UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

MULIANG AGRITECH, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   2870  

90-1137640

(State or other jurisdiction of
incorporation or organization)

 

(Primary Standard Industrial
Classification Code Number)

 

(I.R.S. Employer
Identification Number)

  

2498 Wanfeng Highway, Lane 181

Fengjing Town, Jinshan District

Shanghai, China 201501

(86) 21-67355092

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

  

 

 

Joseph Smith

18124 Wedge Pwky, Ste 1050

Reno, NV 89511

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

William S. Rosenstadt, Esq.

Mengyi “Jason” Ye, Esq.

Ortoli Rosenstadt LLP

366 Madison Avenue, 3 rd Floor

New York, NY 10017

+1-212-588-0022 - telephone

+1-212-826-9307 - facsimile

 

Fang Liu Esq.

Mei & Mark LLP

818 18th Street NW

Suite 410

Washington, DC 20006

+1-888-860-5678 x 718 — telephone

+1-888-706-1173 — facsimile

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

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 12b2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐
Non-accelerated filer ☐   Smaller reporting company ☒
    Emerging growth company ☒

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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 pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

  

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Class of Securities to be Registered   Proposed Aggregate Offering Price (1)     Amount of Registration Fee  
Common stock, par value $0.0001 per share   $ 15,000,000     $ 1,818.00  
Common stock underlying Underwriter’s Warrants (2)   $ 1,500,000     $ 181.80  
Total   $ 16,500,000     $ 1,999.80  

  

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended, which represents the sale of shares at the maximum aggregate price per share.

(2) We have agreed to issue, on the closing date of this offering, warrants to our underwriter Network 1 Financial Securities, Inc. (“Underwriter”) to purchase up to ten percentage (10%) of the aggregate number of shares of common stock sold by the Registrant (the “Underwriters’ Warrants”). The Underwriter’s Warrants may be exercisable at any time, and from time to time, in whole or in part, commencing six (6) months following the effective date of the offering and expiring five years from the effective date of the offering. The exercise price of the Underwriters Warrants is equal to 120% of the offering price of the common stock hereby.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

  

 

PRELIMINARY PROSPECTUS              SUBJECT TO COMPLETION ON June 26, 2019

  

 

  

MULIANG AGRITECH, INC.

 

Minimum Offering:                   Shares of Common Stock

Maximum Offering:                  Shares of Common Stock

  

Muliang Agritech, Inc. is offering a minimum of                  shares of our common stock and a maximum of                  shares of common stock. The offering is being made on a “best efforts” basis without a firm commitment by the underwriter who has no obligation or commitment to purchase any of our shares. The underwriter must sell the minimum number of shares offered, if any are sold, and are only required to use their best efforts to sell the shares offered. See “Underwriting.” Prior to this offering, our stock is currently quoted on the OTCQB Venture Market (“OTCQB”) under the symbol “MULG”, however, there has been no established public trading market for our common stock. As of June 26, 2019, the last reported sales price of our common share on the OTCQB was US$27.00 per share, and on June 26, 2019 we had 56,341,953 shares of common stock outstanding. We expect the offering price of our common stock to be $                   per share. We intend to apply to list our common stock on the Nasdaq Capital Market under the symbol “MULG”. We cannot assure you that our application will be approved.

 

    Per Common Stock     Minimum Offering     Maximum Offering  
Assumed public offering price   $                  $ 6,000,000     $ 15,000,000  
Underwriter fees and commissions (1)   $       $ 390,000     $ 975,000  
Proceeds to us, before expenses (1)(2)   $       $ 5,610,000     $ 14,025,000  

   

 

(1) We will pay the underwriter a commission equal to six and half percent (6.5%) of the public offering price for the shares. In addition, our underwriter shall be entitled to a non-accountable expense equal to one and half percent (1.5%) of the gross proceeds of the offering. We agree to pay our underwriter, the expenses relating to the offering, not to exceed $125,000 in the aggregate, including but not limited to (i) reasonable travel and out-of-pocket expenses, including clearing charges; (ii) reasonable fees of legal counsel incurred by underwriter in connection with the Offering. See “Underwriting” in this prospectus for more information regarding our arrangements with the underwriter.
(2) The total estimated expenses related to this offering are set forth in the section entitled “Fees, Commission and Expense Reimbursement.”

 

In addition, we have agreed to issue to the underwriter warrants to purchase up to a total of                  ordinary shares (equal to ten percent (10%) of the maximum number of shares of common stock sold in this offering) and to register herein such underlying shares. The warrants may be exercised at any time, and from time to time, in whole or in part, commencing six (6) months following the effective date of this public offering and expiring five (5) years from the effective date of the offering. The warrants are exercisable at a per share price equal to 120% of the offering price of this offering. The offering will close or terminate, as the case may be, upon the earlier of: (i) a date mutually acceptable to us and the Underwriter after the minimum offering amount of our offering is raised, or (ii) 180 days from the effective date (the “Effective Date”) of this prospectus (and for a period of up to 60 additional days if extended by agreement of the Company and the Underwriter) (the “Termination Date”). Until we sell at least shares, all investor funds will be held in an escrow account at                  . If we do not sell at least                   shares by the Termination Date, all funds will be promptly returned to investors without interest or deduction. If we complete this offering, then on the closing date, we will issue the shares to investors in the offering on the shares sold in this offering. One of the conditions to our obligation to sell any securities through the Underwriter is that, upon the closing of the offering, the shares of common stock would qualify for listing on the Nasdaq Capital Market.

 

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING ON PAGE 7 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE INVESTING IN SHARES OF OUR COMMON STOCK.

 

NEITHER THE SECURITIES AND EXCHANGE COMMITTEE NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

The date of this prospectus is          , 2019

  

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 7
Special Note Regarding Forward-Looking Statements 25
Use of Proceeds 25
Dividend Policy 26
Capitalization 26
Dilution 27
Post-Offering Ownership 28
Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Business 39
Management 52
Executive Compensation 53
Principal Shareholders 54
Related Party Transactions 55
Description of Securities 56
Market Price and Dividend on Our Common Stock and Related Stockholder Matters 57
Shares Eligible for Future Sale 57
Underwriting 59
Legal Matters 63
Experts 63
Interests of Named Experts and Counsel 63
Where You Can Find Additional Information 63
Index to Financial Statements F-1

 

You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free-writing prospectus. We are offering to sell, and seeking offers to buy, the shares of common stock offered hereby, but only under circumstances and in jurisdictions where offers and sales are permitted and lawful to do so. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the shares of common stock.

 

Neither we nor any of the underwriters have taken any action that would permit a public offering of the shares of common stock outside the United States or permit the possession or distribution of this prospectus or any related free-writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any related free-writing prospectus must inform themselves about and observe any restrictions relating to the offering of the shares of common stock and the distribution of the prospectus outside the United States.

 

Until             , 2019 (the 25 th day after the date of this prospectus), all dealers that buy, sell or trade the shares of common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

i

 

 

PROSPECTUS SUMMARY

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our shares of common stock. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

Prospectus Conventions

 

Except where the context otherwise requires and for purposes of this prospectus only, “we”, “us”, “our company”, “Company”, “our” and “Muliang Agritech” refer to:

 

Muliang Agritech, Inc. (“Muliang Agritech” when individually referenced), a Nevada company;

 

Muliang Agricultural Limited (“Muliang HK” when individually referenced), a Hong Kong company that is a wholly-owned subsidiary of Muliang Agritech;

 

Shanghai Mufeng Investment Consulting Co., Ltd (“Shanghai Mufeng” when individually referenced), (also referred to as 上海牧枫投资咨询有限公司), a wholly-owned subsidiary of Muliang HK and a wholly foreign-owned enterprise (“WFOE”) formed under the laws of the People’s Republic of China (the “PRC”);

 

Shanghai Muliang Industry Co., Ltd. (“Shanghai Muliang” when individually referenced), (also referred to as 上海牧粮实业有限公司), a variable interest entity (“VIE”) and a PRC company that is a wholly-owned subsidiary of Shanghai Mufeng;

 

Shanghai Zongbao Environmental Construction Co., Ltd. (“Shanghai Zongbao” when individually referenced), (also referred to as 上海综宝环境工程有限公司), a PRC company that is a wholly-owned subsidiary of Shanghai Muliang;

 

Shanghai Muliang Agritech Development Co., Ltd. (“Agritech Development” when individually referenced), (also referred to as 上海牧粮农业科技发展有限公司), a PRC Company that is a 60%-owned subsidiary of Shanghai Muliang;

 

Weihai Fukang Bio-Fertilizer Co., Ltd. (“Fukang” when individually referenced), (also referred to as 威海富康生物肥料有限公司), a PRC Company that is a 99.9%-owned subsidiary of Shanghai Muliang;

 

Shanghai Muliang Agricultural Sales Co., Ltd. (“Muliang Sales” when individually referenced), (also referred to as 上海牧粮农资销售有限公司), a PRC company that is a wholly-owned subsidiary of Shanghai Muliang;

 

Zhonglian Huinong (Beijing) Technology Co., Ltd. (“Zhonglian” when individually referenced), (also referred to as 中联慧农(北京)科技有限公司), a PRC company that is a 65%-owned subsidiary of Shanghai Muliang;

 

Yunnan Muliang Animal Husbandry Development Co., Ltd. (“Yunnan Muliang” when individually referenced), (also referred to as云南牧粮畜牧发展有限公司), a PRC company that is an 80%-owned subsidiary of Shanghai Muliang;

 

Shanghai Zongbao Environmental Construction Co., Ltd. Cangzhou Branch (“Zongbao Cangzhou” when individually referenced), (also referred to as上海综宝环境工程有限公司沧州分公司), a PRC company that is a wholly-owned subsidiary of Shanghai Zongbao;

 

For the sake of clarity, this prospectus follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of our Chief Executive Officer will be presented as “Lirong Wang,” even though, in Chinese, Mr. Wang’s name is presented as “Wang Lirong.”

 

We have relied on statistics provided by a variety of publicly-available sources regarding China’s expectations of growth. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. We have sought to provide current information in this prospectus and believe that the statistics provided in this prospectus remain up-to-date and reliable, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus.

 

1

 

 

Overview

 

Muliang Agritech was formed under the laws of the state of Nevada on November 5, 2014. We conduct business primarily through Shanghai Muliang, a variable interest entity (“VIE”) formed under the laws of People’s Republic of China (the “PRC” or “China”).

 

We primarily engage in the manufacturing and distribution of organic fertilizer and the sales of agricultural products in the PRC. Our organic fertilizer products are sold under our brand names “Zongbao,” “Fukang,” and “Muliang.”

 

Through our patented technology, we process crop straw (including corn, rice, wheat, cotton, and other crops) into high quality organic nutritious fertilizers that are easily absorbed by crops in 3 hours. Straws are common agricultural by-product. In PRC, farmers usually remove the straw stubble that are remains after grains by burning them in order to continue farming on the same land. These activities have resulted in significant air pollution and damage the surface structure of the soil with loss of nutrients. We turn waste into treasure by transforming the straws into organic fertilizer, which also effectively reduces air pollution. The straw organic fertilizer we produce does not contain the heavy metals, antibiotics and harmful bacteria that are common in the traditional manure fertilizer. Our fertilizers also provide optimum levels of primary plant nutrients which including multi-minerals, proteins and carbohydrates that promote the healthiest soils capable of growing the healthy crops and vegetables. It can effectively reduce the use of chemical fertilizers and pesticides as well as reduce the penetration of large chemical fertilizers and pesticides into the soil and thus avoid water pollution. Therefore, our fertilizer can effectively improve fertility of soil, and the quality and safety of agricultural products.

 

We generated our revenue mainly from our organic fertilizers, which accounted for approximately 91.3% and 99.1% of our total revenue for the fiscal years ended December 31, 2018 and 2017, respectively. We currently have two integrated factories in Weihai City, Shandong Province, PRC to produce our organic fertilizers, which have been in operations since August 2015. We plan to improve the technology for our existing straw organic fertilizer production lines in the following aspects: (i) adopt more advanced automatic control technology for raw material feed to shorten the processing time of raw material, and (ii) manufacture powdered organic fertilizer instead of granular organic fertilizer production in order to avoid the drying and cooling process, as such will increase our production capacity.

 

With the focus of producing organic fertilizers, we also engage in the business of selling agriculture food products including apples, and as sales agent for other large agriculture companies in the PRC. In 2014, we rented 350 mu (about 57.66 acres) of mountainous land as apple orchard. The sales of apples generated less than 1% of our total revenue for the fiscal years ended December 31, 2018 and 2017, respectively. We expect to generate more revenues from the sales of apples as the apple orchards become more mature in the next few years.

 

In addition, we plan to engage in the processing and distribution of black goat products business commencing the fourth quarter of 2019. We are currently constructing a deep-processing slaughterhouse and processing plant which is expected to have the capacity of slaughtering 200,000 black goats per year in Chuxiong City, Yunnan Province, in China. Our black goat processing products including goat rib lets, goat loin roast, goat loin chops, goat rack, goat leg, goat shoulder, goat leg shanks, ground goat, goat stew meat, whole goat, half goat, lamb viscera, etc. We expect to start generate revenue from the black goat products in 2020.

 

Our assets mainly include: (i) 42,895 square meters of industrial land and 28,549 square meters of factory and office space located in Jinshan District, Shanghai City, (ii) 22,511 square meters of industrial land and 10,373 square meters of plant area and straw organic fertilizer production line in Weihai City, Shandong Province, and (iii) more than $2 million investment of land use right and the black goat slaughtering and processing plant located in Shuangbai County, Chuxiong City, Yunnan Province, in China.

 

As the factory area in Jinshan District, Shanghai City is too close to the urban area to produce straw organic fertilizer, some factory buildings, office buildings and spare land in Jinshan District, Shanghai City, have been leased to third parties.

 

Industry and Market Background

 

The straw in China is in large quantity, has wide variety and broad distribution, and the annual output of straw of is more than 700 million tons. The straw contains more than 3 million tons of nitrogen, more than 700,000 tons of phosphorus and nearly 7 million tons of potassium, equivalent to more than a quarter of China’s current fertilizer amount of use and equivalent to 300 million tons of standard coal. However, nearly 100 million tons of straw are burned directly in the fields every year, which not only damages the beneficial bacteria in the soil surface seriously, but also directly leads to severe air pollution and increases the greenhouse effect. With the significant amount of production of straws in China, so long as part of the straw can be recycled every year, it will bring huge sustainable recycling resources to the fertilizer industry. On November 25, 2015, the National Development and Reform Commission, the Ministry of Finance, the Ministry of Agriculture and the Ministry of Environmental Protection jointly issued a notice, requiring the utilization rate of straw to exceed 85% by 2020.

 

Market demand in China for organic fertilizer is significant. In 2015, the China national sales volume of organic fertilizers was 90 million tons. According to the current policy of encouraging less use of chemical fertilizer, improving the quality of agricultural products and restoring land, it is estimated that the demand of organic fertilizers will increase to 180 million tons by 2020. At the same time, according to a governmental advocate of increasing proportion of organic fertilizer to 50% of the total use of fertilizer, the demand in China for organic fertilizer will reach more than 500 million tons.

 

Straw organic fertilizer industry is an industry of ecological production and recycling economic.

 

2

 

 

Competitive Advantages

 

Quality Advantage: compared with the traditional compost manure fermented fertilizer, our product has high concentration of organic matter and small molecular organic nutrients that can be directly absorbed by crops rich in fulvic acid, polysaccharides and monosaccharides. The effective amount of our product is 50% of the amount of conventional organic fertilizer.

 

Safety advantage: compared with traditional livestock and poultry manure composting fermented fertilizer, our product generates less residue of heavy metals, antibiotics, toxic and harmful bacteria, avoids the pollution of soil, and ensures the quality and safety of agricultural products.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

the ability to include only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations disclosure; and

 

an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.

 

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our shares of common stock held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

Corporate Information

 

Our principal executive office is located at 2498 Wanfeng Highway, Lane 181, Fengjing Town, Jinshan District, Shanghai, China. The telephone number of our principal executive offices is (86) 21-67355092. The office space belongs to our President and Chief Executive Officer, Mr. Lirong Wang, who allows us to use the space for free. Our registered agent in the United States is Joseph Smith.

 

Offering Summary  

 

Following completion of this offering, our ownership will be as follows, assuming completion of the minimum and maximum offerings, respectively. To the extent we complete an offering between the minimum and maximum offerings, the percentage ownership of participants in this offering will between the below amounts:

 

 

 

  

3

 

 

The Offering

 

Shares Offered by us: Minimum:     shares of common stock
  Maximum:      shares of common stock
   
Shares Outstanding Prior to Completion of Offering: 56,341,953 shares of common stock
   
Shares to be Outstanding after Offering*: Minimum:      shares of common stock
  Maximum:       shares of common stock
Assumed Offering Price per Share: $
   
Gross Proceeds to Us Before Expenses: Minimum: $6,000,000
  Maximum: $15,000,000
   
Best efforts The underwriters are selling our shares of common stock on a “best efforts, minimum/maximum” basis. Accordingly, the underwriter has no obligation or commitment to purchase any securities. The underwriters are not required to sell any specific number of dollar amount of shares of common stock but will use its best efforts to sell the shares of common stock offered.
   
  We do not intend to close this offering unless we sell at least a minimum number of shares of common stock, at the price per share set forth on the cover page of this prospectus, to result in sufficient proceeds to list our shares of common stock on the Nasdaq Capital Market.
   
Escrow account The gross proceeds from the sale of the shares of common stock in this offering will be deposited in a non-interest bearing escrow account maintained by the escrow agent,              (the “Escrow Agent”). All check will be deposited directly into the escrow account and all wire transfers will be wired directly to the escrow account. The funds will be held in escrow until the Escrow Agent has advised us and the escrow agent that it has received $6,000,000, the minimum offering, in cleared funds. If we do not receive the minimum of $6,000,000 by 180 days from the effective date of this prospectus (and for a period of up to 60 additional days if extended by agreement of the Company and the underwriter) (the “Termination Date”)., all funds will be promptly returned to purchasers in this offering after the termination of the offering, without charge, deduction or interest. Prior to the Termination Date, in no event will funds be returned to you unless the offering is terminated. You will only be entitled to receive a refund of your subscription price if we do not raise a minimum of $6,000,000 by the Termination Date. No interest will be paid either to us or to you. See “Underwriting — Deposit of Offering Proceeds.”

 

4

 

 

Proposed Nasdaq Capital Market Symbol: “MULG”
   
Transfer Agent:

West Coast Stock Transfer Inc.

Transfer Agent

721 N. Vulcan Ave.

Suite 205

Encinitas, CA 92024

   
Risk Factors: Investing in these securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section of this prospectus before deciding to invest in our shares of common stock.
   
Closing of Offering: The offering contemplated by this prospectus will terminate upon the earlier of: (i) a date mutually acceptable to us and the Underwriter after the minimum offering is sold or (ii) 180 days from the effective date of this prospectus (and for a period of up to 60 additional days if extended by agreement of the Company and the underwriter) (the “Termination Date”). If we complete this offering, net proceeds will be delivered to us on the closing date (such closing date being the above mutually acceptable date on or before the Termination Date, provided the minimum offering has been sold). We will not complete this offering unless our application to list on the Nasdaq Capital Market is approved.
   
Use of Proceeds: We intend to use the proceeds from this offering to for advertising and marketing, working capital and general corporate purposes, including the expansion of our business. To the extent that we are unable to raise the maximum proceeds in this offering, we may not be able to achieve all of our business objectives in a timely manner. See “Use of Proceeds” for more information.
   
Dividend Policy: We have no present plans to declare dividends and plan to retain our earnings to continue to grow our business.

