Spring Pharmaceutical (CYIG) 10-Q 2010 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, 2009

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

  For the transition period from _____ to _____

Commission File No. 0-53600

CHINA YCT INTERNATIONAL GROUP, INC.

(Name of Small Business Issuer in its Charter)

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

c/o Shandong Spring Pharmaceutical Co., Ltd., Economic Development Zone, Gucheng Road, Sishui County, Shandong Province, P.R. China.

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

Indicate by check mark whether the Registrant is a 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_

Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:

August 11, 2009

Common Stock:  29,425,073 shares

TABLE OF CONTENTS	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and March 31, 2009	3
Condensed Consolidated Statements of Income for the three months ended June 30, 2009 and 2008 (Unaudited)	4
Condensed Statements of Cash Flows for the three months ended June 30, 2009 and 2008 (Unaudited)	5
Notes to Condensed Consolidated Financial Statements	6-17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	18
Item 3. Quantitative and Qualitative Disclosures About Market Risks	27
Item 4. Evaluation of Controls and Procedures	27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3. Defaults Upon Senior Securities	28
Item 4. Submission of Matters to a Vote of Security Holders	28

Item 5. Other Information	28
Item 6. Exhibits	28

Signatures  28

2

PART I. FINANCIAL INFORMATION

CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
	June 30, 2009		March 31, 2009
	unaudited
Current assets:
Cash and cash equivalents	$	12,349,376	$	10,048,380
Inventory		8,349		8,346
Other receivable - related party		-		1,124,367
Total Current Assets		12,357,725		11,181,093
Long-term receivable - related party		951,587		951,182
Property and equipment, net of accumulated depreciation of
$263,815 and $221,095, respectively		4,323,359		4,349,493
Land use right, net of accumulated amortization		1,404,321		1,411,274
Total Assets	$	19,036,992	$	17,893,042
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	-	$	456,568
Tax payable		672,805		485,438
Accrued expenses and other payables		144,912		189,890
Other payable - related party		45,041		-
Total Current Liabilities		862,758		1,131,896
Stockholders' Equity
Preferred stock series A, $500 par value, 45 shares authorized and outstanding		22,500		22,500
as of June 30,2009 and March 31, 2009
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; 29,425,073 and
29,380,073 shares issued and outstanding as of June 30, 2009 and March 31, 2009		29,425		29,380
Additional paid-in capital		4,107,994		4,063,039
Accumulated other comprehensive income		1,187,929		1,130,576
Retained earnings		12,826,386		11,515,651
Total Stockholders' Equity		18,174,234		16,761,146
Total Liabilities and Stockholders' Equity	$	19,036,992	$	17,893,042
The accompanying notes are an integral party of these condensed consolidated financial statements

3

CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
	Three Months Ended June 30,
	2009			2008
Revenues	$	6,144,332		$	6,018,588
Cost of Goods Sold		2,678,805			2,625,965
Gross Profit		3,465,527			3,392,623
Operating Expenses
Research and development expenses		65,042			66,222
Selling, general and administrative		1,586,544			739,103
Income Before Other Income		1,813,941			2,587,298
Other Expenses		(29,412	)		(25,066	)
Income Before Income Taxes		1,784,529			2,562,232
Provision for Income Taxes		473,794			640,079
Net Income	$	1,310,735		$	1,922,153
Other Comprehensive Income:
Foreign Currency Translation Adjustment		57,353			228,373
Comprehensive Income	$	1,368,088		$	2,150,526
Basic and diluted income per common share
Basic	$	0.04		$	0.07
Diluted	$	0.04		$	0.07
Weighted average number of common shares outstanding
Basic		29,422,601			29,380,073
Diluted		29,422,601			29,380,073
The accompanying notes are an integral party of these condensed consolidated financial statements

4

CHINA YCT INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
	Three Months Ended June 30,
	2009			2008
Cash Flows From Operating Activities:
Net income	$	1,310,735		$	1,922,153
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		50,185			26,548
Stock issued for service		45,000			-
Changes in operating assets and liabilities:
Inventory		-			671,669
Advance to suppliers		-			350,256
Accounts payable		(456,806	)		(59,688	)
Unearned revenue		-			(33,742	)
Taxes payable		187,179			336,127
Accrued expenses and other payables		5,287			(25,526	)
Cash provided by operating activities		1,141,580			3,187,797
Cash Flows From Investing Activities:
Purchase of  plant and equipment		(14,641	)		-
Loan repaid from (provided to) related party		1,170,000			(45,090	)
Addition to construction in progress		-			(363,632	)
Cash provided by (used in) investing activities		1,155,359			(408,722	)
Cash Flows From Financing Activities
Cash provided by financing activities		-			-
Effect of exchange rate changes on cash and cash equivalents		4,057			123,490
Increase in cash and cash equivalents		2,300,996			2,902,565
Cash and Cash Equivalents - Beginning of period		10,048,380			1,614,336
Cash and Cash Equivalents - Ending of period	$	12,349,376		$	4,516,901
Supplemental disclosures of cash flow information:
Interest paid	$	-		$	-
Income Taxes paid	$	445,428		$	379,027
Non-cash financing activities:
Stock issued for service	$	45,000		$	-
The accompanying notes are an integral party of these condensed consolidated financial statements

