or consolidated financial position.

In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future

Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. The Company has adopted FSP EITF 07-3 and expensed the research and development as it incurred.

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has not determined the effect that the application of SFAS 160 will have on its consolidated financial statements.

In December 2007, Statement of Financial Accounting Standards No. 141(R), Business Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions.

This replaces SFAS 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating the impact that adopting SFAS No. 141R will have on its financial statements.

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective on January 1, 2009. The Company is in the process of evaluating the new disclosure requirements under SFAS 161.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on net income or cash flows.

F - - 7 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)

3.    INVENTORY

Inventory consists of finished goods only. The Company purchased all of its goods from Shandong Yong Chun Tang Bioengineering Co., Ltd. (“Shandong YCT”), an affiliated company owned by the Chairman of the Company (See Note 5). No allowance for inventory was made for the three months ended June 30, 2008 and 2007.

4.   PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

		Balance as of
		June 30, 2008			March 31, 2008
Machinery & Equipment		$	262,615		$	260,025
Furniture & Fixture			3,207			-
Building			1,834,405			1,794,406
	Subtotal		2,100,227			2,054,431
Less: Accumulated Depreciation			(89,210	)		(68,282	)
Construction in progress			1,490,187			1,096,882
Total Property and equipment, net		$	3,501,204		$	3,083,031

The depreciation expense for the three months ended June, 2008 and 2007 was $19,131 and $9,710, respectively.

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

The costs involved with construction in progress amounted to the total of $1,490,187 as of June 30, 2008 and $1,096,882 as of March 31, 2008.

5.  RELATED PARTY TRANSACTIONS

As of June 30, 2008 and March 31, 2008, the Company has other receivables in the amount of $2,067,832 and $2,022,742, respectively, representing loans receivables from two affiliates as stated below.  The entire balance of the receivables is expected to be repaid soon and no allowance is deemed necessary.

	Balance as of
	June 30, 2008		March 31, 2008
a) Loan receivable from Shandong YCT	$	1,120,186	$	1,095,760
b) Loan receivable from Changqing Paper Co.,Ltd.		947,646		926,982
Total	$	2,067,832	$	2,022,742

Shandong YCT is an affiliated company owned by the chairman and controlling shareholder Mr. Yan Tinghe.  Prior to the completion of the Company’s own plant, Shandong YCT provides products to the Company for resale and makes settlement upon sales of goods. The purpose of the loan is to finance Shandong YCT’s production. The loan bears no interests, and is unsecured and due upon demand.

Changqing Paper Co., Ltd is an affiliated company also owned by the chairman and controlling shareholder Mr. Yan Tinghe.  This loan is also unsecured, and matures on August 20, 2008, and demands 1% interests on any unpaid due amount.

6.   MAJOR CUSTOMER AND VENDOR

The Company sells products to individual retail customers and does not have major customer due to the high level competition within the industry.

According to the contract signed on December 26, 2006 between the Company and its affiliate company, Shandong YCT, the Company currently purchases all of its products from Shandong YCT on the consignment sales basis. For the three months ended June 30, 2008 and 2007, Shandong YCT is the sole vendor to the Company.

7.   LAND USE RIGHT

All land in the People’s Republic of China is government owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” (the “Right”) to use the land. The Company has total land use right of RMB10,199,600 (equivalent to $1,454,592) to use for 50 years and amortizes the Right on a straight line basis over 50 years.

Net intangible assets were as follows:

	Balance as of
	June 30, 2008			March 31, 2008
Land use right	$	1,487,017		$	1,454,592
Less: Accumulated amortization		(58,422	)		(49,789	)
Total	$	1,428,595		$	1,404,803

The amortization expense for the three months ended March 31, 2008 and 2007 was $7,416 and $5,145 respectively.

F - - 8 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)

8.   TAX PAYABLE

The Company has tax payable as below:

	Balance as of
	June 30, 2008		March 31, 2008
Corporate Income Tax	$	737,376	$	462,272
Value-Added Tax		149,894		93,392
Other Tax & Fees		11,992		7,471
Total Tax Payable	$	899,262	$	563,135

9. STOCKHOLDERS’ EQUITY

Before the share exchange agreement in June 2007, the Company had 12,724,438 shares of common stock issued and outstanding.

On July 30, 2007, in accordance with the Share Exchange Agreement with Landway Nano, the Company issued 500 shares of its newly-designated Series B Convertible Preferred Stock to two individual investors for $530,000.