 

5

 

 

Summary Financial Information

 

In the table below, we provide you with historical selected financial data for the three months ended March 31, 2019 and the years ended December 31, 2018 and 2017 and for the three months ended March 31, 2019. This information is derived from our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period. When you read this historical selected financial data, it is important that you read it along with the historical financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    For the
Three Months Ended
March 31,
2019
    For the Fiscal
Year Ended
December 31,
2018
    For the Fiscal
Year Ended
December 31,
2017
 
    US$
(Unaudited)
    US$
(Audited)
    US$
(Audited)
 
Statement of operation data:                  
Revenues   $ 2,225,368     $ 13,205,024     $ 737,563  
Operating expenses   $ 518,556     $ 1,632,042     $ 1,674,061  
Income/(Loss) from operations   $ 367,936     $ 3,912,956     $ (1,527,734 )
Provision for income taxes   $ 97,860     $ (25,542 )   $ 26,334  
Net income/(Loss)   $ 445,587     $ 4,473,819     $ (2,034,858 )
Earnings per share, basic and diluted (1)   $ 0.01     $ 0.08     $ (0.04 )
Weighted average ordinary shares outstanding (1)   $ 56,341,718     $ 56,170,859     $ 56,000,000  
                         
Balance sheet data                        
Current assets   $ 6,559,963     $ 6,144,130     $ 870,888  
Total assets   $ 25,509,626     $ 24,813,602     $ 20,048,055  
Current liabilities   $ 13,145,492     $ 13,263,248     $ 11,578,988  
Total liabilities                        
Total equity   $ 8,637,015     $ 8,095,811     $ 930,280  

    

6

 

 

RISK FACTORS

 

An investment in our shares of common stock involves a high degree of risk. Before deciding whether to invest in our shares of common stock, you should consider carefully the risks described below, together with all of the other information set forth in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and related notes. If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be materially and adversely affected, which could cause the trading price of our shares of common stock to decline, resulting in a loss of all or part of your investment. The risks described below and in the sections referenced above are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business. You should only consider investing in our shares of common stock if you can bear the risk of loss of your entire investment.

 

Risks Related to Our Business and Industry

 

Our fertilizer business is seasonal and affected by factors beyond our control, which may cause our sales and operating results to fluctuate significantly.

 

The sale of products from our fertilizer-related segments is partially dependent upon planting and growing seasons, which vary from year to year, and are expected to result in both seasonal patterns and substantial fluctuations in quarterly sales and profitability. Different from the traditional organic fertilizer that mostly be only used as starter fertilizer. Our products can be used as both the starter fertilizer and regular fertilizer which can be applied during the all the periods through the crops’ growth. Weather conditions and natural disasters, such as heavy rains, hail, floods, freezing conditions, windstorms or fire, also affect decisions by our distributors, direct customers and end users about the types and amounts of products to use and the timing of harvesting and planting. As we increase our sales in our current markets and expand into new markets in different geographies, it is possible that we may experience different seasonality patterns in our business.

 

Disruptions may lead to delays in harvesting or planting by growers which can result in pushing orders to a future quarter, which could negatively affect results for the quarter in question and cause fluctuations in our operating results. Seasonal variations may be especially pronounced because our product lines are mainly sold in China. Planting and growing seasons, climatic conditions and other variables on which sales of our products are dependent vary from year to year and quarter to quarter. As a result, we may experience substantial fluctuations in quarterly sales.

 

The overall level of seasonality in our business is difficult to evaluate as a result of our relatively early stage of development, our limited number of commercialized products, our expansion into new geographical territories, the introduction of new products and the timing of introductions of new products. Even though we have conducted protective methods, the Company does have insufficient inventory in April, May, October and November. It is possible that our business may be more seasonal or experience seasonality in different periods than anticipated. Other factors may also contribute to the unpredictability of our operating results, including the size and timing of significant distributor transactions, the delay or deferral of use of our commercial technology or products and the fiscal or quarterly budget cycles of our direct customers, distributors, licensees and end users. Customers may purchase large quantities of our products in a particular quarter to store and use over long periods of time or time their purchases to manage their inventories, which may cause significant fluctuations in our operating results for a particular quarter or year.

 

Unavoidable Insufficient Inventory during busy seasons may cause us to lose some portion of our sales.

 

Traditional organic fertilizers do have seasonal sales because their use can only be applied as starter fertilizers before the crops are planted. Our organic fertilizers can be used as a starter fertilizer or as regular fertilizers which can be applied during the growing period of the crops to supplement the nutrients needed for growth. The Company’s inventory during the peak seasons (such as April to May, and October to November) is insufficient. The Company’s fertilizer production capacity has been upgraded from the original 50,000 tons to 70,000 tons, however, the seasonal inventory supply is still unavoidable. The inevitable selling shortage may cause us to lose some portion our sales.

 

Competition in fertilizer and agricultural industrial products is intense and requires continuous technological development.

 

We currently face significant direct and indirect competition in the markets in which we operate. The markets for fertilizers are intensely competitive and rapidly changing. Many companies engage in the development of fertilizers, and speed in commercializing a new product can be a significant competitive advantage.

 

In most segments of the fertilizer markets, the number of products available to end customers is steadily increasing as new products are introduced. We may be unable to compete successfully against our current and future competitors, which may result in price reductions, reduced margins and the inability to achieve market acceptance for products containing our seed traits and technology. In addition, many of our competitors have substantially greater financial, marketing, sales, distribution and technical resources than us and some of our competitors have more experience in R&D, regulatory matters, manufacturing and marketing. We anticipate increased competition in the future as new companies enter the market and new technologies become available. Programs to improve genetics and crop protection chemicals are generally concentrated within a relatively small number of large companies, while non-genetic approaches are underway with broader set of companies. Mergers and acquisitions in the plant science, specialty food ingredient and agricultural biotechnology seed and chemical industries may result in even more resources being concentrated among a smaller number of our competitors.

 

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Our technology may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors, which will prevent or limit our ability to generate revenues from the commercialization of our seed traits and technology. At the same time, the expiration of patents covering existing products reduces the barriers to entry for competitors. Our ability to compete effectively and to achieve commercial success depends, in part, on our ability to control manufacturing and marketing costs; effectively price and market our products, successfully develop an effective marketing program and an efficient supply chain, develop new products with properties attractive to food manufacturers or growers and commercialize our products quickly without incurring major regulatory costs. We may not be successful in achieving these factors and any such failure may adversely affect our business, results of operations and financial condition.

 

We may not be successful in developing marketable or commercial technologies.

 

Through our patented technology, we process crop straw (including corn, rice, wheat, cotton, and other crops) into high quality organic nutritious fertilizer rich in small molecules, easily absorbed by crops in 3 hours. Our success depends in part on our ability to identify and develop high value fertilizer and agriculture industrial technologies for use in commercial products. Through our technology sourcing and product development collaborations we commit substantial efforts and other resources to accomplish this. It may take several years, if at all, before many of our products complete the development process and become available for production and commercialization.

 

As of the date of this registration statement, many of our products have been commercialized by our patented technology. There can be no assurance that our future fertilizer productivity and agriculture industrial technologies will be viable for commercial use, or that we will be able to generate revenues from those technologies, in a significant manner or at all. If seeds or other products that utilize our fertilizer or technology are unsuccessful in achieving their desired effect or otherwise fail to be commercialized, we will not receive revenues from our customers or royalty payments from the commercialization of the fertilizer and technologies we develop, which could materially and adversely affect our business, financial condition, results of operations and growth strategy.

 

Fertilizers containing the following traits or biological treatments that we develop may be unsuccessful or fail to achiev e commercialization for any of the following reasons:

 

our fertilizers may not be successfully validated in the target crops;

 

our fertilizers may not have the desired effect on the relevant crop sought by our end market;

 

we or our joint ventures or collaborators may be unable to obtain the requisite regulatory approvals for the fertilizers;

 

our competitors may launch competing or more effective fertilizers;

 

we may be unable to patent and/or obtain breeders’ rights or any other intellectual property rights on our traits and technologies in the necessary jurisdictions;

 

even if we obtain patent and/or breeders’ rights or any other intellectual property rights on our fertilizers or processing technologies, such rights may be later challenged by competitors or other parties; and

 

even if we obtain patent and/or breeders’ rights or any other intellectual property rights on our fertilizers, competitors may design competing products that do not infringe these intellectual property rights.

 

If we are unable to compete successfully with our competitors, our financial condition and results of operations may be harmed.

 

We encounter intense competition in each of our business segments on a national, regional and local level. Competition in the industry is primarily based on quality of services, brand name recognition, geographic coverage and range of services. New and existing competitors may offer competitive rates, greater convenience or superior services, which could attract customers away from us, resulting in lower revenues for our operations. Competition among fertilizer companies may cause a decrease in price of sales to attract or retain talented employees.

 

Our major competitors    are Shijiazhuang Xixing Fertilizer Science and Technology Limited, Nanjing Ningliang Bio-chemistry Engineering Limited, Shijiazhuang Jintaiyang Biology Organic Fertilizer Limited, Beijing Wotu Tiandi Biological Science Limited, Zhenzhou Yongfeng Biology Fertilizer Limited, Shandong Jianong Biological Enginerring Limited, Beijing aeronautics Hengfeng Technology Limited, Beijing Century Armstrong Biological Technology Limited, GengLiduo Biological Techonology Limited.

 

We do not have multinational competitors. Due to the high price of organic fertilizers from other countries, China has little organic fertilizer imports. The fertilizers produced by international fertilizer companies entering the Chinese organic fertilizer market are mainly special functional fertilizers such as foliar fertilizers. These functional fertilizers are not sold well in the domestic market due to high price.

 

Some of our competitors may have a broader national presence than us and may have a more established branding recognition than us in major markets, and also may have more financial or other resources than us. Others may have smaller aggregate businesses than us, but may be more established and have greater market presence and brand name recognition on a local or regional basis. We are also subject to competition from other large national and international companies. These companies may have more financial or other resources than us. If we fail to compete effectively, our business operations and financial condition will suffer.

 

The loss of any of our key suppliers and/or customers could have a materially adverse effect on our results of operations.

 

We consider our major suppliers in each period to be those suppliers that accounted for more than 10% of overall purchases in such period. For the years ended December 31, 2018 and 2017, 57% and 53% of our supplies came from two key suppliers, respectively. Although we believe that we can locate replacement suppliers readily on the market for prevailing prices and that we may not have significant difficulty replacing a given supplier, any difficulty in replacing such a supplier could adversely affect our company’s performance to the extent it results in higher prices, slower supply chain and ultimately less desirable results of operations. 

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In addition, for the years ended December 31, 2018 and 2017, two key customers accounted for 60% and 31% of our revenues, respectively. As the majority of our revenues are driven by individual orders for organic fertilizers, there can be no assurance that we will maintain or improve the relationships with customers who does not have long-term contracts with us. Our major customers often change each period based on when a given order is placed. If we cannot maintain long-term relationships with major customers or replace major customers from period to period with equivalent customers, the loss of such sales could have an adverse effect on our business, financial condition and results of operations.

 

Our product development cycle is lengthy and uncertain and we may never generate revenues or earn revenues on the sale of our products currently in development.

 

The research and development in the crop productivity and agriculture biotech industries is expensive, complex, prolonged and uncertain. We may spend many years and dedicate significant financial and other resources developing products that may never generate revenues or come to market. Our process of developing and commercializing technologies involves several phases and can take several years from discovery to commercialization of a product.

 

Development of new or improved agricultural products involves risks of failure inherent in the development of product s based on innovative and complex technologies. These risks include the possibility that:

 

our products will fail to perform as expected in the field;

 

our products will not receive necessary regulatory permits and governmental clearances in the markets in which we intend to sell them;

 

our products may have adverse effects on consumers;

 

consumer preferences, which are unpredictable and can vary greatly, may change quickly, making our products no longer desirable;

 

our competitors develop new products that have other more appealing characteristics than our products;

 

our products will be viewed as too expensive by food companies or growers as compared to competitive products;

 

our products will be difficult to produce on a large scale or will not be economical to grow;

 

intellectual property and other proprietary rights of third parties will prevent us, our research and development partners, or our licensees from marketing and selling our products;

 

we may be unable to patent or otherwise obtain intellectual property protection for our discoveries in the necessary jurisdictions;

 

we or the customers that we sell our products to may be unable to fully develop or commercialize our products in a timely manner or at all; and

 

third parties may develop superior or equivalent products.

 

We intend to continue to invest in research and development including additional and expanded field testing to validate potential products in real world conditions. Because of the long product development cycle and the complexities and uncertainties associated with biotech and agricultural industrial technologies, there can be no assurance that we will ever generate significant revenues from the technologies or products that we are currently developing without significant delay, without the incurrence of unanticipated costs or at all.

 

We depend on our key personnel and research employees and we may be adversely affected if we are unable to attract and retain qualified scientific and business personnel.

 

Our business is dependent on our ability to recruit and maintain highly skilled and educated individuals through direct employment or collaboration arrangements, with expertise in a range of disciplines, including biology, chemistry, plant genetics, agronomics, mathematics programming and other subjects relevant to our business. Our ability to recruit such a work force depends in part on our ability to maintain our market leadership in agricultural biotech industry in China. Maintaining our ability to attract highly-skilled workers and leading scientific institutions depends in part on our ability to maintain a strong technology platform and state-of-the-art facilities, as well as our ability to consistently and successfully commercialize our technology. There can be no assurance that we will be able to maintain leading scientific capabilities or continue to successfully maintain advanced technology in the market.

 

We do not enter into non-compete agreements with our employees, and therefore we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

 

We do not enter into non-compete agreements with our employees, which prevents us from limiting our key employees from joining our competitors or competing directly against us. As a result, we may be unable to prevent our competitors from benefiting from the expertise of such employees. Direct competition by a former employee could materially adversely affect our business, results of operations and ability to capitalize on our proprietary information.

 

9

 

 

We have a limited operating history in our market, which makes it difficult to evaluate our future prospects.

 

We started engaging in our business in the last few years and have limited revenues to date. As our business develops or in response to competition, we may continue to introduce new products and services or make adjustments to our existing offerings and business model. In connection with the introduction of new products or in response to general economic conditions, we may impose more stringent borrower qualifications to ensure the quality of loans facilitated by our companies, which may negatively affect the growth of our business. Any significant change to our business model may not achieve expected results and may have a material and adverse impact on our financial conditions and results of operations. It is therefore difficult to effectively assess our future prospects. The risks and challenges we encounter or may encounter in this developing and rapidly evolving market may have impacts on our business and prospects. These risks and challenges include our ability to, among other things:

 

  navigate an evolving regulatory environment;

 

  expand the base of borrowers and lenders;

 

  broaden our loan product offerings;

 

  enhance our risk management capabilities;

 

  improve our operational efficiency;

 

  cultivate a vibrant consumer finance ecosystem;

 

  maintain the security of our IT infrastructure and the confidentiality of the information provided and utilized across our platform;

 

  attract, retain and motivate talented employees; and

 

  defend ourselves against litigation, regulatory, intellectual property, privacy or other claims.

 

If we fail to educate potential borrowers and lenders about the value of our services, if the market for our services does not develop as we expect, or if we fail to address the needs of our target market, or other risks and challenges, our business and results of operations will be harmed.

 

The loss of any of our key customers could reduce our revenues and our profitability.

 

For the years ended December 31, 2018 and 2017, purchases from two customers consisted 31% and 60% of our revenue, respectively. As the majority of our revenues are driven by individual orders for fertilizer products, there can be no assurance that we will maintain or improve the relationships with customers who does not have long-term contracts with us. Our major customers often change each period based on when a given order is placed. If we cannot maintain long-term relationships with major customers or replace major customers from period to period with equivalent customers, the loss of such sales could have an adverse effect on our business, financial condition and results of operations.

 

Any failure of any of our key suppliers to deliver necessary materials could result in delays in our products development or marketing schedules.

 

For the years ended December 31, 2018 and 2017, two suppliers accounted 53% and 57% of our purchases, respectively. We are dependent on our suppliers for our products. Our suppliers may fail to meet timelines or contractual obligations or provide us with sufficient products, which may adversely affect our business. Certain of our contracts with key suppliers, can be terminated by the supplier upon giving notice within a certain period and restrict us from using other suppliers. Failure to appropriately structure or adequately manage our agreements with third parties may adversely affect our supply of products. We are also subject to credit risk with respect to our third-party suppliers. If any such suppliers become insolvent, an appointed trustee could potentially ignore the service contracts we have in place with such party, resulting in increased charges or the termination of the service contracts. We may not be able to replace a service provider within a reasonable period of time, on as favorable terms or without disruption to our operations. Any adverse changes to our relationships with third-party suppliers could have a material adverse effect on our image, brand and reputation, as well as on our business, financial condition and results of operations.

  

In addition, to the extent that our creditworthiness is impaired, or general economic conditions decline, certain of our key suppliers may demand onerous payment terms that could materially adversely affect our working capital position, or such suppliers may refuse to continue to supply to us. A number of our key suppliers have taken out trade credit insurance on our ability to pay them. To the extent that such trade credit insurance becomes unobtainable or more expensive due to market conditions, we may face adverse changes to payment terms by our key suppliers or they may refuse to continue to supply us.

 

If we do not compete effectively, our results of operations could be harmed.

 

Our industry in China is intensely competitive and evolving. Our competitors operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their services. Our competitors may also have longer operating histories, more extensive borrower or lender bases, greater brand recognition and brand loyalty and broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form a strategic alliance with one or more of our competitors. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our services could stagnate or substantially decline, we could experience reduced revenues or our services could fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations. 

10

 

    

If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed.

 

The continued development and success of our business relies on the recognition of our brands. We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing borrowers and lenders to our services. Successful promotion of our brand and our ability to attract qualified borrowers and sufficient lenders depend largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our services. Our efforts to build our brand have caused us to incur significant expenses, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business. 

 

If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

 

Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. We also have a history of not filing our periodic reports on time due to uncontrollable reasons. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

One material weakness that has been identified related to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to properly address complex U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to fulfill U.S. GAAP and SEC financial reporting requirements. The other material weakness that has been identified related to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP.

 

We have implemented a number of measures to address the material weaknesses that have been identified in connection with the audits of our consolidated financial statements as of and for the two years ended December 31, 2018 and 2017. However, there is no assurance that we will not have any material weakness in the future. Failure to discover and address any control deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud. Ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

 

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results.

 

If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common shares.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, we are required to prepare assessments regarding internal controls over financial reporting. In connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected. We determined that our disclosure controls and procedures over financial reporting are not effective and were not effective as of December 31, 2018 and 2017.

 

The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that we will implement and maintain adequate controls over our financial process and reporting in the future or that the measures we will take will remediate any material weaknesses that we may identify in the future.

 

11

 

 

Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.

 

Our business operations depend on the continued services of our senior management, particularly the executive officers named in this prospectus. While we have provided different incentives to our management, we cannot assure you that we can continue to retain their services. We currently do not carry a “key man” life insurance on the officers. Therefore, if one or more of our key executives were unable or unwilling to continue in their present positions, we may incur substantial cost or may not be able to replace them at all. Consequently, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected. If that’s the case, we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

 

Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.

 

We believe our success depends on the efforts and talent of our employees, including risk management, software engineering, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

 

In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve borrowers and lenders could diminish, resulting in a material adverse effect to our business.

 

Increases in labor costs in the PRC may adversely affect our business and results of operations.

 

The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.

 

We do not have any business insurance coverage.

 

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

 

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

 

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology service failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products and services on our service.

 

Our business could also be adversely affected by the effects of virus, flu and other diseases. Our business operations could be disrupted if any of our employees is suspected of having virus, flu and other diseases, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

 

12

 

 

We may be subject to the general risks underlying the agriculture industry in PRC market .

 

The agriculture industry in the PRC market has been mature. Particularly, we are principally engaged in the fertilizer processing and distribution business in the People’s Republic of China. Therefore, we need to be cautious in selecting our business focus and expansion strategy, and we should be constantly aware of the innovation risk, technology risk and market risk in the industries. If we fail to make an accurate judgment of the current market, our performance can be severely impacted.

 

We may be adversely affected by global economic conditions.

 

Our ability to continue to develop and grow our business, build proprietary distribution channels and generate revenues from product sales and royalty payments may be adversely affected by global economic conditions in the future, including instability in credit markets, declining consumer and business confidence, fluctuating commodity prices and interest rates, volatile exchange rates and other challenges that could affect the global economy such as the changing financial regulatory environment. For example, our customers and licensees may experience deterioration of their businesses, cash flow shortages or difficulties obtaining financing, which could adversely affect the demand for our technologies, products and services. In addition, our earnings may be adversely affected by fluctuations in the price of certain commodities, such as grains, milk, meat, biofuels and biomaterials. If commodity prices are negatively impacted, the value of our products could be directly and negatively impacted. Additionally, growers’ incomes have historically been negatively affected by commodity prices. As a result, fluctuations in commodity prices could have an impact on growers’ purchasing decisions and negatively affect their ability and decisions to purchase our seeds or products that incorporate our proprietary technology. We cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

 

Changes in laws and regulations to which we are subject, or to which we may become subject in the future, may materially increase our costs of operation, decrease our operating revenues and disrupt our business.

