UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

20549

 

For the quarterly period ended September 30, 2017

 

 

For the transition period from                  to                    

 

(Exact name of registrant as specified in its charter)

 

Issuer's telephone number: 406-282-3188

 

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

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.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☐

 

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

 

The number of shares outstanding of the issuer's common stock on November 14, 2017 was 29,789,168.

 

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

 

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

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

The Company's management has evaluated all the recently issued accounting pronouncements during the quarter ended September 30, 2017 and does not believe that they will have a material effect on the Company's consolidated financial position and results of operations.

NOTE 3 – PREPAID EXPENSES

The prepaid expenses consist of the payments that the Company has made in advance for the advertising services to be received in the future. On September 19, 2017, the Company signed an advertising contract with Shenzhen Henghe Media Co., Ltd.  In pursuant to the contract, in September 2017, the Company made approximately $450,000 (RMB 3 Million) advance payment to Shenzhen Henghe Media Co., Ltd for the advertising services to be received within the period from September 2017 to December 31, 2018.  The prepaid expenses are amortized over the service period and unamortized balance as of September 30, 2017 was $284,288.

NOTE 4 - INVENTORIES

 

The components of inventories were as follows: 

No inventory markdown was recorded for the three and six months ended September 30, 2017 and 2016.

NOTE 5 – PLANT, PROPERTY, AND EQUIPMENT, NET

 

The components of property and equipment were as follows:

The depreciation and amortization expense for the three months ended September 30, 2017 and 2016 was $327,864 and $181,287, respectively.

The depreciation and amortization expense for the six months ended September 30, 2017 and 2016 was $615,112 and $357,812 respectively.

NOTE 6 – DEVELOPMENT OF ACER TRUNCATUM BUNGE

Development costs primarily include land development cost incurred for land leveling, irrigation, and fertilization, the purchase costs of acer truncatum bunge trees, and acer truncatum bunge planting fee.

NOTE 7 - TAXES PAYABLE

 

Taxes payable at September 30, 2017 and March 31, 2017 were as follows:

NOTE 8 - INCOME TAXES

China YCT and Landway Nano were incorporated in the United States of America and are subject to United States federal taxation. No provisions for income taxes have been made, as there was no taxable income from U.S. operations for the three and six months ended September 30, 2017 and 2016. The Company has net loss carryforward of approximately $22,000 which will be expired in 2047. The Company has set up 100% valuation allowance on deferred tax assets resulting from net operation loss incurred in the U.S.

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

The Company has not provided deferred taxes on undistributed earnings attributable to its PRC subsidiaries as they are to be permanently reinvested. On February 22, 2008, MOF, and SAT, jointly issued Cai Shui 2008 Circular 1, "Circular 1." According to Article 4 of Circular 1, distributions of accumulated profits earned by foreign investment enterprises, ("FIE") prior to January 1, 2008 to their foreign investors will be exempt from withholding tax, ("WHT") while distribution of the profits earned by a FIE after January 1, 2008 to its foreign investors shall be subject to WHT.

Dividend payments by PRC subsidiaries are limited by certain statutory regulations in the PRC. No dividends may be paid by PRC subsidiaries without first receiving prior approval from SAFE. Dividend payments are restricted to 90% of after tax profits.

Should the Company's PRC subsidiaries distribute all their profits generated after December 31, 2007, the aggregate withholding tax amount will be $8,910,785 and $8,306,160 as of September 30, 2017 and March 31, 2017, respectively.

The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of ASC Topic 740, Income Taxes. Since Shandong Spring intends to reinvest its earnings to further expand its businesses in mainland China, it does not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, the Company has not recorded any deferred taxes in relation to US tax on the cumulative amount of undistributed retained earnings since January 1, 2008.

 

Balances:

 

 

On September 30, 2017 and March 31, 2017, accounts payable balance of $34,739 and $706,048, respectively pertains to payable in respect of purchase of healthcare products from Shandong Yongchuntang.