On September 28, 2007, the Company issued additional 500 shares of Series B Convertible Preferred Stock to the shareholders of Landway Nano.

On November 23, 2007, the Company effected a reverse stock split of the corporation’s common stock in the ratio of 1:28. At the same time, the 1,000 shares of the Company’s

Series B Preferred Stock was converted into common stock and simultaneously reversed split into 28,915,629 shares of common stock. All stock amounts have been retroactively restated for the effect of the reverse stock split.

As of June 30, 2008, there were 45 shares of Series A Preferred Stock and 29,380,073 shares of Common Stock issued and outstanding. There was no Series B Preferred Stock issued and outstanding.

10. SUBSEQUENT EVENTS

On April 4, 2008, Shandong Spring, a wholly-owned subsidiary of the Company, entered into an Entrusted Management Agreement (the “Agreement”) with Shandong YCT, effective as of April 1, 2008. The Agreement provides that Shandong Spring will manage the operations of Shandong YCT.  Included among its responsibilities will be the appointment of members of the Board of Directors of Shandong YCT, hiring of managerial and administrative personnel for Shandong YCT, control of all of the assets of Shandong YCT, and obtaining loans and other sources of financing for the operations of Shandong YCT, as needed.  Shandong Spring also agreed to fund any unpaid debts incurred hereafter by Shandong YCT and to fund any shortfall between its net assets and its registered capital.

In exchange for the managerial services, Shandong YCT will pay to Shandong Spring a fee equal to all of the net profits earned by Shandong YCT. 

On the same date, the parties entered into a Purchase Option and Cooperation Agreement with Mr. Yan Tinghe, who is the Chairman of the Company and the principal owner of Shandong YCT.  The Purchase Option gives Shandong Spring the right to purchase Shandong YCT at any time when the transfer would be permitted by applicable laws.  The purchase price for Shandong YCT would be the fair value price, which will be determined by the parties at the time the option is exercised.

On August 11, 2008, Shandong Spring Rescinded the Agreement with Shandong YCT due to a mutual misunderstanding of the effect of the Agreement. The Board of the Directors of the Company declared that the Agreement was void from the beginning.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Outline of Our Business

China YCT International Group, Inc. is a holding company whose business is carried out entirely by Shandong Spring Pharmaceutical Co., Ltd.  (“Shandong Spring Pharmaceutical”).  Shandong Spring Pharmaceutical was organized in 2005 under the laws of The People’s Republic of China.  From January 2006 until January 2007 management was engaged in developing the company’s manufacturing facility and distribution network.  In January 2007 Shandong Spring Pharmaceutical commenced revenue-producing activities, specifically distributing products manufactured by Shandong Yong Chun Tang Bioengineering Co., Ltd. (“Shandong Yong Chun Tang”), which is owned by Yan Tinghe, the Chairman of Shandong Spring Pharmaceutical.

Shandong Spring Pharmaceutical was originally organized as a subsidiary of Shandong Yong Chun Tang for the purpose of focusing on advanced technology related to the use of gingko as an aide to health.  Shandong Yong Chun Tang later transferred ownership of Shandong Spring Pharmaceutical to its equity-holders.  Nevertheless the business plan remains focused on developing a fully-integrated business engaged primarily in the application of advanced biological engineering technology to the growth and refining of gingko and the use of its constituent compounds in products that will provide health benefits and/or cosmetic advantages.

In order to fully implement its business plan, Shandong Spring Pharmaceutical will require a large capital infusion to finance the creation of state-of-the-art facilities for the extraction of compounds from gingko and the formulation of products based on those compounds.  In order to fund its operations and to attract investment, Shandong Spring Pharmaceutical is currently engaged in distributing health and beauty aides as well as toiletries manufactured by Shandong Yong Chun Tang.  This relatively profitable business is generating funds that can be applied to Shandong Spring Pharmaceutical’s long-term plans.  It is also helping Shandong Spring Pharmaceuticals develop the distribution network that it will use to market its proprietary products, once production begins.

Entrusted Management Agreement

On April 4, 2008, Shandong Spring Pharmaceutical entered into an Entrusted Management Agreement with Shandong Yong Chun Tang, pursuant to which Shandong Spring Pharmaceutical was to manage the operations of Shandong Yong Chun Tang.  On the same date, the parties entered into a Purchase Option and Cooperation Agreement with Yan Tinghe, who is the Chairman of China YCT International Group, Inc. and principal owner of Shandong Yong Chun Tang.