 

Laws and regulatory standards and procedures that impact our business are continuously changing. Respond ing to these changes and meeting existing and new requirements may be costly and burdensome. Changes in laws and regulations may occur that could:

 

impair or eliminate our ability to source technology and develop our products, including validating our products through field trials and passing biosafety evaluations;

 

increase our compliance and other costs of doing business through increases in the cost to protect our intellectual property, including know-how, trade secrets and regulatory data, or increases in the cost to obtain the necessary regulatory approvals to commercialize and market the products we develop directly or jointly;

 

require significant product redesign or redevelopment;

 

render our seed traits and technology and products that incorporate them less profitable or less attractive compared to competing products;

 

reduce the amount of revenues we receive from government grants, licenses or other royalties; and

 

discourage us and other collaborators from offering, and end markets from purchasing, products that incorporate our seed traits and technology.

 

Any of these events could have a material adverse effect on our business, results of operations and financial condition. Legislation and jurisprudence on intellectual property in the key markets where we seek protection, primarily in China, is evolving and changes in laws could affect our ability to obtain or maintain intellectual property protection for our products. Any changes to these existing laws and regulations may materially increase our costs, decrease our revenues and disrupt our business.

  

13

 

 

The overall agricultural industry is susceptible to commodity price changes and we, along with our food manufacturing customers and grower customers, are exposed to market risks from changes in commodity prices.

 

Changes in the prices of certain commodity products could result in higher overall cost along the agricultural supply chain, which may negatively affect our ability to commercialize our products We will be susceptible to changes in costs in the agricultural industry as a result of factors beyond our control, such as general economic conditions, seasonal fluctuations, weather conditions, demand, food safety concerns, product recalls and government regulations. As a result, we may not be able to anticipate or react to changing costs by adjusting our practices, which could cause our operating results to deteriorate.

 

Our operations are subject to various health and environmental risks associated with our use, handling and disposal of potentially toxic materials.

 

We are subject to numerous federal, state, local and foreign environmental, health and safety laws and regulations, including those governing laboratory procedures, the handling, use, storage, treatment, manufacture and disposal of wastes, discharge of pollutants into the environment and human health and safety matters.

 

Although there are no hazardous substances in the raw materials used by us that will affect and damage the company's employees, factory, other property and the environment. The safety of raw materials is also one of the requirements when applying for the fertilizer registration certificate. We cannot completely eliminate the risk of contamination or discharge and any resultant injury from these materials. If these risks were to materialize, we could be subject to fines, liability, reputational harm or otherwise adverse effects on our business. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, or may otherwise be required to remedy the contamination, and our liability may exceed any insurance coverage and our total assets Furthermore, compliance with environmental, health and safety laws and regulations may be expensive and may impair our Research &Development efforts. If we fail to comply with these requirements, we could incur substantial costs and liabilities, including civil or criminal fines and penalties, clean-up costs or capital expenditures for control equipment or operational changes necessary to achieve and maintain compliance In addition, we cannot predict the impact on our business of new or amended environmental, health and safety laws or regulations or any changes in the way existing and future laws and regulations are interpreted and enforced. These current or future laws and regulations may impair our research, development or production efforts.

  

Failure to maintain or enhance our brands or image could have a material and adverse effect on our business and results of operations.

 

We believe our brands are associated with a well-recognized, integrated fertilizers company in the local markets that it operates, with consistent high-quality products end customers in China. Our brands are integral to our sales and marketing efforts. Our continued success in maintaining and enhancing our brand and image depends to a large extent on our ability to satisfy customer needs by further developing and maintaining quality of services across our operations, as well as our ability to respond to competitive pressures. If we are unable to satisfy customer needs or if our public image or reputation were otherwise diminished, our business transactions with our customers may decline, which could in turn adversely affect our results of operations.

 

Any failure to protect our trademarks and other intellectual property rights could have a negative impact on our business.

 

We believe our intellectual property rights are critical to our success. Any unauthorized use of our intellectual property rights could harm our competitive advantages and business. Historically, China has not protected intellectual property rights to the same extent as the United States, and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing unauthorized use is difficult. The measures we take to protect our intellectual property rights may not be adequate. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately protect our brand, trademarks and other intellectual property rights, we may lose these rights and our business may suffer materially.

  

14

 

 

Increases in labor costs in the PRC may adversely affect our business and our profitability.

 

China’s economy has experienced increases in labor costs in recent years. China’s overall economy and the average wage in China are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing prices for our products or services, our profitability and results of operations may be materially and adversely affected.

 

In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract Law, that became effective in January 2008 and its implementing rules that became effective in September 2008 and its amendments that became effective in July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. Besides, pursuant to the Labor Contract Law and its amendments, dispatched employees are intended to be a supplementary form of employment and the fundamental form should be direct employment by enterprises and organizations that require employees. Further, it is expressly stated in the Interim Provisions on Labor Dispatch that became effective on March 1, 2014 that the number of seconded employees an employer uses may not exceed 10% of its total labor force and the employer has a two-year transition period to comply with such requirement. Our VIE and its consolidated subsidiaries and consolidated branch offices had used seconded employees for their principal business activities. The transition period ended on February 29, 2016, and those PRC subsidiaries have taken steps to decrease the number of seconded employees. If the relevant PRC subsidiaries are deemed to have violated the limitation on the use of seconded employees under the relevant labor laws and regulations, we may be subject to fines and incur other costs to make required changes to our current employment practices.

 

As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practice does not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.

 

Risks Related to Our Corporate Structure and Doing Business in the PRC

 

If the PRC government deems that any of our contractual arrangements, do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Foreign ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (except e-commerce) and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment promulgated in 2007, as amended in 2011 and in 2015, respectively, and other applicable laws and regulations.

 

It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. In particular, in January 2015, the Ministry of Commerce, or MOC, published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft would be signed into law and whether the final version would have any substantial changes from the draft. Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations” below. If the ownership structure, contractual arrangements and business of our company, are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income, shutting down our servers, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from this offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations.

 

15

 

 

PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.

 

In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which replaces the previous SAFE Circular 75. SAFE Circular 37 requires PRC residents, including PRC individuals and PRC corporate entities, to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we may make in the future.

 

Under SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose vehicles, or SPVs, are required to register such investments with SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE to reflect any material change. If any PRC resident shareholder of such SPV fails to make the required registration or to update the registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiaries in China. In February, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound direct investments, including those required under SAFE Circular 37, must be filed with qualified banks instead of SAFE. Qualified banks should examine the applications and accept registrations under the supervision of SAFE. We have used our best efforts to notify PRC residents or entities who directly or indirectly hold shares in our holding company and who are known to us as being PRC residents to complete the foreign exchange registrations. However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. We cannot assure you that all other shareholders or beneficial owners of ours who are PRC residents or entities have complied with, and will in the future make, obtain or update any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

 

Furthermore, as these foreign exchange and outbound investment related regulations are relatively new and their interpretation and implementation has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border investments and transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. We cannot assure you that we have complied or will be able to comply with all applicable foreign exchange and outbound investment related regulations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

 

Changes in the policies of the PRC government could have a significant impact upon our ability to operate profitably in the PRC. 

 

We conduct all of our operations and all of our revenue is generated in the PRC. Accordingly, economic, political and legal developments in the PRC will significantly affect our business, financial condition, results of operations and prospects. Policies of the PRC government can have significant effects on economic conditions in the PRC and the ability of businesses to operate profitably. Our ability to operate profitably in the PRC may be adversely affected by changes in policies by the PRC government, including changes in laws, regulations or their interpretation, particularly those dealing with the Internet, including censorship and other restriction on material which can be transmitted over the Internet, security, intellectual property, money laundering, taxation and other laws that affect our ability to operate our website.

  

Because our business is dependent upon government policies that encourage a market-based economy, change in the political or economic climate in the PRC may impair our ability to operate profitably, if at all. 

 

Although the PRC government has been pursuing a number of economic reform policies for more than two decades, the PRC government continues to exercise significant control over economic growth in the PRC. Because of the nature of our business, we are dependent upon the PRC government pursuing policies that encourage private ownership of businesses. Restrictions on private ownership of businesses would affect the securities business in general and businesses using real estate service in particular. We cannot assure you that the PRC government will pursue policies favoring a market-oriented economy or that existing policies will not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life in the PRC.

 

16

 

 

PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitable.

 

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.

 

Because our business is conducted in RMB and the price of our shares of common stock is quoted in United States dollars, changes in currency conversion rates may affect the value of your investments.

 

Our business is conducted in the PRC, our books and records are maintained in RMB, which is the currently of the PRC, and the financial statements that we file with the SEC and provide to our shareholders are presented in United States dollars. Changes in the exchange rate between the RMB and dollar affect the value of our assets and the results of our operations in United States dollars. The value of the RMB against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions and perceived changes in the economy of the PRC and the United States. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue and financial condition. Further, our shares offered by this prospectus are offered in United States dollars, we will need to convert the net proceeds we receive into RMB in order to use the funds for our business. Changes in the conversion rate between the United States dollar and the RMB will affect that amount of proceeds we will have available for our business.  

 

Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a “resident enterprise” of China, which could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

The EIT Law and its implementing rules provide that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” under PRC tax laws. The implementing rules promulgated under the EIT Law define the term “de facto management bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an enterprise. In April 2009, the State Administration of Taxation, or SAT, issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management bodies” of a PRC-controlled enterprise that is incorporated offshore is located in China. However, there are no further detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body.” Although our board of directors and management are located in the PRC, it is unclear if the PRC tax authorities would determine that we should be classified as a PRC “resident enterprise.”

 

If we are deemed as a PRC “resident enterprise,” we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax rate of 25%, although dividends distributed to us from our existing PRC subsidiary and any other PRC subsidiaries which we may establish from time to time could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient” status. This could have a material and adverse effect on our overall effective tax rate, our income tax expenses and our net income. Furthermore, dividends, if any, paid to our shareholders may be decreased as a result of the decrease in distributable profits. In addition, if we were considered a PRC “resident enterprise”, any dividends we pay to our non-PRC investors, and the gains realized from the transfer of our shares of common stock may be considered income derived from sources within the PRC and be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty). It is unclear whether holders of our shares of common stock would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. This could have a material and adverse effect on the value of your investment in us and the price of our shares of common stock.

 

There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.

 

Under the PRC EIT Law and its implementation rules, the profits of a foreign invested enterprise generated through operations, which are distributed to its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Our PRC subsidiary is wholly-owned by our Hong Kong subsidiary. Moreover, under the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, the tax payer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. These beneficial owner of the relevant dividends, and (2) the corporate shareholder to receive dividends from the PRC subsidiary must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the State Administration of Taxation promulgated the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties on October 27, 2009, which limits the “beneficial owner” to individuals, projects or other organizations normally engaged in substantive operations, and sets forth certain detailed factors in determining the “beneficial owner” status. In current practice, a Hong Kong enterprise must obtain a tax resident certificate from the relevant Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority. As of the date of this prospectus, we have not commenced the application process for a Hong Kong tax resident certificate from the relevant Hong Kong tax authority, and there is no assurance that we will be granted such a Hong Kong tax resident certificate.

 

Even after we obtain the Hong Kong tax resident certificate, we are required by applicable tax laws and regulations to file required forms and materials with relevant PRC tax authorities to prove that we can enjoy 5% lower PRC withholding tax rate. We intends to obtain the required materials and file with the relevant tax authorities when it plans to declare and pay dividends, but there is no assurance that the PRC tax authorities will approve the 5% withholding tax rate.

17

 

 

If we become directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation.

 

U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from developing our growth. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of our stock.  

 

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.

 

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by China Securities Regulatory Commission, a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of us, our SEC reports, other filings or any of our other public pronouncements.

  

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.

 

Substantially all of our operations are located in China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

 

The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

 

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.

 

Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to us.

 

The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.

 

Although we have taken measures to comply with the laws and regulations that are applicable to our business operations, including the regulatory principles raised by the CBRC, and avoid conducting any activities that may be deemed as illegal fund-raising, forming capital pool or providing guarantee to investors under the current applicable laws and regulations, the PRC government authority may promulgate new laws and regulations regulating the direct lending service industry in the future. We cannot assure you that our practices would not be deemed to violate any PRC laws or regulations relating to illegal fund-raising, forming capital pools or the provision of credit enhancement services. Moreover, we cannot rule out the possibility that the PRC government will institute a license requirement covering our industry at some point in the future. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.

 

18

 

 

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.

 

Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

The MOC published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOC is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

 

Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs. Once an entity is considered to be an FIE, it may be subject to the foreign investment restrictions or prohibitions set forth in a “negative list” to be separately issued by the State Council later. If an FIE proposes to conduct business in an industry subject to foreign investment “restrictions” in the “negative list,” the FIE must go through a market entry clearance by the MOC before being established. If an FIE proposes to conduct business in an industry subject to foreign investment “prohibitions” in the “negative list,” it must not engage in the business. However, an FIE that is subject to foreign investment “restrictions,” upon market entry clearance, may apply in writing for being treated as a PRC domestic investment if it is ultimately “controlled” by PRC government authorities and its affiliates and/or PRC citizens. In this connection, “control” is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business operations. Once an entity is determined to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “negative list,” to be separately issued by the State Council at a later date, if the FIE is engaged in an industry listed in the negative list. Unless the underlying business of the FIE falls within the negative list, which calls for market entry clearance by the MOC, prior approval from the government authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the FIE.

 

The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is included in the “negative list” as restricted industry, the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as FIEs and any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.

 

f the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions, such as MOC market entry clearance or certain restructuring of our corporate structure and operations, to be completed by companies with existing VIE structure like us, there may be substantial uncertainties as to whether we can complete these actions in a timely manner, or at all, and our business and financial condition may be materially and adversely affected.

 

The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from an investment implementation report and an investment amendment report that are required for each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.

 

19

 

 

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.

 

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.

 

The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the State Council Information Office, the MITT, and the Ministry of Public Security). The primary role of this new agency is to facilitate the policy-making and legislative development in this field, to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry.

 

The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, issued by the MITT in July 2006, prohibits domestic telecommunication service providers from leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunications business in China. According to this circular, either the holder of a value-added telecommunication services operation permit or its shareholders must directly own the domain names and trademarks used by such license holders in their provision of value-added telecommunication services. The circular also requires each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. If an ICP License holder fails to comply with the requirements and also fails to remedy such non-compliance within a specified period of time, the MITT or its local counterparts have the discretion to take administrative measures against such license holder, including revoking its ICP License.

 

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.

 

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Under PRC laws and regulations, we are permitted to utilize the proceeds from our offering to fund our PRC subsidiary by making loans to or additional capital contributions to our PRC subsidiary, subject to applicable government registration and approval requirements.

 

Any loans to our PRC subsidiary, which are treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiary to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the MOC or its local counterpart and the amount of registered capital of such foreign-invested company.

  

We may also decide to finance our PRC subsidiary by means of capital contributions. These capital contributions must be approved by the MOC or its local counterpart. On March 30, 2015, SAFE promulgated Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. Circular 19 came into force and replaced both previous Circular 142 and Circular 36 on June 1, 2015. Circular 19 allows all foreign-invested enterprises established in the PRC to use their foreign exchange capitals to make equity investment and removes certain other restrictions provided in Circular 142. However, Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 19 could result in severe monetary or other penalties. These circulars may significantly limit our ability to use RMB converted from the cash provided by our offshore financing activities to fund the establishment of new entities in China by our PRC subsidiary, to invest in or acquire any other PRC companies through our PRC subsidiary, or to establish new variable interest entities in the PRC.

 

20

 

 

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiary or future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from our offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

 

We are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. We have not made adequate employee benefit payments. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

 

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in August 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who have been granted options or other awards are subject to these regulations. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.

 

Regulatory bodies of the United States may be limited in their ability to conduct investigations or inspections of our operations in China.

 

From time to time, the Company may receive requests from certain U.S. agencies to investigate or inspect the Company’s operations, or to otherwise provide information. While the Company will be compliant with these requests from these regulators, there is no guarantee that such requests will be honored by those entities who provide services to us or with whom we associate, especially as those entities are located in China. Furthermore, an on-site inspection of our facilities by any of these regulators may be limited or entirely prohibited. Such inspections, though permitted by the Company and its affiliates, are subject to the capricious nature of Chinese enforcers, and may therefore be impossible to facilitate.

 

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The laws and regulations governing the online consumer finance industry in China are evolving rapidly. If any of our business practices is deemed to violate any PRC laws or regulations, or if our arrangements with financing partners are adjusted, we may have to change our business model, and our business, financial condition and results of operations would be materially and adversely affected.

 

On December 1, 2017, the Internet Finance Rectification Office and the Online Lending Rectification Office jointly issued the Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, outlining general requirements on the “cash loan” business conducted by network microcredit companies, banking financial institutions and online lending information intermediaries. Circular 141 specifies the features of “cash loans” as not relying on consumption scenarios, with no specified use of loan proceeds, no qualification requirement on customers and unsecured etc. Circular 141 sets forth several general requirements with respect to “cash loan” business, including, without limitation: (i) no organizations or individuals may conduct the lending business without obtaining approvals for the lending business; (ii) the aggregated borrowing costs of borrowers charged by institutions in the forms of interest and various fees should be annualized and subject to the limit on interest rate of private lending set forth in the Private Lending Judicial Interpretations issued by the Supreme People’s Court; (iii) all relevant institutions shall follow the “know-your-customer” principle and prudentially assess and determine the borrower’s eligibility, credit limit and cooling-off period, etc. Loans to any borrower without income sources are prohibited; and (iv) all relevant institutions shall enhance the internal risk control and prudentially use the “data-driven” risk management model. In additions, Circular 141 emphasizes several requirements on the online lending information intermediaries. For instance, such intermediaries are prohibited from facilitating any loans to students or other persons without repayment source or repayment capacity, or loans with no designated use of proceeds. Also, such intermediaries are not permitted to deduct interest, handling fee, management fee or deposit from the principal of loans provided to the borrowers in advance. Any violation of Circular 141 may result in penalties, including but not limited to suspension of operation, orders to make rectification, condemnation, disapproval of recordation, revocation of license, order to cease business operation, and criminal liabilities.

 

Given that the loans we select qualified car dealerships borrowers based on their historical sales volume generated through credit card transactions using UnionPay’s system and our loans are based on real consumption scenarios with specified use, we believe they should not be deemed as “cash loans” under Circular 141, and thus our microfinancing business is not subject to the regulation of Circular 141.

 

However, as the Circular 141 has been issued fairly recently and the laws and regulations governing the online consumer finance industry in China are evolving rapidly, there are substantial uncertainties regarding the interpretation and application of the regulations. Accordingly, we cannot rule out the possibility that the PRC regulatory authorities may take a view that is contrary to ours and view the microfinancing business as “cash loans.” Therefore, in the event that the loans are deemed as “cash loans” under the Circular 141, we may have to significantly change our business model, which would materially and adversely affect our results of operations and financial condition.

 

Risks Relating to this Offering

 

Our common stock has limited public trading market

 

There is a limited established public trading marketing for our common stock and there can be no assurance that one will ever develop. Market liquidity will depend on the perception of our operating business and any steps that our management might take to bring us to the awareness of investors. There can be no assurance given that there will be any awareness generated. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business. As a result holders of our securities may not find purchasers for our securities should they to sell securities held by them. Consequently, our securities should be purchased only by investors having no need for liquidity in their investment and who can hold our securities for an indefinite period of time.

 

We are not likely to pay dividends in the foreseeable future.

 

We currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not expect to pay any dividends in the foreseeable future, but will review this policy as circumstances dictate.

 

Our common stock may be subject now and in the future to the SEC’s “Penny Stock”

 

We may be subject now and in the future to the SEC’s “penny stock” rules if our shares of common stock sell below $5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing before or with the customer’s confirmation.

 

In addition, the penny stock rules require that prior to a transaction; the broker dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our common stock. As long as our shares of common stock are subject to the penny stock rules, the holders of such shares of common stock may find it more difficult to sell their securities.

 

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The offering price for our shares of common stock may not be indicative of prices that will prevail in the trading market and such market prices may be volatile.