5 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

1.  ORGANIZATION AND BASIS OF PRESENTATION

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.  

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

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America.

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, 2009 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.

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.

6 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of estimates

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

Cash and cash equivalents

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

Accounts receivables

Accounts receivables are stated at net realizable value. Any allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables. A considerate amount of judgment is required in assessing the realization of these receivables, including the current credit worthiness of each customer and the related aging analysis. The Company has no account receivables as of June 30, 2009 and March 31, 2009.

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.

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. There was no advance to suppliers as of June 30, 2009 and March 31, 2009.

7 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.

8

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.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, 2009 and 2008 respectively.

Value-added tax

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

Research and development

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

The research and development expense for the three months ended June 30, 2009 and 2008 was $65,042 and $66,222, respectively.

Advertising costs

Advertising costs in newspaper and televisions are expensed as incurred.  The Company incurred advertising costs of $776,932 and $196,763 for the three months ended June 30, 2009 and 2008, respectively.

9 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, 2009 and 2008, the Company incurred $283,097 and $157,424 mailing and handling costs.

Stock-based compensation

The Company records stock based compensation expense pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standards (“SFAS”) No 123R, “Share-based Payments”, which establishes the accounting for employee stock-based awards. Under the provisions of SFAS No. 123(R), stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant).

The Company measures compensation expense for its non-employee stock-based compensation under the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. The fair value of the option 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.

Earnings per share

Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There are no common stock equivalents available for dilution purposes as of June 30, 2009 and 2008.

10 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Risks and uncertainties

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

Fair value of financial instruments

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

Foreign currency translation

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

Translation adjustments resulting from this process amounted to $57,353 and $228,373 as of June 30, 2009 and 2008, respectively. The balance sheet amounts with the exception of equity at June 30, 2009 were translated at 6.8307 RMB to 1.00 US$ as compared to 6.8336 RMB to 1.00 US$ at March 31, 2009. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the three months ended June 30, 2009 and 2008 were 6.8300 RMB and 6.9576 RMB, respectively.

11 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New accounting pronouncements

In June 2008, the FASB ratified EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”. EITF 07-5 addresses how an entity should evaluate whether an instrument or embedded feature is indexed to its own stock, carrying forward the guidance in EITF 01-6 and superseding EITF 01-6. Other issues addressed in EITF 07-5 include addressing situations where the currency of the linked instrument differs from the host instrument and how to account for market-based employee stock options. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and early adoption is not permitted. The Company has evaluated this statement and estimated that it is not expected to have an impact on its financial position and results of operations.

On June 16, 2008, the FASB issued Final Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determines that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of EITF 03-6-1 will have a material impact on its financial condition or results of operation.

On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on the company’s financial position or results.

In May 2009, the FASB issued SFAS 165, Subsequent Events , which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. An entity should apply the requirements of SFAS 165 to interim or annual financial periods ending after June 15, 2009. Adoption of SFAS 165 did not have a material impact on the Company’s results of operations or financial position.

12 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R), which improves financial reporting by enterprises involved with variable interest entities. SFAS 167 addresses (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities , as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166 and (2) concerns about the application of certain key provisions of FIN 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Adoption of SFAS 167 is not expected to have a material impact on the Company’s results of operations or financial position.

In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162. The FASB Accounting Standards Codification TM (“Codification”) will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of SFAS 168 is not expected to have a material impact on the Company’s results of operations or financial position.

13 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

3.    INVENTORY

Inventory primarily consists of only finished goods. The Company purchased all of its goods from Shandong Yong Chun Tang Bioengineering Co., Ltd. (“Shandong YCT”), an affiliated company owned by the Chairman of the Company (See Note 5). No allowance for inventory was made for the three months ended June 30, 2009 and 2008.