(iii)    Sales to related party:

Contingency:

 

The Company sold products through ten distributors during the three and six months ended September 30, 2017 and 2016. Sales to four distributors represented 19%, 16%, 15% and 13% of total sales for the three months ended September 30, 2017. Sales to three distributors represented 20%, 14%, and 13% of total sales for the three months ended September 30, 2016.

The Company's sales through four distributors represented 17%, 17%, 13% and 13% of total sales for the six months ended September 30, 2017. Sales to three distributors represented 21%, 15%, and 14% of total sales for the six months ended September 30, 2016.

The Company purchases its products from Shandong Yongchuntang, a related party, according to the purchase contract signed between the Company and Shandong Yongchuntang. Pursuant to the renewed one year contract dated February 20, 2017, the Company agreed to purchase 9 products from Shandong Yongchuntang at fixed prices. Total purchases from Shandong Yongchuntang represented 43% and 34% of our total purchases during the three months ended September 30, 2017 and 2016, respectively. The purchases from three other vendors represented 20%, 17% and 10% of the Company's total purchases for the three months ended September 30, 2017. The purchases from three other vendors represented 21%, 19%, and 13% of the Company's total purchases for the three months ended September 30, 2016.

NOTE 11 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events that have occurred after the date of the balance sheet through the date of issuance of these consolidated financial statements and determined that no subsequent event requires recognition or disclosure to the consolidated financial statements.

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

 

Overview

 

Results of Operations

 

The following table sets forth information from our statements of comprehensive income for the three months ended September 30, 2017 and 2016, in dollars:

The following table sets forth information from our statements of comprehensive income for the six months ended September 30, 2017 and 2016, in dollars:

Revenue

 

During the three months ended September 30, 2017, we realized $13,866,784 in revenue, representing an increase of 19.6% or $2,272,300 as compared to $11,594,484 for the same period in 2016.  The total 19.6% revenue increase was due to the increased sales of health care products and Huoliyuan Capsule.

During the six months ended September 30, 2017, we realized $31,001,649 in revenue, representing an increase of 45.5% or $9,694,670 as compared to $21,306,979 for the same period in 2016.  The increase in revenue in RMB was 49.0% as compared to the six months ended September 30, 2016, but 3.5% of the increase was offset by fewer USD converted from RMB due to a RMB depreciation occurred in the six months ended September 30, 2017, compared with the same period in 2016. The total 49.0% revenue increase in RMB was due to the increased sales of health care products, acer truncatum bunge seed oil, and Huoliyuan Capsule.

 

Part of our revenues was generated by us as the distributor for the health care products manufactured by Shandong Yongchuntang. We purchase products from Shandong Yongchuntang, a related party, according to the purchase contract signed between the Company and Shandong Yongchuntang. On February 20, 2017, the Company renewed the purchase contract with Shandong Yongchuntang for a term of one year ending on February 25, 2018.  Pursuant to the renewed one year contract, the Company agreed to purchase 9 new products from Shandong Yongchuntang at fixed prices. During the three months ended September 30, 2017, 39.8% of our total revenue was generated as the distributor of Shandong Yongchuntang, compared to 36.5% during the three months ended September 30, 2016.  During the six months ended September 30, 2017, 43.1% of our total revenue was generated as the distributor of Shandong Yongchuntang, compared to 34.8% during the six months ended September 30, 2016. 

For the three months ended September 30, 2017, our revenue from sales of the health care products was $5,519,198, representing an increase of 30.3% or $1,282,581 as compared to $4,236,617 for the same period in 2016.  The increase in sales of the health care products was primarily due to the growth of our customer basis and the internet direct-sales. For the six months ended September 30, 2017, our revenue from sales of the health care products was $13,364,199, representing an increase of 80.1% or $5,943,244 as compared to $7,420,955 for the same period in 2016.  The significant increase in sales of the health care products was primarily due to the growth of our customer basis and the internet direct-sales.