 

The offering price for our shares of common stock will be determined by negotiations between us and the underwriter, and does not bear any relationship to our earnings, book value or any other indicia of value. We cannot assure you that the market price of our shares of common stock will not decline significantly below the offering price. The financial markets in the United States and other countries have experienced significant price and volume fluctuations in the last few years. Volatility in the price of our shares of common stock may be caused by factors outside of our control and may be unrelated or disproportionate to changes in our results of operations.

 

You will experience immediate and substantial dilution in the net tangible book value of our shares of common stock purchased.

 

The offering price of our shares of common stock is substantially higher than the net tangible book value per share of our common stock. Consequently, when you purchase our shares of common stock in the offering and upon completion of the offering, you will incur immediate dilution of US$             per share, based on an assumed offering price of US$             . In addition, you may experience further dilution to the extent that additional shares of common stock are issued upon exercise of outstanding warrants or options we may grant from time to time.    

 

We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our shares of common stock if the market price of our shares of common stock increases.

 

If securities or industry analysts do not publish research or reports about our business, or if the publish a negative report regarding our shares of common stock, the price of our shares of common stock and trading volume could decline.

 

The trading market for our shares of common stock may depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of our shares of common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our shares of common stock and the trading volume to decline.

 

The market price of our shares of common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the offering price.

 

The offering price for our shares of common stock will be determined through negotiations between the underwriter and us and may vary from the market price of our shares of common stock following our offering. If you purchase our shares of common stock in this offering, you may not be able to resell those shares at or above the offering price. The market price of our shares of common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

actual or anticipated fluctuations in our revenue and other operating results;

 

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

23

 

 

lawsuits threatened or filed against us; and

 

other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

Our management has broad discretion to determine how to use the funds raised in the offering and may use them in ways that may not enhance our results of operations or the price of our shares of common stock.

 

We anticipate that we will use the net proceeds from this offering for working capital and other corporate purposes. Our management will have significant discretion as to the use of the net proceeds to us from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the market price of our shares of common stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward looking statements that involve risks and uncertainties, principally in the sections entitled “Description of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact contained in this prospectus, including statements regarding future events, our future financial performance, business strategy and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Risk Factors” or elsewhere in this prospectus, which may cause our or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements

 

You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this prospectus. Before you invest in our securities, you should be aware that the occurrence of the events described in the section entitled “Risk Factors” and elsewhere in this prospectus could negatively affect our business, operating results, financial condition and stock price. Except as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date of this prospectus to conform our statements to actual results or changed expectations.

 

USE OF PROCEEDS  

 

We estimate that our net proceeds from the sale of the shares of common stock that we are offering will be approximately $             assuming a public offering price of $             per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We plan to use the net proceeds of this offering for working capital needs, including devoting further resources to the below use of proceeds. which may include investment in product development, sales and marketing activities, acquisition of other companies, technology infrastructure, team development, capital expenditures, improvement of corporate facilities and other general and administrative matters. The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

 

We intend to use the net proceeds of this offering as follows after we complete the remittance process, and we have ordered the specific uses of proceeds in order of priority.

 

 

 

Description of Use

 

Minimum Offering

Estimated Amount of Net Proceeds

   

Maximum Offering

Estimated Amount of Net Proceeds

Construction of organic fertilizer plant   $            $  
Construction of black goat food processing plant              
Technology research and development               
General working capital                                         
Total   $     $        

   

Pending other uses, we intend to invest the proceeds to us in investment-grade, interest-bearing securities such as money market funds, certificates of deposit, or direct or guaranteed obligations of the U.S. government, or hold as cash. We cannot predict whether the proceeds invested will yield a favorable return. Our management will have broad discretion in the application of the net proceeds we receive from this offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds.

 

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our wholly foreign-owned subsidiary in China only through loans or capital contributions and to our consolidated variable interest entity only through loans, subject to the filings with government authorities and limit on the amount of capital contributions and loans. Subject to completion of applicable government filing and registration requirements, we may extend inter-company loans to our wholly foreign-owned subsidiary in China or make additional capital contributions to our wholly-foreign-owned subsidiary to fund its capital expenditures or working capital. If we provide funding to our wholly foreign-owned subsidiary through loans, the total amount of such loans may not exceed the difference between the entity’s total investment as approved by the foreign investment authorities and its registered capital. Such loans must be registered with SAFE or its local branches, which usually takes up to 20 working days to complete. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all.

 

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DIVIDEND POLICY

 

We plan to retain any earnings for the foreseeable future for our operations. We have never paid any dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will depend on our financial condition, operating results, capital requirements and such other factors as our Board of Directors deems relevant.

  

CAPITALIZATION

 

The following tables set forth our capitalization as of March 31, 2019 on a pro forma as adjusted basis giving effect to the sale of the offering at an assumed public offering price of $               per share and to reflect the application of the proceeds after deducting the estimated underwriter fees. You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Securities.”

 

  On an actual basis;

 

  On a pro forma basis to give effect to the sale of the offering at an assumed public offering price of $              per share

 

Minimum Offering (                  shares of common stock)

U.S. Dollars

 

    As of
March 31, 2019
 
    Actual    

Pro forma (1)

 
Assets:            
Current Assets     6,559,963                  
Intangible assets     3,273,406          
Property     15,142,871        
Other Assets     533,386          
Total Assets     25,509,626          
                 
Liabilities:                
Current Liabilities     13,145,492          
Other Liabilities     3,602,640          
Total Liabilities     16,748,132          
                 
Shareholder’s Equity:                
Common stock (56,341,718 shares issued and outstanding with par value of $0.0001)     5,634          
Additional paid-in capital (2)     19,38,854          
Accumulated deficit     (11,330,741 )        
Accumulated other comprehensive income (loss)     563,268          
Noncontrolling interest     124,479          
Total shareholders’ equity     8,761,494          
Total Liabilities and Shareholders’ Equity     25,509,626          

 

 

(1) Gives effect to the sale of the minimum offering at an assumed public offering price of $               per share and reflects the application of the proceeds after deducting the estimated underwriting discounts and our estimated offering expense.
(2) In the minimum offering, pro forma adjusted for additional paid in capital reflects the net proceeds of approximately $                 we expect to receive, after deducting underwriting discount of $390,000, underwriter non-accountable expense allowance of $90,000, up to $125,000 in other underwriting expenses, and approximately $                  in issuer offering expenses.

 

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Maximum Offering (                   shares of common stock)  

U.S. Dollars

 

    As of
March 31, 2019
 
    Actual    

Pro forma (1)

 
Assets:            
Current Assets     6,559,963                   
Intangible assets     3,273,406        
Property     15,142,871          
Other Assets     533,386          
Total Assets     25,509,626          
                 
Liabilities:                
Current Liabilities     13,145,492          
Other Liabilities     3,602,640          
Total Liabilities     16,748,132          
                 
Shareholder’s Equity:                
Common stock (56,341,718shares issued and outstanding with par value of $0.0001)     5,634          
Additional paid-in capital (2)     19,38,854          
Accumulated deficit     (11,330,741 )        
Accumulated other comprehensive income (loss)     563,268          
Noncontrolling inteest     124,479          
Total shareholders’ equity     8,761,494          
Total Liabilities and Shareholders’ Equity     25,509626          

 

 

(1) Gives effect to the sale of the maximum offering, as applicable, at an assumed public offering price of $ per share and reflects the application of the proceeds after deducting the estimated underwriting discounts and our estimated offering expenses.

(2) In the maximum offering, pro forma adjusted for additional paid in capital reflects the net proceeds of approximately $           we expect to receive, after deducting underwriting discount of $975,000, underwriter non-accountable expense allowance of $225,000, up to $125,000 in other underwriting expenses, and approximately $           in issuer offering expenses.

 

DILUTION

 

If you invest in our shares of common stock, your interest will be diluted to the extent of the difference between the offering price per share and the pro forma net tangible book value per share after the offering. Dilution results from the fact that the per share offering price is substantially in excess of the book value per share attributable to the existing shareholders for our presently outstanding shares of common stock. Our net tangible book value attributable to shareholders at March 31, 2019 was $                  or approximately $                  per share. Net tangible book value per share as of March 31, 2019 represents the amount of total assets less intangible assets and total liabilities, divided by the number of shares outstanding.

 

If the minimum offering is sold, we will have                  shares of common stock outstanding upon completion of the offering. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after March 31, 2019, will be approximately $ or approximately $ per share. This would result in dilution to investors in this offering of approximately $                  per share or approximately % from the assumed offering price of $                  per share. Net tangible book value per share would increase to the benefit of present shareholders by $ per share attributable to the purchase of the shares by investors in this offering.

 

If the maximum offering is sold, we will have                  shares of common stock outstanding upon completion of the offering. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after March 31, 2019, will be approximately $                  or approximately $                  per share. This would result in dilution to investors in this offering of approximately $                  per share or approximately       % from the assumed offering price of $ per share. Net tangible book value per share would increase to the benefit of present shareholders by $                  per share attributable to the purchase of the shares by investors in this offering.

 

The following table sets forth the estimated net tangible book value per share after the offering and the dilution to persons purchasing shares based on the foregoing minimum and maximum offering assumptions.

 

    Minimum
Offering  (1)
    Maximum
Offering  (2)
 
Assumed offering price per share   $                        $                        
Net tangible book value per share as of March 31, 2019   $     $  
Increase in net tangible book value per share after this offering   $     $  
Net tangible book value per share after the offering   $     $  
Dilution per share to new investors   $     $  

 

(1) Assumes gross proceeds from offering of                    Ordinary Shares.
(2) Assumes gross proceeds from offering of                    Ordinary Shares.

 

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POST-OFFERING OWNERSHIP

 

The following chart illustrates our pro forma proportionate ownership, upon completion of the offering under alternative minimum and maximum offering assumptions, by present shareholders and investors in this offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this offering at the offering price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering.

 

    Shares Purchased   Total Consideration   Average Price  
    Amount     Percent   Amount     Percent   Per Share  
MINIMUM OFFERING                                         
Existing shareholders     56,341,953       %          
New investors                      
Total                         

  

    Shares Purchased   Total Consideration   Average Price
    Amount     Percent   Amount     Percent   Per Share
MAXIMUM OFFERING                                  
Existing shareholders     56,341,953       %                  
New investors                      
Total                      

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

The information set forth in this section contains certain “forward-looking statements”, including, among others (i) expected changes in our revenue and profitability, (ii) prospective business opportunities and (iii) our strategy for financing our business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as “believes”, “anticipates”, “intends” or “expects”. These forward-looking statements relate to our plans, liquidity, ability to complete financing and purchase capital expenditures, growth of our business including entering into future agreements with companies, and plans to successfully develop and obtain approval to market our product. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

 

Although we believe that our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this Annual Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

 

We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.

 

Our revenues and results of operations could differ materially from those projected in the forward-looking statements as a result of numerous factors, including, but not limited to, the following: the risk of significant natural disaster, the inability of the our company to insure against certain risks, inflationary and deflationary conditions and cycles, currency exchange rates, and changing government regulations domestically and internationally affecting our products and businesses.

 

You should read the following discussion and analysis in conjunction with the Financial Statements and Notes attached hereto, and the other financial data appearing elsewhere in this Annual Report.

 

US Dollars are denoted herein by “USD”, “$” and “dollars”.

 

Overview

 

We primarily engage in the manufacturing and distribution of organic fertilizer and the sales of agricultural products in the PRC. Our organic fertilizer products are sold under our brand names “Zongbao,” “Fukang,” and “Muliang.”

 

Through our patented technology, we process crop straw (including corn, rice, wheat, cotton, and other crops) into high quality organic nutritious fertilizers that are easily absorbed by crops in 3 hours. Straws are common agricultural by-product. In PRC, farmers usually remove the straw stubble that are remains after grains by burning them in order to continue farming on the same land. These activities have resulted in significant air pollution and damage the surface structure of the soil with loss of nutrients. We turn waste into treasure by transforming the straws into organic fertilizer, which also effectively reduces air pollution. The straw organic fertilizer we produce does not contain the heavy metals, antibiotics and harmful bacteria that are common in the traditional manure fertilizer. Our fertilizers also provide optimum levels of primary plant nutrients which including multi-minerals, proteins and carbohydrates that promote the healthiest soils capable of growing the healthy crops and vegetables. It can effectively reduce the use of chemical fertilizers and pesticides as well as reduce the penetration of large chemical fertilizers and pesticides into the soil and thus avoid water pollution. Therefore, our fertilizer can effectively improve fertility of soil, and the quality and safety of agricultural products.

 

We generated our revenue mainly from our organic fertilizers, which accounted for approximately 91.3% and 99.1% of our total revenue for the fiscal years ended December 31, 2018 and 2017, respectively. We currently have two integrated factories in Weihai City, Shandong Province, PRC to produce our organic fertilizers, which have been in operations since August 2015. We plan to improve the technology for our existing straw organic fertilizer production lines in the following aspects: (i) adopt more advanced automatic control technology for raw material feed to shorten the processing time of raw material, and (ii) manufacture powdered organic fertilizer instead of granular organic fertilizer production in order to avoid the drying and cooling process, as such will increase our production capacity.

 

With the focus of producing organic fertilizers, we also engage in the business of selling agriculture food products including apples, and as sales agent for other large agriculture companies in the PRC. In 2014, we rented 350 mu (about 57.66 acres) of mountainous land as apple orchard. The sales of apples generated less than 1% of our total revenue for the fiscal years ended December 31, 2018 and 2017, respectively. We expect to generate more revenues from the sales of apples as the apple orchards become more mature in the next few years.

 

In addition, we plan to engage in the processing and distribution of black goat products business commencing the fourth quarter of 2019. We are currently constructing a deep-processing slaughterhouse and processing plant which is expected to have the capacity of slaughtering 200,000 black goats per year in Chuxiong City, Yunnan Province, in China. Our black goat processing products including goat rib lets, goat loin roast, goat loin chops, goat rack, goat leg, goat shoulder, goat leg shanks, ground goat, goat stew meat, whole goat, half goat, lamb viscera, etc. We expect to start generate revenue from the black goat products in 2020.

 

Our assets mainly include: (i) 42,895 square meters of industrial land and 28,549 square meters of factory and office space located in Jinshan District, Shanghai City, (ii) 22,511 square meters of industrial land and 10,373 square meters of plant area and straw organic fertilizer production line in Weihai City, Shandong Province, and (iii) more than $2 million investment of land use right and the black goat slaughtering and processing plant located in Shuangbai County, Chuxiong City, Yunnan Province, in China.

 

As the factory area in Jinshan District, Shanghai City is too close to the urban area to produce straw organic fertilizer, some factory buildings, office buildings and spare land in Jinshan District, Shanghai City, have been leased to third parties.

 

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Recent Development

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved a 5 to 1 reverse stock split of all of the issued and outstanding shares of the Company’s common stock, change of corporate name from “Mullan Agritech Inc.” to “Muliang Agritech Inc.”, and creation of one hundred million (100,000,000) shares of Blank Check Preferred Stock.

 

On April 5, 2019, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the Name Change and to authorize the creation of Blank Check Preferred Stock. As a result, the capital stock of the Company consists of 500,000,000 shares of common stock, $0.0001 par value, and 100,000,000 shares of blank check preferred stock, $0.0001 par value. To the fullest extent permitted by the laws of the State of Nevada, as the same now exists or may hereafter be amended or supplemented, the Board of Directors may fix and determine the designations, rights, preferences or other variations of each class or series within each class of preferred stock of the Company. The Company may issue the shares of stock for such consideration as may be fixed by the Board of Directors.

 

On April 16, 2019, we filed a Certificate of Change to our Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the reverse stock split. Any fractional shares are to be rounded up to whole shares. The reverse stock split does not affect the par value or the number of authorized shares of common stock of the Company.

 

The reverse stock split and the name change took effect on May 7, 2019. In connection with the name change, our stock symbol changed to “MULG”.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate, on an on-going basis, our estimates for reasonableness as changes occur in our business environment. We base our estimates on experience, the use of independent third-party specialists, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Critical accounting policies are defined as those that are reflective of significant judgments, estimates and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe the following are our critical accounting policies:

 

Basis of Presentation

 

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or

U.S. GAAP.

 

Going Concern

 

As reflected in the accompanying consolidated financial statements, we had net accumulated deficit of $11,330,741 and $11,773,401 as of March 31, 2019 and December 31, 2018, respectively. Our cash balances as of March 31, 2019 and December 31, 2018 were $6,317 and $12,778, respectively. We had current liability of $13,145,492 at March 31, 2019 which would be due within the next 12 months. In addition, we had a working capital deficit of $6,585,529 and $7,119,118 at March 31, 2019 and December 31, 2018, respectively.

 

The company plans to continue its expansion and investments, which will require continued improvements in revenue, net income, and cash flows.

 

The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise additional capital, and generate more revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Principles of Consolidation

 

Muliang Agritech consolidates the following entities, including wholly-owned subsidiaries, Muliang HK, Shanghai Mufeng, and its wholly controlled variable interest entities, Muliang Industry, and Zhongbao, 60% controlled Agritech Development, 99% controlled Fukang, 65% controlled Zhonglian and 80% controlled Yunnan Muliang. The 40% equity interest holder of Agritech Development, 1% equity interest holders in Fukang, 35% equity interest holders in Zhonglian, and 20% interest in Yunnan Muliang are accounted as non-controlling interest in the Company’s consolidated financial statements.

 

The variable interest entities consolidated for which the Company is deemed the primary beneficiary. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

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Use of Estimates

 

In preparing financial statements in conformity with U.S. GAAP, 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 period. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.

 

Accounts Receivable

 

We state accounts receivable at cost, net of allowance for doubtful accounts. Based on our past experience and current practice in the PRC, management provides for an 100% allowance for doubtful accounts equivalent to those accounts that are not collected within one year, and 50% for receivables outstanding for longer than six months. It is management’s belief that the current bad debt allowance adequately reflects an appropriate estimate based on management’s judgment.

 

Inventory Valuation

 

We value our fertilizer inventories at the lower of cost, determined on a weighted average basis, and net realizable value (the estimated market price). Substantially all inventory expenses, packaging and supplies are valued by the weighted average method.

 

Apple Orchard

 

Apple Orchard consists primarily of rent for an apple farm, labor cost, fertilizers, apple seeds, apple seedlings and others. The costs to purchase and cultivate apple trees and the expenditures related to labor and materials to plant apple trees until they become commercially productive are capitalized, which require a 2-year period. The estimated production life for apple tree is 10 years, and the costs are amortized without a residual value. Expenses incurred maintaining apple trees during the growth cycle until seedling apple trees or grafted varieties are fruited are capitalized into inventory and included in Work In Process—apple orchard, a component of inventories.

 

Amortized expenses pertaining to apple orchard are included in inventory costs for those apples to be sold and ultimately become a component of cost of goods sold. Similar to other assets, the failure of our apple orchard to be serviceable over the entirety of their anticipated useful lives or to be sold at their anticipated residual value will negatively impact our operating results.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Results for the reporting period beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.

 

Management has determined that the adoption of ASC 606 did not impact the Company’s previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to opening retained earnings.

 

Revenue for sale of products is derived from contracts with customers, which primarily include the sale of fertilizer products and environmental protection equipment. The Company’s sales arrangements do not contain variable consideration. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the products has been transferred to the customer. For vast majority of the Company’s product sales, the performance obligations and control of the products transfer to the customer when products are delivered, and customer acceptance is made.

  

Pursuant to the guidance of ASC Topic 840, rent shall be reported as income by lessors over the lease term as it becomes receivable. The Company currently leased part of the building of the Shanghai new plant to third parties as warehouse. The Company recognizes building leasing revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned. 

 

The Company recognized rental income from leasing a portion of its manufacturing facility located in Shanghai to third parties. For the three months ended March 31, 2019 and 2018, rental income of $165,711 and $118,962 were recognized as other income.

 

Income Taxes

 

The Company accounts for income taxes under the provision of FASB ASC 740-10, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

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New Accounting Standards

 

In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control” . These amendments change the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a variable interest entity), the amendments require that reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a variable interest entity and, on a proportionate basis, its indirect variable interests in a variable interest entity held through related parties, including related parties that are under common control with the reporting entity. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity adopts the pending content that links to this paragraph in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “ Leases (Topic 842) ”. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, on its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. ASU 2016-02 is effective for publicly-traded companies for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach.