4.   PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following: 

	Balance as of
	June 30, 2009			March 31, 2009
Machinery & Equipment	$	436,976		$	459,628
Furniture & Fixture		83,370			95,475
Building		3,855,361			3,804,107
Subtotal		4,375,707			4,359,210
Less: Accumulated Depreciation		(263,815	)		(221,095	)
Construction in progress		211,467			211,377
Total Property and equipment, net	$	4,323,359		$	4,349,493

The depreciation expense for the three months ended June 30, 2009 and 2008 was $42,631 and $19,131, respectively.

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

The costs involved with construction in progress amounted to the total of $211,467 and as of June 30, 2009 and $211,377 as of March 31, 2009.

14 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

5.  RELATED PARTY TRANSACTIONS

As of June 30, 2009 and March 31, 2009, the Company has loans to related party in the amount of $951,587 and $2,075,549, respectively, representing loans receivables from two affiliates as stated below.  The entire balance of loans to related party is expected to be repaid soon and no allowance is deemed necessary.

	Balance as of
	June 30, 2009			March 31, 2009
a) Loan receivable (payable) from Shandong YCT	$	(45,041	)	$	1,124,366
b) Loan receivable from Changqing Paper Co.,Ltd.		951,587			951,182
Total	$	906,546		$	2,075,549

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 loans was to finance Shandong YCT’s production. The loan bears no interests and is unsecured and has been settled by the end of June 2009.

Changqing Paper Co., Ltd is an affiliated company also owned by the chairman and controlling shareholder Mr. Yan Tinghe.  This loan is also unsecured and interest free with an original maturity date of August 20, 2008. But the loan demands 0.08% monthly late payment penalty on any unpaid due amount after the maturity date. On October 27, 2008, the Company extended the loan with Changqing Paper Co., Ltd. for an additional year. All other terms remain unchanged.

6.   MAJOR CUSTOMER AND VENDOR

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

The Company purchases its products from its affiliate company, Shandong YCT, according to the contract signed on December 26, 2006 between the Company and Shandong YCT. As of June 30, 2009, Shandong YCT remains the sole vendor to the Company.

15 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

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, 2009			March 31, 2009
Land use right	$	1,493,202		$	1,492,566
Less: Accumulated amortization		(88,881	)		(81,293	)
Total	$	1,404,321		$	1,411,274

The amortization expense for the three months ended June 30, 2009 and 2008 was $7,555 and $7,416 respectively.

8.   TAX PAYABLE

The Company has tax payable as below:

	Balance as of
	June 30, 2009		March 31, 2009
Corporate Income Tax	$	479,480	$	445,195
Value-Added Tax		184,312		37,262
Other Tax & Fees		9,013		2,981
Total Tax Payable	$	672,805	$	485,438

16 

CHINA YCT INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

9. INCOME TAXES

The Company is governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are subject to tax at a statutory rate of 25% and were, until January 2008, subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax) on its income reported in the statutory financial statements after appropriate tax adjustments.

On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”), which is effective from January 1, 2008. Under the new law, the corporate income tax rate applicable to all Companies, including both domestic and foreign-invested companies, will be 25%, replacing the current applicable tax rate of 33%.  However, tax concession granted to eligible companies prior to the new CIT laws will be grand fathered.

For the three months ended June 30, 2009 and 2008, the company recorded income tax provisions of $473,794 and $640,079, respectively.

10. STOCKHOLDERS’ EQUITY

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

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

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

On November 23, 2007, the Company effected a reverse stock split of the corporation’s common stock in the ratio 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.

On April 6, 2009, the Company issued 45,000 shares of restricted common stock as partial compensation to three directors for certain consulting services provided to the Company, recorded at the fair value of $1 on the date of grant.

As of June 30, 2009 and March 31, 2009, there were 45 shares of Series A Preferred Stock issued and outstanding and 29,425,073 and 29,380,073 shares of Common Stock issued and outstanding. There was no Series B Preferred Stock issued and outstanding.

17 

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking” statements as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company that is based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitations, 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. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

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 an affiliated company 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 through 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 distribution of 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 could be used to market its own proprietary products, once the production begins.

18

Results of Operations – For the Three Months Ended June 30, 2009 compared to the Three Months Ended June 30, 2008

In general, the Company continued to benefit from the ongoing trend of growth and expanding acceptance of its products. During the first quarter of fiscal year 2010, the Company continued to witness the emergence and development of Shandong Spring Pharmaceutical as a marketing force. Having commenced revenue-producing operations just in January 2007, it realized $25,817,447 in revenue for the year ended March 31, 2009.  