On August 14, 2008 the parties agreed to rescind, ab initio, both the Entrusted Management Agreement and the Purchase Option and Cooperation Agreement.  The reason for the rescission was the parties’ discovery of a mutual mistake regarding the effect of the agreements on the ability of Shandong Yong Chun Tang Bioengineering Co. Ltd. to do business in China.  Since the mistake, if not corrected, would have led to a material reduction in the benefit that the parties expected to obtain from the agreements, the parties have declared the agreements void.

Shandong Yong Chun Tang Bioengineering Co. Ltd. will continue to serve as the principal supplier of goods sold by Shandong Spring Pharmaceutical Co., Ltd.

Results of Operations

Fiscal year 2008 witnessed the emergence of Shandong Spring Pharmaceutical as a marketing force.  Having commenced revenue-producing operations only in January 2007, it realized $981,849 in revenue for the year ended March 31, 2007.  However, during fiscal year 2008, which ended on March 31, 2008, Shandong Spring Pharmaceutical realized $16,586,741 in revenue, including $5,958,113 in the quarter ended March 31, 2008 and $5,381,028 in the quarter ended December 31, 2007.

Entering fiscal year 2009, we have continued our growth.  During the three months ended June 30, 2008, we realized $6,018,588 in revenue, compared to $1,915,769 in revenue during the three months ended June 30, 2007.  Throughout the past year and a half of operations, no single product has accounted for more than 20% of our revenue, and a total of 38 products each contributed to revenue, including both health care supplements, cosmetics and toiletries.

All of the business reflected in the financial statements filed with this Report consisted of resale of products purchased by Shandong Spring Pharmaceutical from Shandong Yong Chun Tang. The purchases were made pursuant to a Purchase & Sale Contract dated December 26, 2006, which sets forth the wholesale price that Shandong Spring Pharmaceutical pays to Shandong Yong Chun Tang for each of the 38 products governed by the Contract.  Since Shandong Spring Pharmaceutical was not an exclusive distributor for Shandong Yong Chun Tang during this period, its resale prices are determined in large part by competition.  For that reason, the gross margin realized by Shandong Spring Pharmaceutical during the quarter ended June 30, 2008 was nearly identical to gross margin in each quarter of the 2008 fiscal year, averaging 56%, despite the growth in sales from quarter to quarter.

Our operating expenses in the quarter ended June 30, 2008 were equal to 13.3% of our revenue, an improvement over the 18.7% ratio recorded in the quarter ended June 30, 2007.  The improvement was primarily a result of the efficiencies that come from higher revenue.    Notwithstanding the efficiencies that we expect to realize from continued growth, we expect that several factors will cause our selling, general and administrative expenses to increase in the coming months:

·   If we are successful in obtaining the funds to complete our manufacturing facility, we will initiate manufacturing activities.  This will cause us to incur facility costs and the expense of administrative personnel.

·   Although we have $3.5 million in property, plant and equipment on our balance sheet, we are not recording any significant amount of depreciation, since we have not put our facility into service yet.  When we commence manufacturing, we will begin to depreciate our property, plant and equipment – which will have a substantially larger book value at that time – and incur the expense as a general expense to the extent it is not allocable to cost of goods sold.

·   The recent merger of Shandong Spring Pharmaceutical into a subsidiary of China YCT International Group has transferred to Shandong Spring Pharmaceutical the burden of paying the expenses associated with being a public company in the United States, including accounting and legal fees, and the expense of maintaining appropriate investor relationships.

Our operations produced net pre-tax income of $2,562,232 in the three months ended June 30, 2008, compared to $700,640 in the three months ended June 30, 2007.  Commencing in January 2008, the income tax rate imposed by the government of China was reduced from 33% to 25%.  The tax provisions left us with $1,922,153 net income for the three months ended June 30, 2008 ($.07 per share), compared to $498,907 in the three months ended June 30, 2007 ($.04 per share).  In future periods we expect to become eligible for the tax abatement that China affords newly-profitable companies – two years tax-free and two years at 50% tax rate.  We cannot predict when we will obtain the abatement, however, since it occurs only after a lengthy application process.

Our business operates entirely in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars.  The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income.  The net income is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our balance sheet labeled “accumulated other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business.  In three months ended June 30, 2008, the effect of converting our financial results to Dollars was to add $228,372 to our accumulated other comprehensive income.