 

In July 2018, the FASB issued ASU 2018-10, “ Codification Improvements to Topic 842, Leases ”. The amendments in ASU 2018-10 affect narrow aspects of the guidance issued in the amendments in ASU 2016-02 including those regarding residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on rate implicit in the lease, and failed sale and leaseback transactions. In July 2018, the FASB issued ASU 2018-11, “ Leases (Topic 842): Targeted Improvements ”. The amendments in ASU 2018-11 affect the guidance issued in ASU 2016-02, “Leases (Topic 842)”, which is not yet effective. The amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments also provide lessors with a practical expedient to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component in certain circumstances. In December 2018, the FASB issued ASU 2018-20, “ Leases (Topic 842) – Narrow-Scope Improvements for Lessors. ” ASU 2018-20 allow lessors to make an accounting policy election not to evaluate whether sales taxes and similar taxes imposed by a governmental authority on a specific lease revenue-producing transaction are the primary obligation of the lessor as owner of the underlying leased asset. The amendments also require a lessor to exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf from variable payments and include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense. In addition, the amendments clarify that when lessors allocate variable payments to lease and non-lease components, they are required to follow the recognition guidance in the new lease standard for the lease component and other applicable guidance, such as the new revenue standard, for the non-lease component. For entities that early adopted Topic 842, the amendments are effective upon issuance of ASU 2018-10, AUS 2018-11and ASU 2018-20, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842.

 

In January 2017, the FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) ”. This pronouncement amends the SEC’s reporting requirements for public filers regarding new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.

 

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In January 2017, the FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) ”. This pronouncement amends the SEC’s reporting requirements for public filers regarding new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) ”. This pronouncement amends the SEC’s reporting requirements for public filers regarding new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.

 

In August 2017, the FASB issued guidance, which amends the existing accounting standards for derivatives and hedging. The amendment improves the financial reporting of hedging relationships to better represent the economic results of an entity’s risk management activities in its financial statements and made certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement ,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The amendments in this Update modify the disclosure requirements on fair value measurements based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential impacts of ASU 2018-13 on its consolidated financial statements.

 

The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

  

Results of Operations

 

We are principally engaged in the organic fertilizer manufacture and distribution business in the PRC, which account for 86% of our total revenue for the three months ended March 31, 2019.

 

Currently, almost all of our revenue is derived from powdered organic fertilizer product, as it is easier to absorb for soil and plants, compared with the granular organic fertilizer.

    

We are principally engaged in the organic fertilizer manufacture and distribution business in the PRC, which account for 91% of our total revenue of 2018.

 

Currently, majority of our revenue is derived from powdered organic fertilizer product, as it is easier to absorb for soil and plants, compared with the granular organic fertilizer.

 

During the year ended December 31, 2018, Management also started to develop the sales of agricultural products (food). Sales from agricultural products (food) accounted for around 9% and 16% of our total sales for the year ended December 31, 2018 and for the three months ended March 31, 2019, respectively.

 

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For the year ended December 31, 2018, we received capital contribution of approximately $2.7 million from our shareholder. We also generated a significant net income instead of suffering a loss. All of which improved the Company’s financial position significantly as of December 31, 2018.

 

Operation Result for the Years Ended December 31, 2018 and 2017 and for the Three Months Ended March 31, 2019

 

 

     

For the Three Months Ended

     

For the Years

                 
     

March 31,

     

Ended December 31

     

 

         
      2019       2018       2017       Fluctuation          
              $       $       $       %  
Revenues     1,915,973       13,205,024       737,563       12,467,461       1,690 %
Cost of goods sold     309,395       7,660,026       591,236       7,068,790       1,196 %
Gross profit     2,225,368       5,544,998       146,327       5,398,671       3,689 %
Operating expenses:                                        
General and administrative expenses     341,556       1,100,271       1,511,019       (410,748 )     -27 %
Selling expenses     177,000       531,771       163,042       368,729       226 %
Total operating expenses     518,556       1,632,042       1,674,061       (42,019 )     -3 %
Income (Loss) from operations     367,936       3,912,956       (1,527,734 )     5,440,690          
Other income (expense):                                        
Interest expense     (94,596 )     (421,054 )     (508,818 )     87,764          
Subsidy income     146,560       756,197       -       756,197        N/A  
Rental income, net     122,960       228,208       -       228,208        N/A  
Other income (expense), net     587       (28,030 )     28,028       (56,058 )      N/A  
Total other income (expense)     175,511       535,321       (480,790 )     1,016,111       -211 %
Income (Loss) before income taxes     543,447       4,448,277       (2,008,524 )     6,456,801       -321 %
Income taxes     97,860       (25,542 )     26,334       (51,876 )     -197 %
Net income (loss)     445,587       4,473,819       (2,034,858 )     6,508,677       -320 %

 

Revenue

 

Total revenue increased from $1,188,020 for the three months ended March 31, 2018 to $2,225,368 for the three months ended March 31, 2019, which represented an increase of $1,037,348, or approximately 87.32%. The significant increase in revenue was mainly due to a larger demand for our organic fertilizer products from large scale agricultural companies and farmer professional cooperatives for the three months ended March 31, 2019. We have developed more customers, such as Huizhou Sijilv Agricultural Products Co., Ltd., Jilin Jijie Farmers’ Professional Union, and Guangzhou Lvxing Organic Agricultural Products Co., Ltd., who are buying a large quantity of our products. We are continuing to obtain more stable customers in 2019.

 

Our high-quality agriculture food products sales also increased significantly for the three months ended March 31, 2019 and it was expected to continue to increase throughout the 2019.

 

Total revenue increased from $737,563 for the year ended December 31, 2017 to $13,205,024 for the year ended December 31, 2018, which represented an increase of $12,467,461, or approximately 1,690%. The significant increase in revenue was mainly due to a larger demand for our organic fertilizer products from large scale agricultural companies and farmer professional cooperatives for the year ended December 31, 2018. We have developed more customers, such as Huizhou Sijilv Agricultural Products Co., Ltd., Jilin Jijie Farmers’ Professional Union, and Guangzhou Lvxing Organic Agricultural Products Co., Ltd., who are buying a large quantity of our products. We are continuing to obtain more stable customers in 2019.

 

We also started to sell high quality agriculture food products for the year ended December 31, 2018 and expect to increase the sales of this business segment significantly in the near future.

 

Cost of sales

 

Cost of sales for increased from $682,779 for the three months ended March 31, 2018 to $1,338,876 for the three months ended March 31, 2019, which represented an increase of approximately $656,097, or 96.09%. The significant increase in cost of sales was in line with the significant increase in our revenue from fertilizer sales and agriculture product sales for the same period.

 

Cost of sales for organic fertilizer increased from $591,236 for the year ended December 31, 2017 to $7,660,026 for the year ended December 31, 2018, which represented an increase of approximately $7,068,790, or 12 times. The significant increase in cost of sales was in line with the significant increase in our revenue from fertilizer sales and agriculture product sales for the same period.

 

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Gross Profit (Loss)

 

The gross profit for organic fertilizer increased significantly from $505,241 for the three months ended March 31, 2018 to gross profit of $891,036 for the three months ended March 31, 2019. The gross margin increased from 43% for the three months ended March 31, 2018 to 47% for the three months ended March 31, 2019. The gross margin of around 45% represents our normal operation result of sales to final customers. The significant increase in gross margin was mainly due to the advantage from economies of scale for our organic fertilizer production.

 

The agriculture food products sales incurred a slight gross loss of $4,545 for the three months ended March 31, 2019. We expected to generate gross profit with the increase of sales scale in 2019.

 

The gross profit for organic fertilizer increased significantly from $146,327 for the year ended December 31, 2017 to gross profit of $5,476,778 for the year ended December 31, 2018. The gross margin increased from 20% for the year ended December 31, 2017 to 45% for the year ended December 31, 2018. The gross margin of 45% represents our normal operation result of sales to final customers. The significant increase in gross margin was mainly due to a small quantity of depreciation for some idle equipment was recorded as the cost of goods sold for the year ended December 31, 2017. We turned to selling powdered organic fertilizer instead of granular organic fertilizer for the year ended December 31, 2018, as powdered organic fertilizer has a higher gross margin than granular organic fertilizer.

 

The gross profit for agriculture food products was $1,148,203, and gross margin was approximately 6% for the year ended December 31, 2018.

 

Expenses

 

We incurred $177,000 in selling expenses for the three months ended March 31, 2019, compared to $23,317 for the three months ended March 31, 2018. We incurred $341,556 in general and administrative expenses for the three months ended March 31, 2019, compared to $392,510 for the three months ended March 31, 2018. Total selling, general and administrative expenses increased by $102,729, or 24.70% for the three months ended March 31, 2019 as compared to the same period in 2018. Our selling expenses increased by $153,683 and our general and administrative expenses decreased by $50,954. The increase in our selling expenses was mainly due to the increase in salaries expense, travelling expense, etc., for selling department. The decrease in general and administrative expenses was because some employees and resource in administrative department transferred to support the selling department for the three months ended March 31, 2019.

 

We incurred $531,771 in selling expenses for the year ended December 31, 2018, compared to $163,042 for the year ended December 31, 2017. We incurred $1,100,271 in general and administrative expenses for the year ended December 31, 2018, compared to $1,511,019 for the year ended December 31, 2017. Total selling, general and administrative expenses slightly decreased by $42,019, or 3% for the year ended December 31, 2018 as compared to the same period in 2017. Our selling expenses increased by $368,729 and our general and administrative expenses decreased by $410,748. The increase in our selling expenses was mainly due to the increase in salaries expense, travelling expense, etc., for selling department. The decrease in general and administrative expenses was due to more depreciation expense for idle building reclassified from general and administrative expense to rental cost as more idle building was leased in 2018. However, we expect to increase our general and administrative expense for the next year, as our sales continued to grow.

 

Interest income (expense)

 

We incurred $94,596 in interest expense during the three months ended March 31, 2019, compared with interest expense of $108,081 for the three months ended March 31, 2018.

 

We incurred $421,054 in interest expense during the year ended December 31, 2018, compared with interest expense of $508,818 for the year ended December 31, 2017. The decrease in interest expense was mainly due to the repayment of $754,422 interest bearing bank loan for the year ended December 31, 2018.

 

Net Income (loss)

 

Our net income was $445,587 for the three months ended March 31, 2019, compared with net income of $47,871 for the three months ended March 31, 2018, representing an increase of $397,716, or 830.81%.

 

The significant increase of $397,716 in net income was mainly due to (1) the increase of 381,251 in gross profit; (2) the increase of $144,372 and $49,434 in government grant and net rental income;(3)in spite of the increase of $12,729 in operating expense.

 

Our net income was $4,473,819 for the year ended December 31, 2018, compared with net loss of $2,034,858 for the year ended December 31, 2017. We ceased to incur net losses and began to generate a profit because we increased our revenue and gross profit significantly for the year ended December 31, 2018. We expanded our organic fertilizers business significantly, received a government subsidy of $756,197 and generated more net rental income in 2018.

 

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Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At March 31, 2019 and December 31, 2018 our working capital deficit was $6,585,529 and $7,119,118, respectively. At December 31, 2018 and December 31, 2017 our working capital deficit was $7,119,118 and $10,708,100, respectively. The significant improvement in our working capital deficit was reflecting greater increase in our current assets.

 

We have financed our operations over the three months ended March 31, 2019 and 2018 primarily through proceeds from net cash inflow in operation, and advances from related parties. And we have financed our operations over the years ended December 31, 2018 and 2017 primarily through proceeds from stock issuance and advances from related parties, and net cash inflow from operation.

 

The components of cash flows are discussed below:

 

 

    For the
Three Months Ended
 
    March 31,  
    2019     2018  
Net cash provided by (used in) operating activities   $ 917,171     $ 995,260  
Net cash provided by (used in) investing activities     (246,966 )     (752,397 )
Net cash used in financing activities     (676,947 )     (222,615 )
Exchange rate effect on cash     281       570  
Net cash inflow (outflow)   $ (6,461 )   $ 20,818  

  

    For the
Years Ended
December 31,
 
    2018     2017  
Net cash provided by (used in) operating activities   $ 1,823,544     $ (1,715,588 )
Net cash provided by (used in) investing activities     (2,469,701 )     (651 )
Net cash provided by financing activities     548,337       1,708,331  
Exchange rate effect on cash     101,547       (254 )
Net cash inflow (outflow)   $ 3,727     $ (8,162 )

  

Cash provided by (used in) Operating Activities

 

Net cash provided by operating activities was $917,171 for the three months ended March 31, 2019. The net cash inflow consisted primarily of net income of $445,587 which was adjusted by depreciation and amortization of $291,069. The Company had an increase of $38,911 in other payable, an increase of $25,638 in our advance from customers, an increase of $145,941 in account payable, a decrease of $149,975 in prepayment, and a decrease of $133,884 in account receivable, which were offset by an increase of $82,007 in other receivable, and an increase of $329,687 in inventory.

 

Net cash provided by operating activities was $995,260 for the three months ended March 31, 2018. The net cash inflow consisted primarily of net income of $47,871 which was adjusted by depreciation and amortization of $223,491. The Company had an increase of $1,560,502 in other payable, an increase of $540,560 in our advance from customers, an increase of $125,853 in account payable-related party, a decrease of $37,661 in inventory which were offset by an increase of $568,309 in accounts, receivable, an increase of $377,045 in account receivable - related party, and a decrease of $489,512 in account payable and accrued payable.

 

Net cash provided by operating activities was $1,823,544 for the year ended December 31, 2018. Cash provided by operating activities for the year ended December 31, 2018 consisted primarily of net income of $4,473,819, which was adjusted by depreciation and amortization of $849,792, and deferred income tax assets of $472,749. The Company had an increase of $270,176 in other payables, an increase of $447,207 in income tax payable, which were offset by an increase of $3,893,269 in accounts receivable, and an increase of $58,409 in inventory.

 

Net cash used in operating activities was $1,715,588 for the year ended December 31, 2017. Cash used in operating activities for the year ended December 31, 2017 consisted primarily of net loss of $2,034,858 which was adjusted by depreciation and amortization of $649,976. The Company had a decrease of $1,339,649 in account payable, an increase of $268,096 in prepaid expense, an increase of $46,077 in other receivable, which were offset by an increase of $1,042,996 in other payable, a decrease of $ 143,989 in inventory.

 

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Cash provided by (used in) Investing Activities

 

Net cash used in investing activities was $246,966 for the three months ended March 31, 2019. The activities consisted of purchase of biological assets of $18,508, and investment in construction in progress of $228,458. Net cash used in investing activities was $2,469,701 for the year ended December 31, 2018. The activities consisted of our investments of $1,514,586 in the construction for black goat slaughtering and processing project in Yunnan province; purchase of land use right of $936,238 for black goat slaughtering and processing project; and additional investment of apple orchard of $18,877.

 

Net cash used in investing activities was $752,397 for the three months ended March 31, 2018. The activities primarily consisted of purchase of biological assets of $7,313, and investment in construction in progress of $745,084. Net cash used in investing activities was $651 for the year ended December 31, 2017. The investments included purchase of biological assets of $651.

 

Cash Provided by Financing Activities

 

Net cash used in financing activities was $676,947 for the three months ended March 31, 2019. During the period, cash used in financing activities consisted of the repayment to related parties of $724,803, repayment of short-term loan of $14,823, and offset by proceeds from third party individual of $62,679.

 

Net cash used in financing activities was $222,615 for the three months ended March 31, 2018. During the period, cash used in financing activities consisted of the repayment to related parties of $222,615, repayment of short-term loans of $786,584 offset by proceeds from notes payable of $786,584.

 

Net cash provided by financing activities was $548,337 for the year ended December 31, 2018. During the period, cash provided by financing activities consisted of the proceeds from notes payable of $1,812,718, proceeds of $2,599,413 in capital contribution from shareholders, offset by repayment of $3,109,372 to related parties and repayment of $754,422 in short term loans.

 

Net cash provided by financing activities was $1,708,331 for the year ended December 31, 2017. During the year, cash provided by financing activities included capital borrowed from related parties of $2,191,534, and Proceeds from short-term loans of $547,580, which were partly offset by repayments of $1,030,783 in our short-term loans.

 

We anticipate that our current cash reserves plus cash from our operating activities will not be sufficient to meet our ongoing obligations and fund our operations for the next twelve months. As a result, we will need to seek additional funding in the near future. We currently do not have a specific plan of how we will obtain such funding; however, we anticipate that additional funding will be in the form of equity financing from the sale of shares of our common stock or renewing our current obligations with loaners. We may also seek to obtain short-term loans from our directors or unrelated parties. Additional funding may not be available, or at acceptable terms, to us at this time. If we are unable to obtain additional financing, we may be required to reduce the scope of our business development activities, which could harm our business plans, financial condition and operating results.

 

Contractual Commitments and Commitments for Capital Expenditure

 

Contractual Commitments

 

The following table summarizes our contractual obligations at March 31, 2019 and the effect those obligations are expected to have on our liquidity and cash flow in future periods.

 

    Payments Due by Period as of March 31, 2019  
    Total     Less than
1 Year
    1 – 3
Years
    3 – 5
Years
    Over
5 Years
 
Contractual obligations                              
Loans   $ 9,329,719     $ 5,727,079     $ 3,602,640     $       -     $        -  
Others     -       -       -       -       -  
    $ 9,329,719     $ 5,727,079     $ 3,602,640     $ -     $ -  

 

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The following table summarizes our contractual obligations at December 31, 2018 and the effect those obligations are expected to have on our liquidity and cash flow in future periods.

 

    Payments Due by Period as of December 31, 2018  
   

 

Total

   

Less than

1 Year

   

1 – 3

Years

   

3 – 5

Years

   

Over 5

Years

 
Contractual obligations                              
Loans   $ 9,058,493     $ 5,603,950     $ 3,454,543     $     $  
Others                          
    $ 9,058,493     $ 5,603,950     $ 3,454,543     $     $  

 

Commitments for Capital Expenditure              

 

On October 18, 2018, the Company signed a building construction agreement with Yunnan Junxiong Construction Engineering Co., Ltd. for the black goat slaughtering and processing project located in Shuangbai County, Chuxiong City, Yunnan Province, PRC. The total contract price is $1,599,674 (RMB 11,000,000), all of which is unpaid as of December 31, 2018.

 

In addition, the Company signed a set of construction agreements with third parties in 2018 for the black goat slaughtering and processing project, including surveying and mapping contract, equipment installation contract, and electricity installation contract, etc. As of December 31, 2018, a total amount of $436,275 (RMB3,000,000) is unpaid

 

Off Balance Sheet Items

 

Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

 

any obligation under certain guarantee contracts,

 

any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,

 

any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and

 

any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

 

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

  

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BUSINESS

 

Overview

 

We primarily engage in the manufacturing and distribution of organic fertilizer and the sales of agricultural products in the PRC. Our organic fertilizer products are sold under our brand names “Zongbao,” “Fukang,” and “Muliang.”

 

Through our patented technology, we process crop straw (including corn, rice, wheat, cotton, and other crops) into high quality organic nutritious fertilizers that are easily absorbed by crops in 3 hours. Straws are common agricultural by-product. In PRC, farmers usually remove the straw stubble that are remains after grains by burning them in order to continue farming on the same land. These activities have resulted in significant air pollution and damage the surface structure of the soil with loss of nutrients. We turn waste into treasure by transforming the straws into organic fertilizer, which also effectively reduces air pollution. The straw organic fertilizer we produce does not contain the heavy metals, antibiotics and harmful bacteria that are common in the traditional manure fertilizer. Our fertilizers also provide optimum levels of primary plant nutrients which including multi-minerals, proteins and carbohydrates that promote the healthiest soils capable of growing the healthy crops and vegetables. It can effectively reduce the use of chemical fertilizers and pesticides as well as reduce the penetration of large chemical fertilizers and pesticides into the soil and thus avoid water pollution. Therefore, our fertilizer can effectively improve fertility of soil, and the quality and safety of agricultural products.

 

We generated our revenue mainly from our organic fertilizers, which accounted for approximately 91.3% and 99.1% of our total revenue for the fiscal years ended December 31, 2018 and 2017, respectively. We currently have two integrated factories in Weihai City, Shandong Province, PRC to produce our organic fertilizers, which have been in operations since August 2015. We plan to improve the technology for our existing straw organic fertilizer production lines in the following aspects: (i) adopt more advanced automatic control technology for raw material feed to shorten the processing time of raw material, and (ii) manufacture powdered organic fertilizer instead of granular organic fertilizer production in order to avoid the drying and cooling process, as such will increase our production capacity.