During the first quarter of 2010, our sales barely changed as compared to the same period a year earlier. The following table summarizes the results of our operations during the three month periods ended June 30, 2009 and 2008 and provides information regarding the dollar and percentage increase or (decrease) from the first quarter of fiscal 2009 to the first quarter of fiscal 2010:

		Q1 2010		Q1 2009	Change in $			Variance
Net Revenue	$	6,144,332	$	6,018,588	$	125,744			2	%
Cost of Good Sold	$	2,678,805	$	2,625,965	$	52,840			2	%
Gross Profit	$	3,465,527	$	3,392,623	$	72,904			2	%
Operating Expenses	$	1,651,586	$	805,325	$	846,261			105	%
Income from Operation	$	1,784,529	$	2,562,232	$	(777,703	)		(30	%)
Net Income	$	1,310,735	$	1,922,153	$	(611,418	)		(32	%)

Net Sales

During the three months ended June 30, 2009, we realized $6,144,332 in revenue, representing an increase of 2% or $125,744 as compared to $6,018,588 for the same period of 2008. During the past year of operations, a total of 34 products each contributed to revenue, including health care supplements, cosmetics and toiletries and daily necessities, and no single product has accounted for more than 20% of our revenue.

The following table set forth a sales breakdown by product for the period indicated. The proportion structure of our overall sale varies from quarter to quarter. Seasonal influence is also a factor involved in our various product percentages in overall sales.

		Q1 2010		Q1 2009	Change in $			Variance
Revenue from :
Health care supplements	$	1,284,227	$	3,917,674	$	(2,633,447	)		(67	%)
Cosmetics and toiletries		2,471,428		1,313,043		1,158,385			88	%
Daily necessities		2,388,677		787,871		1,600,806			203	%
Total	$	6,144,332	$	6,018,588	$	125,744			2	%

19

All of the business reflected in the financial statements filed with this Report consisted of resale of products purchased by Shandong Spring Pharmaceutical from Shandong Yong Chun Tang. The purchases were made pursuant to a Purchase & Sale Contract dated December 26, 2006, which sets forth the wholesale price that Shandong Spring Pharmaceutical pays to Shandong Yong Chun Tang for each of the 34 products governed by the Contract.  Since Shandong Spring Pharmaceutical was not an exclusive distributor for Shandong Yong Chun Tang, 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, 2009 was nearly identical to gross margin in each quarter of a year earlier, averaging 56%, despite the growth in sales from quarter to quarter.

Cost of Good Sold

Our costs of revenue are primarily comprised of the cost of finished goods purchased from Shandong Yong Chun Tang and our direct labor and other expenses. For the three months ended June 30, 2009, our cost of good sold totaled $2,678,805, representing an increase of 52,840 or 2% as compared to $2,625,965 of the same period of 2008. However, the percentages of the costs of good sold to total revenues remained unchanged from quarter to quarter. Our cost ratio is relatively steady. It is primarily attributable to the steady relationship between us and our major supplier, Shandong Yong Chun Tang. As a result, we are always able to acquire products at a fixed cost basis.

Gross Profit

Gross profit for the three months ended June 30, 2009 was $3,465,527, an increase of 2% or $72,904 as compared to the same period in the year earlier. The increase in gross profit is a result of increased sales volume of the quarter. Gross profit as a percentage of net revenues was 56% for the three months ended June 30, 2009. Our gross margin largely remained unchanged.

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

	Gross profit for the quarter ended June 30,				Gross Margin for the quarter ended June 30,
	2009		2008		2009			2008
Product
Health care supplements	$	692,568	$	2,136,566		54	%		55	%
Cosmetics and toiletries		1,476,210		789,401		60	%		60	%
Daily necessities		1,296,749		466,656		55	%		59	%
Overall	$	3,465,527	$	3,392,623		56	%		56	%

20

Research and Development Expenses. 

Our R&D expenses for the three months ended June 30, 2009 and 2008 were $65,042 or approximate 1% of total corresponding revenue and $66,222 or approximate 1% of total corresponding revenue, respectively. We did not incur any significant R&D expenses recently. However, our long term goal is to utilize advanced biological technology to refine and extract the beneficial compounds in plants that have traditionally been known to have medicinal benefits, primarily gingko. Toward that end, we have a staff of eight currently engaged in research and development of new technologies and resulting products. In addition we maintain close ties to the research staffs at Tsinghua University, China Agriculture University, Shandong Herbal Medicine University, and the Shandong Herbal Medicine Research Institute.

Selling, General and Administrative Expenses.

Our SG&A expenses consist primarily of sales commissions, advertising and promotion expenses, freight charges and related compensation. Our overall SG&A expenses for three months ended June 30, 2009 were $1,586,544 or 26% of our net sales for the period, representing an increase of 115% or $847,441 as compared with the SG&A expenses for the same period of the year earlier. This dramatic increase in our overall SG&A expenses was primarily due to the significant increase in our a) advertising expenses, to enhance our promotion force; b) professional consulting fees; c) salary, to inspire our marketing staffs,and d) travel expense. These four different kind of expenses totaled $897,787 and account for 57% of our overall SG&A expenses during the quarter ended June 30, 2009.

