China YCT International Group Inc. (OTCQB:CYIG) announced an unusually complex agreement between its China subsidiary, Shandong Spring Pharmaceutical Co., Ltd, and a second company with which it shares some history, Shandong Yong Chun Tang Bioengineering Co. Ltd.
Both organizations are run by Yan Tinghe, who is both the Chairman of China YCT International Group and the principal owner of Shandong Yong Chun Tang.
The two companies have signed an Entrusted Management Agreement under which Shandong Spring will manage the operations of Shandong Yong Chun Tang in exchange for all of the latter’s net profits. The two companies already have a relationship because Shandong Yong Chun Tang is the primary supplier of products marketed and distributed by Shandong Spring. Under the new agreement, Shandong Spring will continue to distribute Shandong Yong Chun Tang's gingko products.
Also, the two parties signed a Purchase Option and Cooperation Agreement with the principal owner of Shandong Yong Chun Tang, Yan Tinghe. Under the Purchase Option, Shandong Spring has the right to purchase Shandong Yong Chun Tang at a fair value to be determined when the option is exercised. It was not disclosed how “fair value” would be determined.
Mr. Yan gave Shandong Spring Pharmaceutical a proxy to exercise his voting rights as a
shareholder of Shandong Yong Chun Tang. Yan said the agreement would be mutually beneficial to the two companies and would help to establish “meaningful market share” for the gingko products.
Shandong Spring Pharmaceutical was organized in 2005. From January 2006 until January 2007, the company developed its manufacturing facility and distribution network. In January 2007, Shandong Spring Pharmaceutical began distributing products manufactured by Shandong Yong Chun Tang, its first revenue producing activity.
Originally, Shandong Spring Pharmaceutical was organized as a subsidiary of Shandong Yong Chun Tang to use advanced technology and develop gingko-based products as an aide to health. Then, Shandong Yong Chun Tang later transferred ownership of Shandong Spring Pharmaceutical to its equity-holders. Now, the pecking order is reversed, and Shandong Yong Chun Tang will be the subsidiary of Shandong Spring Pharmaceuticals.
According to the company’s most recent financial disclosure, Shandong Spring will need a large capital infusion before it can implement its business plan. The capital will create a facility and buy equipment that can extract compounds from gingko and formulate products. In the meantime, Shangdong Spring is making a reasonable profit on its distribution of Shandong Yong Chun Tang’s existing gingko-based health and beauty products and toiletries. Supposedly, the addition of Shandong Yong Chun Tang’s manufacturing profits will also help the company’s bottom line, but no financial report of the company was released.
In the first nine months of its fiscal 2007, China YTC International made a profit of $2.2 million on revenues of $10.6 million. Its market capitalization is $58 million.