 

With the focus of producing organic fertilizers, we also engage in the business of selling agriculture food products including apples, and as sales agent for other large agriculture companies in the PRC. In 2014, we rented 350 mu (about 57.66 acres) of mountainous land as apple orchard. The sales of apples generated less than 1% of our total revenue for the fiscal years ended December 31, 2018 and 2017, respectively. We expect to generate more revenues from the sales of apples as the apple orchards become more mature in the next few years.

 

In addition, we plan to engage in the processing and distribution of black goat products business commencing the fourth quarter of 2019. We are currently constructing a deep-processing slaughterhouse and processing plant which is expected to have the capacity of slaughtering 200,000 black goats per year in Chuxiong City, Yunnan Province, in China. Our black goat processing products including goat rib lets, goat loin roast, goat loin chops, goat rack, goat leg, goat shoulder, goat leg shanks, ground goat, goat stew meat, whole goat, half goat, lamb viscera, etc. We expect to start generate revenue from the black goat products in 2020.

 

Our assets mainly include: (i) 42,895 square meters of industrial land and 28,549 square meters of factory and office space located in Jinshan District, Shanghai City, (ii) 22,511 square meters of industrial land and 10,373 square meters of plant area and straw organic fertilizer production line in Weihai City, Shandong Province, and (iii) more than $2 million investment of land use right and the black goat slaughtering and processing plant located in Shuangbai County, Chuxiong City, Yunnan Province, in China.

 

As the factory area in Jinshan District, Shanghai City is too close to the urban area to produce straw organic fertilizer, some factory buildings, office buildings and spare land in Jinshan District, Shanghai City, have been leased to third parties.

 

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Corporation History and Structure

 

The following diagram illustrates and assumes the completion of the Reorganization, including consolidation of our subsidiaries and VIEs:

 

 

Shanghai Muliang Industry Co., Ltd. (referred to herein as “Muliang Industry”) was incorporated in PRC on December 7, 2006 as a limited liability company, owned 95% by Lirong Wang and 5% by Zongfang Wang. Muliang Industry through its own operations and its subsidiaries is engaged in the business of developing, manufacturing, and selling organic fertilizers and bio-organic fertilizers for use in the agricultural industry.

  

On May 27, 2013, Muliang Industry entered into and consummated an equity purchase agreement whereby it acquired 99% of the outstanding equity of Weihai Fukang Bio-Fertilizer Co., Ltd. (“Fukang”), a corporation organized under the laws of the People’s Republic of China. Fukang was incorporated in Weihai City, Shandong Province on January 6, 2009. Fukang is focused on the distribution of organic fertilizers and the development of new bio-organic fertilizers. As a result of the completion of the transaction, Fukang became a 99% owned subsidiary of Muliang Industry, with the remaining 1% equity interest owned by Mr. Hui Song.

 

On July 11, 2013, Muliang Industry established a wholly owned subsidiary, Shanghai Muliang Agritech Development Co., Ltd. (“Agritech Development”) in Shanghai, China. On November 6, 2013, Muliang Industry sold 40% of the outstanding equity of Agritech Development to Mr. Jianping Zhang for consideration of approximately $65,000 or RMB 400,000. Agritech Development does not currently conduct any operations.

  

On July 17, 2013, Muliang Industry entered into an equity purchase agreement to acquire 100% of the outstanding equity of Shanghai Zongbao Environmental Construction Co., Ltd. (“Zongbao”) with consideration of approximately $3.2 million or RMB 20 million, effectively becoming the wholly-owned subsidiary of Muliang Industry. Zongbao was incorporated in Shanghai on January 25, 2008. Zongbao processes and distributes organic fertilizers. Zongbao wholly owns, Shanghai Zongbao Environmental Construction Co., Ltd. Cangzhou Branch (“Zongbao Cangzhou”).

 

On August 21, 2014, Muliang Agricultural Limited (“Muliang HK”) was incorporated in Hong Kong as an investment holding company.

 

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January 27, 2015, Muliang HK incorporated a wholly foreign-owned enterprise, Shanghai Mufeng Investment Consulting Co., Ltd (“Shanghai Mufeng”), in China

 

On July 8, 2015, Mullan Agritech entered into certain stock purchase agreement with Muliang Agriculture, Inc., pursuant to which Mullan Agritech, for a consideration of $5,000, acquired 100% interest in Muliang HK and its wholly-owned subsidiary Shanghai Mufeng. Both Muliang HK and Shanghai Mufeng are controlled by the Company’s sole officer and director, Lirong Wang.

 

On July 23, 2015, Muliang Industry established a wholly owned subsidiary, Shanghai Muliang Agricultural Sales Co., Ltd. (“Muliang Sales”) in Shanghai, China.

 

On September 3, 2015, Mullan Agritech effected a split of its outstanding common stock resulting in an aggregate of 150,525,000 shares outstanding of which 120,000,000 were owned by Chenxi Shi the founder of Mullan Agritech and its sole officer and director. The remaining 30,525,000 were held by a total of 39 investors.

 

On January 11, 2016, Mullan Agritech issued 129,475,000 shares of its common stock to Lirong Wang for an aggregate consideration of $64,737.50. On the same date, Chenxi Shi, the sole officer and director of Mullan Agritech on that date, transferred 120,000,000 shares of common stock of the Company held by him to Lirong Wang for $800 pursuant to a transfer agreement.

 

On February 10, 2016, Shanghai Mufeng entered into a set of contractual agreements known as Variable Interest Entity (“VIE”) Agreements, including (1) Exclusive Technical Consulting and Service Agreement, (2) Equity Pledge Agreement, and (3) Call Option Cooperation Agreement, with Muliang Industry, and its Principal Shareholders. As a result of the Stock Purchase Agreement and the set of VIE Agreements, Shanghai Muliang Industry Co., Ltd., along with its consolidated subsidiaries, became entities controlled by Mullan Agritech whereby Mullan Agritech would derive all substantial economic benefit generated by Muliang Industry and its subsidiaries.

 

As a result, Mullan Agritech has a direct wholly-owned subsidiary, Muliang HK and an indirectly wholly owned subsidiary Shanghai Mufeng. Through its VIE Agreements, Mullan Agritech exercises control over Muliang Industry. Muliang Industry has two wholly-owned subsidiaries (Zongbao and Muliang Sales), one 99% owned subsidiary (Fukang), one 60% owned subsidiary (Agritech Development), and one indirectly wholly owned subsidiary Zongbao Cangzhou.

 

On June 6, 2016, Muliang Industry established a wholly-owned subsidiary, namely, Muliang (Ningling) Bio-chemical Fertilizer Co. Ltd (“Ningling Fertilizer”) in Henan Province, the central plain of China. Ningling Fertilizer is setup for a new production line of bio-chemical fertilizer and has not begun any operation yet.

  

On July 7, 2016, Muliang Industry established a subsidiary, namely, Zhonglian Huinong (Beijing) Technology Co., Ltd (“Zhonglian”) in Beijing City, China. Muliang Industry owns 65% shares of Zhonglian, and a third-party company, Zhongrui Huilian (Beijing) Technology Co., Ltd owns the other 35% shares. Zhonglian is to develop and operate online agricultural products trading platform.

  

On October 27, 2016, Muliang Industry established a subsidiary, namely, Yunnan Muliang Animal Husbandry Development Co., Ltd (“Yunnan Muliang”) in Yunnan Province, China. Muliang Industry owns 55% shares of Yunnan Muliang, and a third-party company, Shuangbai County Development Investment Co., Ltd. owns the other 45% shares. Yunnan Muliang was setup for the sales development of West China.

 

On October 12, 2017, the Company canceled the registration of Ningling with the administration authorities for Industry and Commerce. Ningling has historically been reported as a component of our operations and incurred $33,323 to loss before income taxes provisions for the year ended December 31, 2017. The termination does not constitute a strategic shift that will have a major effect on our operations or financial results and as such, the termination is not classified as discontinued operations in our consolidated financial statements.

  

Mullan Agritech, Muliang HK, Shanghai Mufeng, Muliang Industry, Zongbao, Zongbao Cangzhou, Muliang Sales, Fukang, Agritech Development, Ningling Fertilizer, Yunnan Muliang, and Zhonglian are referred to as subsidiaries the Company and its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.

 

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On April 4, 2019, the Company’s Board of Directors and majority shareholder approved a 5 to 1 reverse stock split of all of the issued and outstanding shares of the Company’s common stock, change of corporate name from “Mullan Agritech Inc.” to “Muliang Agritech Inc.”, and creation of one hundred million (100,000,000) shares of Blank Check Preferred Stock.

 

On April 5, 2019, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the Name Change and to authorize the creation of Blank Check Preferred Stock. As a result, the capital stock of the Company consists of 500,000,000 shares of common stock, $0.0001 par value, and 100,000,000 shares of blank check preferred stock, $0.0001 par value. To the fullest extent permitted by the laws of the State of Nevada, as the same now exists or may hereafter be amended or supplemented, the Board of Directors may fix and determine the designations, rights, preferences or other variations of each class or series within each class of preferred stock of the Company. The Company may issue the shares of stock for such consideration as may be fixed by the Board of Directors.

 

On April 16, 2019, we filed a Certificate of Change to our Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the reverse stock split. Any fractional shares are to be rounded up to whole shares. The reverse stock split does not affect the par value or the number of authorized shares of common stock of the Company.

 

The reverse stock split and the name change took effect on May 7, 2019. In connection with the name change, our stock symbol changed to “MULG”.

 

  Our Industry

 

The Status and Market Demand of Straw Organic Fertilizer Industry in China

 

The straw in China is in large quantity, has wide variety and broad distribution, and the annual output of straw of is more than 700 million tons. The straw contains more than 3 million tons of nitrogen, more than 700,000 tons of phosphorus and nearly 7 million tons of potassium, equivalent to more than a quarter of China’s current fertilizer amount of use and equivalent to 300 million tons of standard coal. However, nearly 100 million tons of straw are burned directly in the fields every year, which not only damages the beneficial bacteria in the soil surface seriously, but also directly leads to severe air pollution and increases the greenhouse effect. With the significant amount of production of straws in China, so long as part of the straw can be recycled every year, it will bring huge sustainable recycling resources to the fertilizer industry. On November 25, 2015, the National Development and Reform Commission, the Ministry of Finance, the Ministry of Agriculture and the Ministry of Environmental Protection jointly issued a notice, requiring the utilization rate of straw to exceed 85% by 2020.

  

Market demand in China for organic fertilizer is significant. In 2015, the China national sales volume of organic fertilizers was 90 million tons. According to the current policy of encouraging less use of chemical fertilizer, improving the quality of agricultural products and restoring land, it is estimated that the demand of organic fertilizers will increase to 180 million tons by 2020. At the same time, according to a governmental advocate of increasing proportion of organic fertilizer to 50% of the total use of fertilizer, the demand in China for organic fertilizer will reach more than 500 million tons.

 

Straw organic fertilizer industry is an industry of ecological production and recycling economic.

 

The Environmental Considerations of Promoting Straw Organic Fertilizer

 

Less Air Pollution. Even if each county area builds a 100,000 tons of straw disposal factory, 100 counties in total can approximately reduce 10 million tons of straw burning, reduce carbon dioxide emissions by 15 million tons, and reduce a large number of carbon monoxide, volatile organic particles (PM), nitrogen oxides, benzene, polycyclic aromatic hydrocarbons and other harmful gases.

 

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Less soil pollution, more environment restoration. Straw is a circulating agricultural resource and the best organic fertilizer resource. Straw organic fertilizer is also the main measure to convert wasteland, tidal flat and saline-alkali land into arable land, transform barren land into medium-low yield field and upgrade medium-low yield field to high-quality fertile field.

 

Less water pollution. The utilization rate of traditional chemical fertilizers is generally below 30%, and 70% of the dissolved chemical fertilizers directly enter the underground water bodies and flow into rivers, resulting in eutrophication of water bodies. Increasing the application of organic fertilizer is one of the important methods to reduce water pollution.

   

Our Products

 

We are committed to ensuring the quality of agricultural products. We aim to provide high-quality and environmental friendly straw organic fertilizer for our customers. Our organic fertilizers are the products of natural decomposition and are easy for plants to absorb and digest. While we are primarily engaged in producing organic fertilizers, we also sell agriculture food products such as apples. We generated our revenue mainly from our organic fertilizers, which constituted approximately 91.3% and 99.1% of our total revenue for the fiscal years ended December 31, 2018 and 2017, respectively. The sales of apples generated less than 1% of our total revenue for the fiscal years ended December 31, 2018 and 2017, respectively. In addition, we invested in the construction of a deep-processing slaughterhouse which is expected to have the capacity of slaughtering 200,000 black goats per year in Chuxiong City, Yunnan Province, in China. We expect to complete the construction in the fourth quarter of 2019 and start generating revenues from the black goat processing products in 2010. The rest of our revenues for the last two fiscal years comes from the sales of agricultural foods as an intermediate sales agent for large diary companies in China such as Bright Dairy & Food Co., Ltd., and Mengniu Dairy industry Limited, etc.

 

Organic Fertilizer

 

Our fertilizer products are sold under our brand names “Zongbao,” “Fukang,” and “Muliang.” There are seven lines of our organic fertilizers including:

 

Soil improvement and preparation fertilizer, which including compound micros, probiotics that can supplement microorganisms and trace elements of soil. It can be used as bother starter fertilizer and regular fertilizer;

 

Root protection fertilizer, which is an organic nutrient water-soluble fertilizer that can help the growth of crops’ roots;

 

Foliar nutrition fertilizer, which is a biological growth promoter to help customers take care of the foliar of their plants;

 

Lower pesticide residue fertilizer, which can help our customers reduce the usage of pesticide and enhance the resistance ability for plants;

 

Fruit special fertilizer which contains enhanced nutrient availability to increase plant performance;

 

Fruit tree fertilizer that promotes healthy roots and fruit growth and are ideal for all fruit trees and berries;

 

Corn and peanuts fertilizer that are specially used for corns and peanuts.

 

Our organic fertilizer contains all-purpose nutrition that can be used in the different stages of plan growth. It aims to increase soil fertility, improve soil aggregate structure, provide nutrient absorption ability for crop, improve water maintain capacity and improve fertilizer utilization, thus creating a sustaining environment and healthy soil.

 

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Agricultural Products (Food)

 

While concentrating on the development of organic fertilizers, we are actively developing the agricultural food business.

 

Apple orchard

 

In 2014, we leased 350 mu (about 57.66 acres) of mountainous land as apple farm and, for the purpose of using our own fertilizer to demonstrate the advantages of our straw organic fertilizer. Selling of apples generated less than 1% of our total revenue for the fiscal years ended December 31, 2018 and 2017, respectively. As the apple trees become more mature, we expect to generate more revenues from the sales of apples in the future.

 

Other Agricultural products

 

We are also acting as intermediate sales agent for the agricultural products from large agricultural products companies, such as Bright Dairy & Food Co., Ltd., Mengniu Dairy industry Limited, Haitian Flavoring & Food Co., Ltd., and Hangzhou Wahaha Group, etc.

 

Future Products

 

Black Goat Processing Products

 

Currently we invested in a goat slaughtering and processing factory located in Shuangbai County, Chuxiong City, Yunnan Province, PRC starting in 2018. This factory is expected to be completed in the fourth quarter of 2019 with a capacity of deep processing of 200,000 black goats per year. Our products will include goat rib lets, goat loin roast, goat loin chops, goat rack, goat leg, goat shoulder, goat leg shanks, ground goat, goat stew meat, whole goat, half goat, and lamb viscera, etc. We expect to commence the sales of black goat processing products and generate revenue in 2020.

 

Forage Grass

 

We are exploring the options to use forage grass as an alternative for traditional feed for live-stocks. We currently have several research and development projects with schools and institutions. See “Research and Development” below.

 

Our Technology and Manufacturing Process

 

We utilize our patented technologies to process crop straws into organic fertilizer.

 

Crop straws include the stems, roots, leaves, pods and vines of crops. The main ingredients are cellulose, hemicellulose and lignin, as well as a small amount of minerals. Straw is a crude fiber material and is waxy and lignified, the fermentation cycle is long for the straw to be processed into organic fertilizer. It takes 15 days to 60 days for the microbial action. This is a common challenge for large-scale and timely manufacture of straw fertilizer.

 

The crop straws will be processed into a nutrient-rich organic fertilizer in a closed container by low-pressure, medium-temperature acid hydrolysis technology (with 9-to-13-kg pressure and at 150-to-180-degree temperature). The basic principle is as follows:

 

We utilize cellulose hydrolysis, hemicellulose hydrolysis and lignin hydrolysis methods to process cellulose, hemicellulose and lignin into short-chain cellulose, polysaccharide, monosaccharide, oligomer, etc. Based on the demand for our organic fertilizers and the controlled processing conditions, on average our methods produce a mix with a majority of short-chain cellulose, some polysaccharides and a small amount of monosaccharides.

 

The straws are stored in our warehouse after compacting the straws in a briquetting machine. The straw compacts are easy to transfer and occupy less storage space. The straw compacts will be first crushed to 3 cm to 5 cm in length. The straws are then processed in the hydrothermal degradation tank for 2 to 3 hours. We pump steam generated by a boiler into the hydrothermal degradation tank, so that the temperature in the hydrothermal degradation tank is maintained between 150°C and 180°C and the pressure is maintained at 0.9-1.3MPa. After 2-3 hours of thermal degradation, we release the pressure to 0.2~0.4MPa. By releasing the pressure, the straws explode to the storage tank, resulting in a mechanical treatment of the explosion impinging stream, breaking the cellulose, hemicellulose and lignin in the straw, breaking the hydrogen bonds, degrading fiber crystallization regions into an amorphous stage and degrading macromolecules into micromolecules. After that, we add different auxiliary materials through an automatic batching system to make different organic fertilizers suitably for difference crops. We then repeat a process of crushing, granulating, cooling and screening before packaging the fertilizers into products.

 

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Sales and Marketing

 

We believe that our sales services, combined with the quality and reputation of our products will help us retain and attract new customers.

 

We distribute and sell our products to our end-customers through several different channels, including professional markets, sales department of our company and distributors:

 

Professional Market : we built long-term cooperation relationship with private agricultural companies and agricultural cooperative associations for sales;

 

Sales Department: we have sixteen sales representatives with our sales department that are professionally trained to efficiently promote and deliver products to our customers;

 

Third-party Agent and Distributors : we utilize various third-party agents and distributors to sell and distribute our products; and

 

E-commerce : we are designing and setting up online trading platform to sell our products which is expected to be completed in 2020.

 

By using various channels to sell and distribute our products to customers, we can directly serve our customers and end-customers by providing customer service and support.

 

Suppliers and Customers

 

Suppliers

 

Most of our suppliers are local suppliers from Qingdao city, Shandong province. The main raw materials for organic fees include: (i) hydrolysed crop straw, which are chemically decayed wheat straw, corn straw and other kinds of crop straw, accounting for about 54% of the total raw materials; (ii) plant ash (Potassium carbonate, K 2 CO 3 ), accounting for estimated 4% of the total raw materials; and (iii) Humic acid, accounting for about 3% of the total raw materials. Other auxiliary materials include monoammonium phosphate, urea, etc.

 

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchase for the years ended December 31, 2018 and 2017.

 

    For the year ended December 31,  
Suppliers   2018     2017  
    Amount     %     Amount     %  
A     3,651,430       43 %     N/A       N/A  
B     N/A       N/A       212,453       46 %
C     N/A       N/A       49,578       11 %
D     840,657       10 %     N/A       N/A  

 

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Customers

 

Our customers are mainly located in provinces of Guangdong, Jilin and Shandong.

 

The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the years ended December 31, 2018 and 2017.

 

    For the year ended December 31,  
Customers   2018     2017  
    Amount     %     Amount     %  
                         
A     N/A       N/A       358,710       48 %
B     N/A       N/A       92,446       12 %
C     2,096,121       16 %     N/A       N/A  
D     1,952,652       15 %     N/A       N/A  

 

Our Growth Strategy

 

We intend to build upon our proven ability to produce high-quality organic fertilizer and increase our presence and market share in the agriculture industry. We have begun to implement the growth strategies described below and expect to continue to do so over the several years following this offering. Although the net proceeds of this offering will be available to assist us to implement our growth strategies, we cannot estimate the ultimate amount of capital needed to achieve our expected growth. We may need additional capital to implement these strategies, particularly in the event we pursue acquisitions of complementary businesses or technologies.