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Liquidity and Capital Resources

At June 30, 2008 Shandong Spring Pharmaceutical had $6,227,516 in working capital, an increase of $1,708,560 since the end of the last fiscal year on March 31, 2008.  The increase was primarily a result of our net income for the quarter.  In addition to $4,516,901 in cash, the greater portion of our current working capital consists of a debt of $1,120,186 due to us from Shandong Yong Chun Tang, our supplier.  We expect that debt to be liquidated in the future by delivery to us of products for resale, which will correspondingly increase the cash flow from our operations.  The remainder of our loans receivable from related parties was $947,646 owed to us by Changqing Paper Co., Ltd., which is payable on August 20, 2008.

 Our current level of working capital is sufficient to fund our current operations.  Ever since we commenced marketing activity in January, 2007, our operations produced positive cash flow, including $1,356,006 in fiscal year 2008 and $3,142,707 in the three months ended June 30, 2008. Because we carry relatively little inventory and no accounts receivable, we expect our marketing activities to continue to operate cash-positive.  In future periods, however, when we commence our own manufacturing operations, the cash requirements of manufacturing may put pressure on our cash flow.

 To this point the development of Shandong Spring Pharmaceutical and its initial operations have been funded by capital contributions from its shareholders and by occasional loans from management and their associates, all of which have been repaid.  As a result, at June 30, 2008 Shandong Spring Pharmaceutical had over $4.9 million in fixed assets and no debt.  This situation provides an opportunity to fund future development and an expansion of operations through bank debt by pledging the company’s fixed assets as collateral.  We expect that financing of this variety will be readily available to us, when our manufacturing facility approaches completion.

In order to fully implement our business plan, however, we will require capital contributions far in excess of our current asset value.  Our budget for bringing our manufacturing facility to an operating level that assures profitability is $10 million.  To fully implement our business plan - including development of a facility to utilize our proprietary method of extracting flavones from ginkgo by using enzyme technology - we expect to need $40 million.  Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds we require.  At the present time, however, we do not have commitments of funds from any source.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial condition or results of operations.

Risk Factors that May Affect Future Results

You should carefully consider the risks described below before buying our common stock.  If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.

Because we have not yet commenced our gingko production operations, unexpected factors may hamper our efforts to implement our business plan.

Our business plan contemplates that we will become a fully-integrated grower, manufacturer and marketer of products derived from gingko.  At the present time, however, our entire business consists of distributing health and beauty aids manufactured by Shandong Yong Chun Tang.  In order to fully implement our business plan, we will have to successfully complete the development of an agricultural facility and an industrial facility.   The complexity of this undertaking means that we are likely to face many challenges, some of which are not yet foreseeable.  Problems may occur with our raw material production and with the roll-out of efficient manufacturing processes.  If we are not able to minimize the costs and delays that result, our business plan may fall short of its goals, and the current profitability or our distribution activities may be offset by losses from the new gingko business.

The capital investments that we plan may result in dilution of the equity of our present shareholders.

Our business plan contemplates that we will invest approximately $40 million in capital improvements during the next five years.  At very least, we estimate that we will be unable to achieve profitable operations as an independent producer of gingko products unless we invest over $10 million in our facility.  We intend to raise the largest portion of the necessary funds by selling equity in our company.  At present we have no commitment from any source for those funds.  We cannot determine, therefore, the terms on which we will be able to raise the necessary funds.  It is possible that we will be required to dilute the value of our current shareholders’ equity in order to obtain the funds.  If, however, we are unable to raise the necessary funds, our growth will be limited, as will our ability to compete effectively.

We are subject to the risk of natural disasters.

We intend to produce the greater portion of our raw materials.  In particular, we intend to produce our own gingko.  Gingko is a very sensitive crop, which can be readily damaged by harsh weather, by disease, and by pests.  If our crops are destroyed by drought, flood, storm, blight, or the other woes of farming, we will not be able to meet the demands of our manufacturing facility, which will then become inefficient and unprofitable.  In addition, if we are unable to produce sufficient products to meet demand, our distribution network is likely to atrophy.  This could have a long-term negative effect on our ability to grow our business, in addition to the near-term loss of income.

If we lost control of our distribution network, our business would fail.

We depend on our distribution network for the success of our business.  Competitors may seek to pull our distribution network away from us.  In addition, if dominant members of our distribution network become dissatisfied with their relationship with Shandong Spring Pharmaceutical, a concerted effort by the distribution network could force us to accept less favorable financial terms from the distribution network.  Either of these possibilities, if realized, would have an adverse effect on our business.