The sales of Huoliyuan Capsule accounted for 49.4% of our revenue during the three months ended September 30, 2017, compared to 47.6% during the three months ended September 30, 2016. The sales of Huoliyuan Capsule accounted for 42.7% of our revenue during the six months ended September 30, 2017, compared to 49.9% during the six months ended September 30, 2016. The sales of the Huoliyuan Capsule during the three months ended September 30, 2017 were $6,856,369, an increase of 24.3% or $1,340,676 as compared to the three months ended September 30, 2016. The sales of the Huoliyuan Capsule during the six months ended September 30, 2017 were $13,251,411, an increase of 26.4% or $2,616,699 as compared to the six months ended September 30, 2016. The increase in sales of Huoliyuan Capsule was primarily due to the stabilization of the market competition.

Since July 2015, the Company has produced Acer truncatum Bunge Seed Oil and sold the product to customers through its distributors.  The Acer truncatum Bunge Seed Oil was extracted from the acer truncatum pods that were purchased from third party vendors.  Our self-grown acer truncatum pods will not be ready to be used for production until approximately the fall of 2018. During the three months ended September 30, 2017, 10.8% of our total revenue was generated from the sales of acer truncatum oil products, compared to 15.9% during the same period in 2016. During the three months ended September 30, 2017, the sales of acer truncatum bunge seed oil was $1,491,217, representing a decrease of 19.1% or $350,957 compared to $1,842,174 for the same period in 2016. The decrease in sales of acer truncatum oil products during the three months ended September 30, 2017 was primarily due to approximately two-month production line shutdown for the specification, adjustment and maintenance of the production equipment. During the six months ended September 30, 2017, 14.2% of our total revenue was generated from the sales of acer truncatum oil products, compared to 15.3% during the same period in 2016. During the six months ended September 30, 2017, the sales of acer truncatum bunge seed oil was $4,386,039, representing an increase of 34.9% or $1,134,727 compared to $3,251,312 for the same period in 2016. The increase in sales of acer truncatum oil products was primarily due to the increased promotion of our acer truncatum bunge seed oil by organizing conferences to introduce the features and benefits of the product to our distributors and customers.

 

The following is the sales breakdown by products during the three months ended September 30, 2017 and 2016:

 

The following is the sales breakdown by products during the six months ended September 30, 2017 and 2016:

 

Cost of Goods Sold

 

Our cost of goods sold were comprised primarily of the cost of finished goods we purchased from Shandong Yongchuntang, the raw materials we purchased from third party vendors, and the manufacturing costs of acer truncatum bunge seed oil, and Huoliyuan Capsule. The cost of manufacturing Huoliyuan Capsule was approximately 55.5% and 51.7% of the total cost of goods sold during the three months ended September 30, 2017 and 2016, respectively. The cost of manufacturing Huoliyuan Capsule was approximately 48.3% and 54.3% of the total cost of goods sold during the six months ended September 30, 2017 and 2016, respectively. The cost of manufacturing acer truncatum bunge seed oil was approximately 9.8% and 14.8% of the total cost of goods sold during the three months ended September 30, 2017 and 2016, respectively. The cost of manufacturing acer truncatum bunge seed oil was approximately 12.9% and 13.8% of the total cost of goods sold during the six months ended September 30, 2017 and 2016, respectively.

During the three months ended September 30, 2017, our cost of goods sold totaled $8,811,390, representing an increase of $1,799,824 or 25.7% as compared to $7,011,566 during the three months ended September 30, 2016. The percentages of the cost of goods sold to total revenues increased from 60.5% for the three months ended September 30, 2016 to 63.5% for the three months ended September 30, 2017.   

During the six months ended September 30, 2017, our cost of goods sold totaled $19,098,538, representing an increase of $6,174,711 or 47.8% as compared to $12,923,827 during the six months ended September 30, 2016. The percentages of the cost of goods sold to total revenues increased slightly from 60.7% for the six months ended September 30, 2016 to 61.6% for the six months ended September 30, 2017.   