 

Scale Up Production of Organic Fertilizer and Accelerate Penetration in Local and Regional Markets

 

We plan to construct a new organic fertilizer factory in Heilongjiang Province, China. We have entered into a strategic cooperation agreement with Suihua City of Heilongjiang Province to produce a total of 1 million tons of organic fertilizer. We expect to produce 100,000 tons of organic fertilizer in 2019 and the remaining within the next 5 years. In addition, we will establish warehouse and distribution center in Heilongjiang Province, which is expected to accelerate penetration in the local and regional market.

 

Increase Sources of Revenue by Expanding Our Current Business

 

We have a slaughtering and processing plant for black goats under construction in Yunnan Province, China. We expect the plant to begin operations in the fourth quarter of 2019 and start generating revenue in 2020. Demand for lamb in China as an alternative to pork is increasing due to growing concern on swine disease and pork quality. We plan to offer lamb and lamb products to consumers via a subscription program available on our website and mobile app in the future.

 

Continue to Invest in Research and Development and Expand Our Product Portfolio

 

We have invested significant capital in the development and improvement of our products. One of the R&D results introduced us to a type of forage grass that contains 30% more protein than other crops. We plan to work with the forage grass farmers in Xinjiang Province and produce plant protein powder from the forage grass to be used in food and beverages in 2020.

 

Competitive Advantages

 

Competitive Advantage of Our Technology

 

  Quick disposal: straw can be disposed into powder in 3 hours.

 

  Continuous operation: the production line is formed with connecting hydrolysis tanks, which allows the full use of steam heat and continuous charging, hydrolysis and discharge.

 

  Environmental protection: all the disposal devices are closed containers and pipelines to avoid gas and material leakage.

 

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  High fertilizer efficiency: the organic fertilizer matrix after straw disposal has a higher content of organic matter than the compost products of livestock and poultry manure, and has a comprehensive organic nutritional composition. It also avoids pesticide, insect pest returning to the field, excessive loose soil and hidden trouble of fermenting and burning seedlings in the field.

  

  Less space: 80,000 tons of straw disposal plant only need 6.6 – 8.2 acres of land.

 

  Strong replicability: our technology and production line can be reproduced in different countries.

 

Competitive Advantage of Our Products

 

  Quality Advantage. Compared with the traditional compost manure fermented fertilizer, our product has high concentration of organic matter and small molecular organic nutrients that can be directly absorbed by crops rich in fulvic acid, polysaccharides and monosaccharides. The effective amount of our product is 50% of the amount of conventional organic fertilizer.

 

  Safety advantage. Compared with traditional livestock and poultry manure composting fermented fertilizer, our product generates less residue of heavy metals, antibiotics, toxic and harmful bacteria, avoids the pollution of soil, and ensures the quality and safety of agricultural products.

 

Research and Development

 

Forage Grass Production Capacity

 

In July 2014, we entered into a Technology Transfer Agreement and a Consulting Agreement with the Chinese Academy of Agricultural Sciences in connection with forage grass. We seek to increase the production capacity of forage grass through this collaboration.

 

Food Product Development

 

In October 2015, we entered into a Food Development Agreement with Shanghai Food Science and Technology School. The goal of this project is to explore the technology and product application of forage grass seeds for plant protein, dietary fiber and food and beverage.

 

Animal Waste Disposal

 

In January 2019, we entered into a Technology Development Agreement with Shanghai Academy of Agricultural Sciences to research ways to dispose and utilize animal waste from our black goat slaughtering and processing plant. We aim to minimize environmental impact and avoid any water pollution.

 

Intellectual Property

 

We rely on certain intellectual property to protect our domestic business interests and ensure our competitive position in our industry.

 

We have 12 patents and 5 registered trademarks on sludge and straw technology, and we are a pilot company of technology in Jinshan District, Shanghai. Among the patents we now own, “microwave induced catalytic hydrolysis treatment sludge” was reviewed by Chinese Academy of Sciences Shanghai Technology Chaxin Consulting Centre (report no. 200921C0703709, 200821C0701507). According to the review by the Centre, there is no public report of the same kind of research, and therefore, the project is innovative and is advanced at the international level.

 

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Patents

 

We own the following patents through our subsidiaries and/or VIE entities:

 

No.     Patent Name   Patent Number   Certificate Number
1     Pressure relief material discharge and storage device   ZL2009200705204   130427
2     Chemical catalytic hydrolysis tank   ZL2009200705219   1370181
3     Material storage bin with crusher   ZL2009200706156   1370214
4     Pneumatic check valve type tank cap   ZL2009200706160   1370180
5     Regenerative heat exchanger   ZL2009200705223   1419186
6     Method for preparing novel material by catalyzing and hydrolyzing mud through microwave inducing   ZL2008100346358   814191
7     Method for removing heavy metals from activated sludge   ZL2009100494481   1224500
8     Method for comprehensively treating grating garbage and activated sludge in sewage plant   ZL2009100494462   1276553
9     Method for preparing water soluble quick-acting organic fertilizer from activated sludge   ZL2009100494458   1311657
10     Mechanical force chemical treating method for organic solid wastes   ZL2009100494477   1372950
11     Method for preparing fuel oil by activated sludge in pipe bundle cracking furnace   ZL2011100405076   1513772
12     Method for directly flashing treated water into superheated steam and application   ZL2011100405127    

 

Trademarks

 

We own several trademarks through our subsidiaries and/or VIE entities, including muliang, zongbao, xiutubao, yijifeng, jingletu, and huangdicao. Muliang and zongbao are our company’s brand names.

 

Our Property, Plant and Equipment

 

Our principal executive office is located at 2498 Wanfeng Highway, Lane 181, Fengjing Town, Jinshan District, Shanghai, China, and our telephone number is (86) 21-67355092. The office space belongs to our President and Chief Executive Officer, Mr. Lirong Wang, who allows us to use the space for free.

 

Property, plant and equipment at December 31, 2018 and 2017 consisted of:

 

    December 31,     December 31,  
    2018     2017  
Building   $ 12,838,100     $ 13,603,224  
Operating equipment     2,754,463       2,968,880  
Vehicle     104,121       58,492  
Office equipment     59,897       18,500  
Apple Orchard     1,026,505       1,029,230  
Construction in progress     341,173       -  
      17,124,259       17,678,326  
Less: Accumulated depreciation     (2,196,936 )     (1,461,897 )
    $ 14,927,323     $ 16,216,429  

 

Our Employees

 

As of the date of this prospectus, we have 106 full-time employees. The following table sets forth the number of our employees by function:

 

Functional Area   Number of Employees  
Senior management     8  
Sales and Procurement     16  
Accounting     5  
Human resources and administrative personnel     7  
Warehouse     5  
Factory     65  
Total     106  

 

We provide social insurance for each employee in accordance with Chinese law, including pension insurance, medical insurance, unemployment insurance, work injury insurance and maternity insurance, and housing provident fund.

 

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Legal Proceedings

 

Currently there are no legal proceedings pending or threatened against the Company. However, from time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise.

 

PRC Regulations

 

Our operation in China is subject to a number of PRC laws and regulations. This section summarizes all material PRC laws and regulations relevant to our business and operations in China and the key provisions of such regulations.

 

Fertilizer License

 

The examination and approval of fertilizer license is based on Article 25 of the Agricultural Law of the People's Republic of China, the Management for the Administration of Fertilizer Registration (Order No. 32 and No. 38 by the Ministry of Agriculture), and the Requirements for Fertilizer Registration Materials (Publication No. 161 from the Ministry of Agriculture). Organic fertilizers are required to be registered with provincial agricultural department.

 

There are four examination and approval requirements for obtaining a fertilizer license (1) A valid business license issued by Administration for Industry and Commerce, whose business scope shall cover the industry of fertilizer; (2) Products must comply with the relevant requirements of laws, regulations and relevant national policies (such as safety and environmental protection); (3) The product quality must comply with national standards, industry standards, local standards or enterprise standards approved by the quality supervision department; and (4) The application materials must be true, legal, complete and effective.

 

All of our fertilizer products currently have valid five-year fertilizer licenses that are renewable upon the expiration date in the year of 2022.

 

Corporate Laws and Industry Catalogue Relating to Foreign Investment

 

The establishment, operation, and management of corporate entities in China are governed by the Company Law of the PRC, or the Company Law, effective in 1994, as amended in 1999, 2004, and 2005, respectively. The Company Law is applicable to our PRC subsidiaries and affiliated PRC entity unless the PRC laws on foreign investment have stipulated otherwise.

 

The establishment, approval, registered capital requirement, and day-to-day operational matters of wholly foreign-owned enterprises (“WFOE”), are regulated by the WFOE Law of the PRC effective in 1986, as amended in 2000, and the Implementation Rules of the WFOE Law of the PRC effective in 1990, as amended in 2001.

 

Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. The Catalogue divides industries into three categories: encouraged, restricted, and prohibited. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.

 

Establishment of WFOEs is generally permitted in encouraged industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures.

 

For example, sales and distribution of audio and video products are among the restricted categories, and only contractual joint ventures in which Chinese partners holding majority interests can engage in the distribution of audio and video products in China.

 

In addition, restricted category projects are also subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited category.

 

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Regulations Relating to Taxation

 

In January 2008, the PRC Enterprise Income Tax Law (The “EIT” Law) took effect. The EIT applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, unless where tax incentives are granted to special industries and projects. Under the EIT Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a non-resident enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax.

 

Under the EIT Law, an enterprise established outside China with “de facto management bodies” within China is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. A circular issued by the State Administration of Taxation in April 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprises” clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities.

 

Under the implementation regulations to the EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances, and properties of an enterprise. In addition, the tax circular mentioned above specifies that certain PRC-invested overseas enterprises controlled by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident enterprises if the following are located or residence in the PRC: senior management personnel and departments that are responsible for daily production, operation, and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.

 

Regulations Relating to Foreign Exchange

 

Pursuant to the Regulations on the Administration of Foreign Exchange issued by the State Council and effective in 1996, as amended in January 1997 and August 2008, current account transactions, such as sale or purchase of goods, are not subject to PRC governmental control or restrictions. Certain organizations in the PRC, including foreign-invested enterprises, may purchase, sell, and/or remit foreign currencies at certain banks authorized to conduct foreign exchange business upon providing valid commercial documents. Approval of the PRC State Administration of Foreign Exchange (“SAFE”), however, is required for capital account transactions.

 

In August 2008, SAFE issued a circular on the conversion of foreign currency into Renminbi by a foreign-invested company that regulates how the converted Renminbi may be used. The circular requires that the registered capital of a foreign-invested enterprise converted into Renminbi from foreign currencies may only be utilized for purposes within its business scope. For example, such converted amounts may not be used for investments in or acquisitions of other PRC companies, unless specifically provided otherwise, which can inhibit the ability of companies to consummate such transactions. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi registered capital of foreign-invested enterprises converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been utilized. Violations may result in severe penalties, such as heavy fines.

 

Regulations Relating to Labor

 

Pursuant to the PRC Labor Law effective in 1995 and the PRC Labor Contract Law effective in 2008, a written labor contract is required when an employment relationship is established between an employer and an employee. Other labor-related regulations and rules of the PRC stipulate the maximum number of working hours per day and per week as well as the minimum wages. An employer is required to set up occupational safety and sanitation systems, implement the national occupational safety and sanitation rules and standards, educate employees on occupational safety and sanitation, prevent accidents at work, and reduce occupational hazards.

 

In the PRC, workers dispatched by an employment agency are normally engaged in temporary, auxiliary, or substitute work. Pursuant to the PRC Labor Contract Law, an employment agency is the employer for workers dispatched by it and must perform an employer’s obligations toward them. The employment contract between the employment agency and the dispatched workers, and the placement agreement between the employment agency and the company that receives the dispatched workers must be in writing. Also, the company that accepts the dispatched workers must bear joint and several liabilities for any violation of the Labor Contract Law by the employment agencies arising from their contracts with dispatched workers. An employer is obligated to sign an indefinite term labor contract with an employee if the employer continues to employ the employee after two consecutive fixed-term labor contracts. The employer also has to pay compensation to the employee if the employer terminates an indefinite term labor contract. Except where the employer proposes to renew a labor contract by maintaining or raising the conditions of the labor contract and the employee is not agreeable to the renewal, an employer is required to compensate the employee when a definite term labor contract expires. Furthermore, under the Regulations on Paid Annual Leave for Employees issued by the State Council in December 2007 and effective as of January 2008, employees who have served an employer for more than one (1) year and less than ten years are entitled to a 5-day paid vacation, those whose service period ranges from 10 to 20 years are entitled to a 10-day paid vacation, and those who have served for more than 20 years are entitled to a 15-day paid vacation. An employee who does not use such vacation time at the request of the employer shall be compensated at three times their normal salaries for each waived vacation day.

 

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Pursuant to the Regulations on Occupational Injury Insurance effective in 2004 and the Interim Measures concerning the Maternity Insurance for Enterprise Employees effective in 1995, PRC companies must pay occupational injury insurance premiums and maternity insurance premiums for their employees. Pursuant to the Interim Regulations on the Collection and Payment of Social Insurance Premiums effective in 1999 and the Interim Measures concerning the Administration of the Registration of Social Insurance effective in 1999, basic pension insurance, medical insurance, and unemployment insurance are collectively referred to as social insurance. Both PRC companies and their employees are required to contribute to the social insurance plans. Pursuant to the Regulations on the Administration of Housing Fund effective in 1999, as amended in 2002, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both PRC companies and their employees are required to contribute to the housing funds.

 

Regulations on Dividend Distribution

 

Wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits after tax as determined in accordance with PRC accounting standards. Remittance of dividends by a wholly foreign-owned enterprise out of China is subject to examination by the banks designated by SAFE. Wholly foreign-owned companies may not pay dividends unless they set aside at least 10% of their respective accumulated profits after tax each year, if any, to fund certain reserve funds, until such time as the accumulative amount of such fund reaches 50% of the wholly foreign-owned company’s registered capital. In addition, these companies also may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds at their discretion. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

Safe Regulations on Offshore Special Purpose Companies Held by PRC Residents or Citizens

 

Pursuant to the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles, or Circular No. 75, issued in October 2005 by SAFE and its supplemental notices, PRC citizens or residents are required to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees, or other material events that do not involve roundtrip investments. Subsequent regulations further clarified that PRC subsidiaries of an offshore company governed by the SAFE regulations are required to coordinate and supervise the filing of SAFE registrations in a timely manner by the offshore holding company’s shareholders who are PRC citizens or residents. If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE branches. If the shareholders of the offshore holding company who are PRC citizens or residents do not complete their registration with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions.

 

M&A Rules

 

On August 8, 2006, six PRC regulatory agencies, including China Securities Regulatory Commission (“CSRC”), promulgated a rule entitled Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“the M&A Rules”) to regulate foreign investment in PRC domestic enterprises. The M&A rules, among other things, requires an overseas special purpose vehicle (“SPV”), formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of CSRC prior to publicly listing their securities on an overseas stock exchange.. There remains some uncertainty as to how this regulation will be interpreted or implemented in the context of an overseas offering. If the CSRC or another PRC regulatory agency subsequently determines that approval is required for this offering, we may face sanctions by the CSRC or another PRC regulatory agency.

 

The M&A Rules also establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise.

 

SAFE Regulations on Employee Share Options

 

On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Share Holding Plan or Share Option Plan of Overseas Listed Company, or the Share Option Rule. Pursuant to the Share Option Rule, Chinese citizens who are granted share options by an overseas publicly listed company are required to register with SAFE through a Chinese agent or Chinese subsidiary of the overseas publicly listed company and complete certain other procedures. Our PRC employees who have been granted share options will be subject to these regulations. Failure of our PRC share option holders to complete their SAFE registrations may subject these PRC employees to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us.

 

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MANAGEMENT

 

Directors, Executive Officers and Corporate Governance.

 

The following table sets forth certain information with respect to our directors, executive officers and significant employees:

 

Name   Age   Position

Lirong Wang

  45   President, Chief Executive Officer, Chief Financial Officer, and Director

 

Lirong Wang

 

Mr. Wang has been the sole officer and director of the Company since January 11, 2016. Mr. Wang has also been the Chairman and CEO of Shanghai Muliang Industries Co., Ltd. since December 2006. From November 2002 to November 2006, Mr. Wang was general manager of Shanghai Aoke Chemical Products Co., Ltd. Mr. Wang received his bachelor’s degree in storage management from Harbin University of Commerce in 1996.

 

Term of Office

 

Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.

 

Family Relationships

 

There are no family relationships between any of our directors or executive officers.

 

Certain Legal Proceedings

 

To our knowledge, no director, nominee for director, or executive officer of the Company has been a party in any legal proceeding material to an evaluation of his ability or integrity during the past ten years.

 

Code of Ethics

 

The company has not adopted a Code of Ethics applicable to its Principal Executive Officer and Principal Financial Officer.

 

Corporate Governance

 

The business and affairs of the company are managed under the direction of our board. In addition to the contact information in this annual report, each stockholder will be given specific information on how he/she can direct communications to the officers and directors of the corporation at our annual stockholders meetings. All communications from stockholders are relayed to the members of the board of directors.

 

Board Committees

 

We presently do not have an audit committee, compensation committee or nominating committee or committee performing similar functions, as our management believes that until this point it has been premature at the early stage of our management and business development to form an audit, compensation or nominating committee. Until these committees are established, these decisions will continue to be made by our Board of Directors. The Company expects to create committees which are compliant with the rules of Nasdaq in connection with its application to the Nasdaq Capital Market.

 

Board Leadership Structure and Role in Risk Oversight

 

Our Board is primarily responsible for overseeing our risk management processes. The Board receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The Board focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our company are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.

   

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Executive Compensation.

 

The following summary compensation table sets forth the compensation earned by our named executive officers for the years ended December 31, 2018 and 2017.

 

Summary Compensation Table

 

          Salary     Bonus     Stock Awards     All Other Compensation     Total  
Name and Principal Position   Fiscal Year     ($)     ($)     ($)     ($)     ($)  
Lirong Wang     2018       17,450       0       0       0       17,450  
President, Chief Executive Officer, Chief Financial Officer, Secretary, and Treasurer     2017       18,443       0       0       0       18,443  

 

Compensation of Directors

 

Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors (which currently consists solely of Lirong Wang) has the authority to fix the compensation of directors. No amounts have been paid to, or accrued to, directors in such capacity.

 

Employment Agreements

 

Currently, we do not have an employment agreement in place with our officers and directors.

 

Option Grants

 

We had no outstanding equity awards as of the end of fiscal years ended December 31, 2018 and 2017.

 

Option Exercises and Fiscal Year-End Option Value Table

 

There were no stock options exercised during fiscal years ended December 31, 2018 and 2017 by the executive officers.

 

Outstanding Equity Awards at Fiscal Year-End Table

 

We had no outstanding equity awards as of the end of fiscal years ended December 31, 2018 and 2017.

 

Long-Term Incentive Plans and Awards

 

There were no awards made to a named executive officer in fiscal 2018 and 2017 under any long-term incentive plan.

  

Director Compensation

 

Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix the compensation of directors.

 

Our directors did not receive any compensation for their services as directors for the years ended December 31, 2018 and 2017.

 

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PRINCIPAL SHAREHOLDERS

  

The following table provides information as to shares of common stock beneficially owned as of June 26, 2019, by:

 

each director;

 

each named executive officer;

 

each person known by us to beneficially own at least 5% of our common stock; and

 

all directors and executive officers as a group.

 

Beneficial ownership is determined in accordance with the rules of the SEC. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned (subject to community property laws where applicable). Unless otherwise indicated, the address of each beneficial owner listed below is 1958 Qianming East Road, Fengjing, Jinshan District, Shanghai, China.

 

Name of Beneficial Owners   Amount and Nature of Beneficial Ownership     Percent of Common Stock  
Lirong Wang     36,322,973       64.862 %
All officers and directors as a group (1 persons)     36,322,973       64.862 %
Other 5% shareholders:                
None.                