		Q1 2010		Q1 2009	Change in $		Percentage
Advertising Exp.	$	731,989	$	200,418	$	531,570		265	%
Salary Exp.	$	44,717	$	16,330	$	28,387		174	%
Professional Exp.	$	99,961	$	1,962	$	97,999		4994	%
Traveling Exp.	$	21,119	$	3,704	$	17,415		470	%

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 $4.32 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 – 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.

21

Net Income

For the quarter ended June 30, 2009, we realized $1,310,735 in net income, representing a 32% or $611,418 decrease as compared to $1,922,153 for the quarter ended June 30, 2008. The decrease was a result of the significant increase in our SG&A expenses during the quarter.

Liquidity and Capital Resources

Our principal sources of liquidity were primarily generated from our operations. As of June 30, 2009, Shandong Spring Pharmaceutical had $11,494,967 in working capital, an increase of $1,445,770 or 14% as compared to working capital at March 31, 2009. The increase was primarily a result of our net income in the three-month period. As of June 30, 2009, cash and cash equivalents were $12,349,376, an increase by $2,300,996 or 23% from $10,048,380 as of March 31, 2008. This increase in amount of cash occurred primarily because we collected back a loan to one of our affiliated companies, in the amount of $1,170,000. This repayment enabled us to preserve our cash for further operations.

Based on our current operating plan, we believe that existing cash and cash equivalents balances, as well as cash forecast by management to be generated by operations will be sufficient to meet our working capital and capital requirements for our current operations. Our operations have produced positive cash flow, with is $1,141,580 for the three months ended June 30, 2009. We did not have accounts receivable outstanding as of June 30, 2009. And we carry relatively little inventory. We expect our marketing activities to continue to operate cash-positively. However, once we commence our own manufacturing operations, the working capital requirements of manufacturing may put pressure on our cash flow, and we may be required to seek additional capital and reduce certain spending as needed. There can be no assurance that any additional financing will be available on acceptable terms.

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 will need $40 million. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds we require. At the present time, however, we do not have commitments of funds from any source.

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

	Three months ended June 30,
	2009		2008
Net cash provided by operating activities	$	1,141,580	$	3,187,797
Net cash provided by(used in)  investing activities	$	1,155,359	$	(408,722	)
Net cash provided by financing activities	$	0	$	0
Effect of exchange rate change on cash and cash equivalents	$	4,057	$	123,490
Net increase in cash and cash equivalents	$	2,300,996	$	2,902,565
Cash and cash equivalents, beginning balance	$	10,048,308	$	1,616,336
Cash and cash equivalents, ending balance	$	12,349,376	$	4,516,901

22

Operating Activities

Net cash provided by operating activities was $1,141,580 for the three-month period ended June 30, 2009, which was a decrease of 156% or $2,046,217 from the $3,187,797 net cash provided by operating activities for the same period a year earlier. The decrease was mainly attributable to the reduction in our net income and to payments made to reduce our accounts payable.

Investing Activities

During the quarter ended June 30 2009, our net cash provided by investing activities was $1,155,359, as compared to $408,722 of net cash used in investing activities for the quarter ended June 30, 2008. This significant positive cash flow result from the investing activities during the quarter ended June 30, 2009 was primarily because we collected back a loan to one of our affiliated companies, $1,170,000 at the end of June, 2009. 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 was to finance Shandong YCT’s production. The loan bore no interest and was unsecured.

Financing Activities

Net cash generated or used by financing activities in the three-month period ended June 30 2009 and 2008 were both 0. None of our officers or shareholders has made commitments to the Company for financing in the form of advances, loans or credit lines. 

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.

23

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.

24

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

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

Our 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.

25

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.

26

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, 2009. 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, 2009 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 of 2010 that has materially affected or is reasonably likely to materially affect China YCT International Group’s internal control over financial reporting.

27

PART II   -   OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The company is not party to any material legal proceeding.

ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES

 (c) Unregistered sales of equity securities

 In April 2009, the Company issued a total of 45,000 shares of common stock to three members of its Board of Directors. The shares were issued in consideration of services, and were valued at $1.00 per share, the market value on the date of grant. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act, as the directors were investing for their own accounts and had access to information abou the Company. 

 (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 2010.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

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 14, 2009 By: /s/ Yan Tinghe

      Yan Tinghe, Chief Executive Officer

28