 

Gross profit for the three months ended September 30, 2017 was $5,055,394, an increase of 10.3% or $472,476 as compared to the same period for the prior year. The overall gross profit as a percentage of net revenues was approximately 36.5% for the three months ended September 30, 2017, a decrease of 3% from 39.5% for the same period of 2016. The gross profit as percentage of net revenues for the health care products was approximately 44.5% for the three months ended September 30, 2017, representing no change on the percentage of total revenue from 44.5% for the same period of 2016.  The gross profit as percentage of net revenues for Huoliyuan was approximately 28.7% for the three months ended September 30, 2017, decreased from 34.3% for the same period of 2016. The gross profit as percentage of net revenues for acer truncatum bunge seed oil was approximately 42.1% for the three months ended September 30, 2017, a slight decrease from 43.6% for the same period of 2016. The lower gross profit as percentage of net revenue for Huoliyuan during the three months ended September 30, 2017 was due to the increased raw material and manufacturing costs. The lower gross profit as percentage of net revenue for the acer truncatum bunge seed oil during the three months ended September 30, 2017 was primarily due to the net impact of decreased sales price offset by the decreased raw material cost.

 

The comparison of the profits for the three months ended September 30, 2017 and 2016 as follows:

Gross profit for the six months ended September 30, 2017 was $11,903,111, an increase of 42.0% or $3,519,959 as compared to the same period for the prior year. The overall gross profit as a percentage of net revenues was approximately 38.4% for the six months ended September 30, 2017, a slight decrease from 39.3% for the same period of 2016. The gross profit as percentage of net revenues for the health care products was approximately 44.6% for the six months ended September 30, 2017, a slight increase from 44.5% for the same period of 2016.  The gross profit as percentage of net revenues for Huoliyuan was approximately 30.4% for the six months ended September 30, 2017, decreased from 34.0% for the same period of 2016. The gross profit as percentage of net revenues for acer truncatum bunge seed oil was approximately 43.7% for the six months ended September 30, 2017, a slight decrease from 45.2% for the same period of 2016. The lower gross profit as percentage of net revenue for Huoliyuan during the six months ended September 30, 2017 was due to the increased raw material and manufacturing costs. The lower gross profit as percentage of net revenue for the acer truncatum bunge seed oil during the six months ended September 30, 2017 was primarily due to the net impact of decreased sales price offset by the decreased raw material cost.

Research and Development Expenses

 

Our R&D expenses for the three months ended September 30, 2017 were $62,033 or approximate 0.4% of total corresponding revenue, a decrease of $343,703 or 84.7%, as compared to $405,736 or approximately 3.5% of total corresponding revenue for the three months ended September 30, 2016.  Our R&D expenses for the six months ended September 30, 2017 were $126,411 or approximate 0.4% of total corresponding revenue, a decrease of $348,485 or 73.4%, as compared to $474,896 or approximately 2.2% of total corresponding revenue for the six months ended September 30, 2016.  The lower R&D expense and the decrease on the percentage of R&D expense over total revenue compared with the same period of the prior year was mainly due to the decreased purchase of the materials that were used in the R&D.

Our long-term goal is to utilize advanced biological technology to refine and extract the beneficial compounds in plants that have traditionally been known to have medicinal benefits, primarily gingko and acer trunkatum bunge plants. As of September 30, 2017, we had 27 staff in R&D department.

 

Operating expenses

 

Our selling expenses consist primarily of sales commissions, advertising and promotion expenses, freight charges and related compensation. Our selling expenses for the three months ended September 30, 2017 were $1,082,147 or 7.8% of our total revenue for the period, representing slight increase on the percentage of total revenue from 7.0% for the prior year's quarter ended September 30, 2016. Our selling expenses for the three months ended September 30, 2017 increased by 34.0% or $274,344 as compared to the same period in the prior year. The increase in selling expenses was primarily due to the increase in shipping cost, sales commission as a result of increased sales and increased advertising cost.