Increased government regulation of our production and/or marketing operations could diminish our profits.

At present, there is no significant government regulation of the health claims that participants in our industry make regarding their products.  In addition, there is only limited government regulation of the conditions under which we will manufacture our products.  Other developed countries, such as the United States and, in particular, members of the European Community, have far more extensive regulation of the operations of nutraceuticals and plant-based cosmetics, including strict limitations on the health-related claims that can be made without scientifically-tested evidence.  It is not unlikely, therefore, that China will increase its regulation of our activities in the future.  To the extent that new regulations required us to conduct a regimen of scientific tests of the efficacy of our products, the expense of such testing would reduce our profitability.  In addition, to the extent that the health benefits of some of our products could not be fully supported by scientific evidence, our sales might be reduced.

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Our bank deposits are not insured.

There is no insurance program in the PRC that protects bank deposits, in the way that bank deposits in the U.S. are given limited protection by the FDIC.  If the bank in which we maintain our cash assets were to fail, it is likely that we would lose most or all of our deposits.

Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.

Our future success depends on our ability to attract and retain highly skilled agronomists, biologists, chemists, industrial technicians, production supervisors, and marketing personnel.  In general, qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand.  In a specialized scientific field, such as ours, the demand for qualified individuals is even greater.  If we are unable to successfully attract or retain the personnel we need to succeed, we will be unable to implement our business plan.

We may have difficulty establishing adequate management and financial controls in China.

The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with.  We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company.  If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.

Government regulation may hinder our ability to function efficiently.

The national, provincial and local governments in the People’s Republic of China are highly bureaucratized.  The day-to-day operations of our business will require frequent interaction with representatives of the Chinese government institutions.  The effort to obtain the registrations, licenses and permits necessary to carry out our business activities can be daunting.  Significant delays can result from the need to obtain governmental approval of our activities.  These delays can have an adverse effect on the profitability of our operations.  In addition, compliance with regulatory requirements applicable to agriculture and to nutraceutical manufacturing and marketing may increase the cost of our operations, which would adversely affect our profitability.

Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.

The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to pay dividends to our shareholders.

Currency fluctuations may adversely affect our operating results.

Shandong Spring Pharmaceutical generates revenues and incurs expenses and liabilities in Renminbi, the currency of the People’s Republic of China.  However, as a subsidiary of China YCT International Group, it reports its financial results in the United States in U.S. Dollars.  As a result, our financial results will be subject to the effects of exchange rate fluctuations between these currencies.  From time to time, the government of China may take action to stimulate the Chinese economy that will have the effect of reducing the value of Renminbi.  In addition, international currency markets may cause significant adjustments to occur in the value of the Renminbi.  Any such events that result in a devaluation of the Renminbi versus the U.S. Dollar will have an adverse effect on our reported results.  We have not entered into agreements or purchased instruments to hedge our exchange rate risks.

We have limited business insurance coverage.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.

China YCT International Group is not likely to hold annual shareholder meetings in the next few years.

Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved.  The current members of the Board of Directors were appointed to that position by the previous directors.  If other directors are added to the Board in the future, it is likely that the current directors will appoint them.  As a result, the shareholders of China YCT International Group will have no effective means of exercising control over the operations of China YCT International Group.

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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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 June 30, 2008.  Pursuant to Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant to 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 June 30, 2008 for the purposes described in this paragraph.

Changes in Internal Controls.  There was no change in internal controls over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act or 1934) identified in connection with the evaluation described in the preceding paragraph that occurred during China YCT International Group’s first fiscal quarter that has materially affected or is reasonably likely to materially affect China YCT International Group’s internal control over financial reporting.

PART II   -   OTHER INFORMATION

Item 2.  Changes in Securities and Small Business Issuer Purchase of Equity Securities

(c) Unregistered sales of equity securities

None.

(e) Purchases of equity securities

The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the 1st quarter of fiscal 2009.

Item 6.                 Exhibits

      31.1 Rule 13a-14(a) Certification – CEO

      31.2 Rule 13a-14(a) Certification – CFO

      32                 Rule 13a-14(b) Certification

SIGNATURES

Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the undersigned thereunto duly authorized.

CHINA YCT INTERNATIONAL GROUP, INC.

Date: August 19, 2008 By: /s/ Yan Tinge

      Yan Tinghe, Chief Executive Officer

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