 

Our selling expenses for the six months ended September 30, 2017 were $2,318,439 or 7.5% of our total revenue for the period, representing a slight increase on the percentage of total revenue from 7.3% for the prior year's six months ended September 30, 2016.

 

Our G&A expenses for the three months ended September 30, 2017 were $868,258 or 6.3% of our total revenue for the period, representing no change on the percentage of total revenue from 6.3% for the prior year's quarter ended September 30, 2016.  Our G&A expenses for the three months ended September 30, 2017 increased by 18.2% or $133,756 as compared to the same period in the prior year.  The increase in G&A expenses was primarily due to the increase in depreciation and amortization expenses and consulting fees.

Our G&A expenses for the six months ended September 30, 2017 were $1,776,663 or 5.7% of our total revenue for the period, representing a decrease on the percentage of total revenue from 7.4% for the prior year's six months ended September 30, 2016.  Our G&A expenses for the six months ended September 30, 2017 increased by 12.1% or $191,804 as compared to the same period in the prior year. The increase in G&A expenses was primarily due to the increase in depreciation and amortization expenses and consulting fees offset by the decrease of stock options amortization.

Income tax expense increased by $112,635 during the three months ended September 30, 2017, as compared to the prior quarter ended September 30, 2016, as a result of the increase in income from operation.

Income tax expense increased by $849,120 during the six months ended September 30, 2017, as compared to the six months ended September 30, 2016, as a result of the increase in income from operation and the gain from disposal of acer truncatum bunge plants.

Comprehensive Income (Loss)
 

Our business operates entirely in Chinese RMB, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income. The net income is added to the retained earnings on our balance sheet while the translation adjustment is added to a line item on our balance sheet labeled "Accumulated other comprehensive income (loss)," since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the three months ended September 30, 2017, the effect of converting our financial results to Dollars was income of $1,908,799 to our other comprehensive income, as compared to a loss of $565,119 during the three months ended September 30, 2016 as a result of the currency exchange rate fluctuation.

During the six months ended September 30, 2017, the effect of converting our financial results to Dollars was income of $3,564,300 to our other comprehensive income, as compared to a loss of $2,650,307 during the six months ended September 30, 2016 as a result of the currency exchange rate fluctuation.
 

Since March 18, 2017, Shandong Yongchuntang has become a 3% shareholder of Shandong Spring.  During the three months ended September 30, 2017, $126,432 of comprehensive income was attributable to Shandong Yongchuntang.

During the six months ended September 30, 2017, $292,747 of comprehensive income was attributable to Shandong Yongchuntang.

 

In order to fully implement our business plan, however, we will require capital contributions far in excess of our current asset value. Our budget for bringing our manufacturing facility to an operating level that assures profitability is $5 million. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds we need. At present, we have no commitment from any source for additional funds and there can be no assurance that the funds will be available on terms acceptable to us.

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

Operating Activities

 

Investing Activities

 

During the six months ended September 30, 2017, our net cash used in investing activities was $2,416,389, as compared to $3,716,289 of net cash used for the six months ended September 30, 2016. The cash used in investing activities for the six months ended September 30, 2017 of $2,416,389 was primarily attributable to the acquisition of property, plant and equipment of $2,110,189, and capital expenditures of $2,420,741 in acer truncatum bunge planting, and offsetting by cash receipt of $2,114,541 from disposal of acer truncatum bunge plants.

 

Financing Activities

 

No net cash was generated or used by financing activities over the six months ended September 30, 2017 and 2016.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

 

Changes in Internal Controls

 

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PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

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

 

Not Applicable

Item 3. Defaults Upon Senior Securities.

 

None

Item 4. Removed and Reserved

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

SIGNATURES

CHINA YCT INTERNATIONAL GROUP, LTD.

 

Date: November 14, 2017

Yan Tinghe Chief Executive Officer (Principal Executive Officer)

 

Li Chuanmin Chief Financial Officer (Principal Financial Officer)

 

 

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