 

  (1) Applicable percentages are based on 56,341,953 shares outstanding as of June 26, 2019 adjusted as required by rules of the SEC. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Unless otherwise indicated in the footnotes to this table, Company believes that each of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them.

 

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RELATED PARTY TRANSACTIONS

 

Account receivable and sales from related parties

 

The Company did not make sales to any related party for the year ended December 31, 2018 and 2017 and for the three months ended March 31, 2019 and 2018. And the Company has no account receivable balance as of March 31, 2019 and 2018.

 

Account pa y able and purchase f rom related parties

 

For the year ended December 31, 2018, the Company purchased fertilizer manufacturing equipment of $120,945 from Shanghai Aoke Chemicals Co., Ltd, an entity controlled by Mr. Lirong Wang, CEO and majority shareholder of the Company. As of March 31, 2019 and December 31, 2018, account payable to Shanghai Aoke Chemicals Co., Ltd. were $119,205 and $116,340.

 

The Company did not purchase other material or service from related parties for the year ended December 31, 2018 and 2017. The Company did not make any purchase from related parties for the three months ended March 31, 2019.

 

Due from Related Parties

 

The Company does not have balances due from related parties as of March 31, 2019, December 31, 2018 and 2017, respectively.

 

Due to related party

 

Outstanding balance due to Mr. Lirong Wang and Mr. Guohua Lin below are advances from related parties for working capital of the Company which are due on demand, non-interest bearing, and unsecured, unless further disclosed.

 

    March 31,     December 31,      
    2019     2018     Relationship
Mr. Lirong Wang     680,238       1,442,751     The CEO and Chairman / Actual controlling person
Ms. Xueying Sheng     161,403       169,743     Controller/Accounting manager of the Company
Mr. Guohua Lin     85,083       3,054     Senior management / One of the Company’s shareholders
Total     926,724       1,615,547      

 

For the three months ended March 31, 2019, the Company borrowed $574,295 from Mr. Lirong Wang, and repaid $1,114,501.

 

For the three months ended March 31, 2019, the Company borrowed $83,742 from Mr. Guohua Lin, and repaid $271.  

 

On November 8, 2017, the Company borrowed $31,993 from Ms. Xueying Sheng. The loan is unsecured, without maturity, and bears an interest rate of 20%.

 

For the three months ended March 31, 2019, the Company borrowed $25,976 from Ms. Xueying Sheng and repaid $38,431.

 

These loans are due on demand, non-interest bearing, and unsecured.

 

Independence of the Board of Directors

 

For a director to be “independent” under these standards, the Board must affirmatively determine that the director has no material relationship with us, either directly or as a partner, shareholder, or officer of an organization that has a relationship with us. Applying corporate governance standards, and all other applicable laws, rules and regulations, the Board of Directors has determined that none of our directors are independent. This does not constitute an independent board of directors.

  

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DESCRIPTION OF SECURITIES

 

Authorized Capital Stock

 

Our capital stock shall consist of 500,000,000 shares of common stock, $0.0001 par value, and 100,000,000 shares of blank check preferred stock, $0.0001 par value. To the fullest extent permitted by the laws of the State of Nevada, as the same now exists or may hereafter be amended or supplemented, the Board of Directors may fix and determine the designations, rights, preferences or other variations of each class or series within each class of preferred stock of the Company. We may issue the shares of stock for such consideration as may be fixed by the Board of Directors.

 

As of June 26, 2019, there were 56,341,953 shares of common stock issued and outstanding. There are no shares of our preferred stock issued and outstanding.

 

Common Stock

 

Each share of our common stock entitles its holder to one vote in the election of each director and on all other matters voted on generally by our stockholders, other than any matter that (1) solely relates to the terms of any outstanding series of preferred stock or the number of shares of that series and (2) does not affect the number of authorized shares of preferred stock or the powers, privileges and rights pertaining to the common stock. No share of our common stock affords any cumulative voting rights. This means that the holders of a majority of the voting power of the shares voting for the election of directors can elect all directors to be elected if they choose to do so.

 

Holders of our common stock will be entitled to dividends in such amounts and at such times as our Board of Directors in its discretion may declare out of funds legally available for the payment of dividends. We currently intend to retain our entire available discretionary cash flow to finance the growth, development and expansion of our business and do not anticipate paying any cash dividends on the common stock in the foreseeable future. Any future dividends will be paid at the discretion of our Board of Directors after taking into account various factors, including:

 

  general business conditions;

 

  industry practice;

 

  our financial condition and performance;

 

  our future prospects;

 

  our cash needs and capital investment plans;

 

  our obligations to holders of any preferred stock we may issue;

 

  income tax consequences; and

 

  the restrictions Delaware and other applicable laws and our credit arrangements then impose.

 

If we liquidate or dissolve our business, the holders of our common stock will share ratably in all our assets that are available for distribution to our stockholders after our creditors are paid in full and the holders of all series of our outstanding preferred stock, if any, receive their liquidation preferences in full.

 

Our common stock has no preemptive rights and is not convertible or redeemable or entitled to the benefits of any sinking or repurchase fund.

 

Preferred Stock

 

We do not have any preferred shares outstanding as of the date of this prospectus. However, preferred shares may be issued from time to time in one or more series, each consisting of a number of preferred shares as determined by our Board of Directors, who also may fix the designations, rights, privileges, restrictions and conditions attached to the shares of each series of preferred shares. The preferred shares of each series shall, with respect to payment of dividends and distributions of assets in the event of liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, or any other distribution of our assets among our shareholders for the purpose of winding-up our affairs, rank on a preference over shares of our common stock and the shares of any other class ranking junior to the preferred shares.

 

Transfer Agent and Registrar

 

The Transfer Agent for our common stock is West Coast Stock Transfer Co., located at 721 N. Vulcan Ave., Suite 205, Encinitas, CA 92024.

 

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MARKET PRICE AND DIVIDENDS ON OUR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS

 

Our common stock is currently quoted on OTCQB under the symbol “MULG’”, however, there has been no established public trading market for our common stock. As of June 26, 2019, the last reported sale price of our shares of common stock on the OTCQB was US$27.00 per share, and on June 26, 2019 we had 56,341,953 shares of common stock outstanding.

 

Holders of Capital Stock

 

As of the date of this prospectus, we had 1,022 holders of our common stock.

 

Stock Option Grants

 

We do not have a stock option plan in place and have not granted any stock options at this time.

 

Dividends

 

To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our Board of Directors has the discretion to declare and pay dividends in the future.

 

Payment of dividends in the future will depend upon our earnings, capital requirements, and any other factors that our Board of Directors deems relevant.

 

SHARES ELIGIBLE FOR FUTURE SALE

 

Immediately prior to this offering, there was little to no trading activity in our common stock. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the market price of our common stock. Immediately prior to the offering, there are 56,341,953 shares of common stock outstanding. Upon the completion of the offering, we will have an aggregate of                   shares of common stock (for the maximum offering amount) or            (for minimum offering amount) shares outstanding immediately.

  

All shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to the Rule 144 resale restrictions described below, other than the holding period requirement. The remaining shares of common stock, representing approximately % or % of our outstanding shares, following the maximum offering or minimum offering, respectively, will be held by our existing shareholders. Many of these shares are “restricted securities” as that phrase is defined in Rule 144 under the Securities Act. Subject to certain contractual restrictions, including the lock-up agreements described below, holders of restricted shares will be entitled to sell those shares in the public market pursuant to an effective registration statement under the Securities Act or if they qualify for an exemption from registration under Rule 144. Sales of these shares in the public market after the restrictions under the lock-up agreements lapse, or the perception that those sales may occur, could cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales or perceptions. As a result of lock-up agreements described below, and the provisions of Rules 144 under the Securities Act, the restricted securities will be available for sale in the public market.

 

We, all of our directors and officers and certain shareholders have agreed with the underwriter, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our shares of common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock for a period of 180-days after the date of this prospectus without the prior written consent of the underwriter. This consent may be given at any time without public notice. Upon expiration of the lock-up period, these shares will be available for sale in the public market, subject in some cases to applicable volume limitations under Rule 144.

 

We also agreed to register shares underlying the Underwriter’s Warrants. Once exercised, of which there can be no guarantee, subject to the relative lock up period described elsewhere in this prospectus, those shares shall be freely tradable without restriction or further registration under the Securities Act.

  

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Rule 144

 

Some of our stockholders will be forced to hold their shares of our common stock for at least a six-month period before they are eligible to sell those shares, and even after that six-month period, sales may not be made under Rule 144 promulgated under the Securities Act unless we and such stockholders are in compliance with other requirements of Rule 144.

 

In general, Rule 144 provides that (i) any of our non-affiliates that has held restricted common stock for at least six months is thereafter entitled to sell its restricted stock freely and without restriction, provided that we remain compliant and current with our SEC reporting obligations, and (ii) any of our affiliates, which includes our directors, executive officers and other person in control of us, that has held restricted common stock for at least six months is thereafter entitled to sell its restricted stock subject to the following restrictions: (a) we are compliant and current with our SEC reporting obligations, (b) certain manner of sale provisions are satisfied, (c) a Form 144 is filed with the SEC, and (d) certain volume limitations are satisfied, which limit the sale of shares within any three-month period to a number of shares that does not exceed the greater of 1% of the total number of outstanding shares. A person who has ceased to be an affiliate at least three months immediately preceding the sale and who has owned such shares of common stock for at least one year is entitled to sell the shares under Rule 144 without regard to any of the limitations described above.

  

Summary of Shares Available for Future Sale

 

The following table summarizes the total shares potentially available for future sale. To the extent we sell a number of shares of common stock between the minimum and maximum offering, the below tables will be adjusted proportionately as to numbers of shares available for sale and dates on which such shares may be sold (as to currently outstanding shares).

 

Minimum Offering Shares   Date Available for Sale
Currently Outstanding Shares of Common Stock Subject to Lock-up Agreement: (1)   After 180-day from the date of effectiveness or commencement of sales of the public offering.
     
Shares Offered in this Offering:   After the completion of this offering, these shares will be freely tradable.

 

Maximum Offering Shares   Date Available for Sale
Currently Outstanding Shares of Common Stock Subject to Lock-up Agreement: (1)   After 180-days from the date of effectiveness or commencement of sales of the public offering.
     
Shares Offered in this Offering:   After the completion of this offering, these shares will be freely tradable.

 

(1) The number of shares of common stock outstanding as of June 26, 2019.

   

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UNDERWRITING

 

In connection with this offering, we will enter into an underwriting agreement with Network 1 Financial Securities, Inc., which we sometimes refer to herein as the Underwriter. The Underwriter is not purchasing or selling any securities offered by this prospectus but will assist us in this offering on a “best efforts” basis. The Underwriter has no obligation to buy any of the common stock from us nor are they required to arrange the purchase or sale of any specific number or dollar amount of the common stock, but have agreed to use their “best efforts” to arrange for the sale of a minimum of [ ] shares of common stock and a maximum of [ ] shares of common stock. The Underwriter may retain other brokers or dealers to act as sub-agents on its behalf in connection with this offering and may pay any sub-agent a solicitation fee with respect to any securities placed by it. Affiliates of the company and affiliates and associated persons of the Underwriter may invest in this offering on the same terms and conditions as the public investors participating in this offering, and any common stock purchased will make up a portion of the minimum offering needed to complete this offering.

 

The shares of common stock are being offered on a “best efforts” basis, meaning that the Underwriter is not obligated to purchase any common stock. No common stock will be sold unless at least a minimum of [ ] shares of common stock have been sold no later than [ ], 20[ ], unless extended until [ ], 20[ ] with the consent of our board of directors. All monies collected for subscriptions will be held in a separate escrowed bank account at [ ]. [ ] shall serve as escrow agent. The monies shall remain in the bank account until the total amount of [ ] shares of common stock have been sold. Any checks for the purchase of shares should be made payable to “[ ] Escrow Account” The Underwriter will instruct their customers to transfer funds from their respective accounts directly to the escrow agent by wire transfer and will instruct other purchasers of the shares to make checks payable to “[ ] Escrow Account”. Upon receipt, the Escrow Agent shall promptly deposit funds in the escrowed bank account. Upon receipt of funds sufficient for the sale of [ ] shares and satisfaction of all other closing conditions, the funds may be transferred to our business account. In the event the minimum total of [ ] shares is not sold prior to [ ], unless extended until [ ] with the consent of our board of directors, all monies will be returned to investors, without interest or deduction, within one business day.

 

Fees and Expenses

 

The following table shows the public offering price, Underwriter commissions and proceeds, before expenses, to us.

 

    Price
per Share
  Commission
per Share
  Proceeds to
Company
 
Minimum Offering ($6,000,000)   $          $             $         
Maximum Offering ($15,000,000)   $     $     $    

 

We and the Underwriter have agreed to pay commissions of 6.5% per share (or $[ ] per share) on the offering proceeds. We have agreed to pay to the Underwriter upon the consummation of the offering, a non-accountable expense allowance equal to 1.5% of the gross proceeds of the offering. We have also agreed to pay the Underwriter reasonable out-of-pocket expenses including but not limited to, (i) reasonable travel and out-of-pocket expenses, including clearing charges; (ii) reasonable fees of legal counsel incurred by the Underwriter in connection with the offering. The total accountable expenses shall not exceed $125,000. We have paid an advance of $75,000 to the Underwriter to be applied to the Underwriter’ anticipated out-of-pocket expenses. The advance will be returned to us to the extent such out-of-pocket accountable expenses are not actually incurred in accordance with FINRA Rule 5110(f)(2)(C).

 

Underwriter Warrants

 

We have also agreed to grant to the Underwriter a warrant covering a number of shares equal to 10% of the aggregate number of the Shares sold in the offering. The Underwriter warrants will be exercisable, in whole or in part, during a period commencing on the effective date of the registration statement and will expire on the five-year anniversary of the effective date of the offering. The Underwriter warrants will be exercisable at a price equal to 120% of the offering price and shall not be redeemable. We have registered the shares underlying the Underwriter warrants in the registration statement. The Underwriter warrants may not be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the effective date of the registration statement , of which this prospectus forms a part (in accordance with FINRA Rule 5110), except that they may be assigned, in whole or in part, to any successor, officer, manager, member, or partner of the underwriter, and to members of the syndicate or selling group and their respective officers, managers, members or partners. The Underwriter warrants may be exercised as to all or a lesser number of shares, and will provide for cashless exercise. The Underwriter warrants shall further provide for adjustment in the number and price of such warrants (and the share of the common stock underlying such warrants) in the event of recapitalization, merger or other structural transaction to prevent dilution.

 

Terms of the Offering

 

We are offering, on a best efforts basis, a minimum of US$6,000,000 and a maximum of US$15,000,000. The offering is being made without a firm commitment by the Underwriter, which has no obligation or commitment to purchase any securities. The Underwriter is not required to sell any specific number of dollar amount of the common stock but will use its best efforts to sell of the common stock offered. The common stock is being offered for a period through and including [   ], unless extended until [   ] with the consent of our board of directors. If the minimum offering amount is not raised prior to [   ], or [   ] if the offering is extended, all subscription funds from the escrow account will be returned to investors promptly without interest (since the funds are being held in a non-interest bearing account) or deduction of fees. The offering may terminate on the earlier of (i) any time after the minimum offering amount of our common stock is raised, or (ii) [ ], unless extended by our board of directors until [   ]. Reasons the board may consider in determining whether to extend or terminate the offering may include, but are not limited to: amount of funds raised, potential to raise additional capital, and response to the offering as of that date. If we can successfully raise the minimum offering amount within the offering period, the proceeds from the offering will be released to us.

 

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Escrow Agent and Deposit of Offering Proceeds

 

The Underwriter and the Company have agreed in accordance with the provisions of SEC Rule 15c2-4 to cause all funds received by the Underwriter for the sale of the common stock to be promptly deposited in a non-interest bearing escrow account (“Escrow Account”) maintained by [   ] (the “Escrow Agent”) as escrow agent for the investors in the offering, who will deposit the funds received in the Escrow Account into a special bank account established by [  ]. The purpose of the Escrow Account is for (i) the deposit of all subscription monies (checks or wire transfers) which are received by the underwriter from prospective purchasers of our offered common stock and are delivered by the underwriter to the Escrow Agent, (ii) the holding of amounts of subscription monies which are collected through the banking system, and (iii) the disbursement of collected funds. The Escrow Agent will exercise signature control on the escrow account and will act based on joint instructions from our Company and the Underwriter. On the closing date for the offering, and presuming that all conditions to closing have been satisfied (such as NASDAQ approval and other conditions described herein), proceeds in the bank account maintained will be delivered to our company.

 

The Underwriter shall promptly deliver to the Escrow Agent all funds in the form of checks or wire transfers which it receives from prospective purchasers of our common stock by noon of the next business day following receipt where internal supervisory review is conducted at the same location at which subscription documents and funds are received. Simultaneously with each deposit to the Escrow Account, the Underwriter shall inform the Escrow Agent about the subscription information for each prospective purchaser. Upon the Escrow Agent’s receipt of such monies, they shall be credited to the Escrow Account and then deposited to the bank account at [ ]. All checks delivered to the Escrow Agent shall be made payable to “[   ] Escrow Account”. The Escrow Agent shall not be required to accept for credit to the Escrow Account or for deposit into the Escrow Account checks which are not accompanied by the appropriate subscription information. Wire transfers representing payments by prospective purchasers shall not be deemed deposited in the Escrow Account until the Escrow Agent has received in writing the subscription information required with respect to such payments.

 

No interest will be available for payment to either us or the investors (since the funds are being held in a non-interest bearing account). All subscription funds will be held in trust pending the raising of the minimum offering amount and no funds will be released to us until the completion of the offering. Release of the funds to us is based upon the Escrow Agent reviewing the records of the depository institution holding the escrow to verify that the funds received have cleared the banking system prior to releasing the funds to us. All subscription information and subscription funds through checks or wire transfers should be delivered to the Escrow Agent. Failure to do so will result in subscription funds being returned to the investor. In event that the offering is terminated, all subscription funds from the escrow account will be returned to investors.

 

If we terminate this offering, all amounts will be promptly returned to the investors as described below. In the event of any dispute between us and the Underwriter, including whether and how funds are to be reimbursed, the Escrow Agent is entitled to petition a court of competent jurisdiction to resolve any such dispute.

 

Investors must pay in full for the common stock at the time of investment. Payment for the shares may be made (i) by check, bank draft or money order made payable to “[   ] Escrow Account” and delivered to the Underwriter no less than four business days before the date of closing, or (ii) by wire made payable to “[ ] Escrow Account”. The checks, bank drafts and money orders will be forwarded/returned by the Underwriter and their dealers to the Escrow Agent by noon of the following business day. The Underwriter will inform prospective purchasers of the anticipated date of closing.

 

Proceeds deposited in escrow with the Escrow Agent may not be withdrawn by investors prior to the earlier of the closing of the offering or the date the offering is terminated. If the offering is withdrawn or canceled or terminated and proceeds therefrom are not received by us on or prior to the date the offering is terminated, all proceeds will be promptly returned by the Escrow Agent without interest or deduction to the persons from which they are received (within one business day) in accordance with applicable securities laws. All such proceeds will be placed in a non-interest bearing account pending such time.

 

Electronic Offer, Sale and Distribution of Ordinary Shares

 

A prospectus in electronic format may be made available on the websites maintained by the Underwriter. In addition, the common stock may be sold by the Underwriter to securities dealers who resell the common stock to online brokerage account holders. Other than the prospectus in electronic format, the information on the Underwriter’s website and any information contained in any other website maintained by the Underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the Underwriter in its capacity as Underwriter and should not be relied upon by investors.

 

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Lock-up Agreements

 

We, each of our directors and officers and holders of ten percent or more of our common stock on a fully diluted basis immediately prior to the consummation of this offering have agreed or are otherwise contractually restricted for a period of 180 days after the date of this prospectus, without the prior written consent of the Underwriter not to directly or indirectly:

 

  issue (in the case of us), offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of our common stock or other capital stock or any securities convertible into or exercisable or exchangeable for our common stock or other capital stock;
     
  in the case of us, file or cause the filing of any registration statement under the Securities Act with respect to any shares of our common stock or other capital stock or any securities convertible into or exercisable or exchangeable for our common stock or other capital stock, other than registration statements on Form S-8 filed with the SEC after the closing date of this offering; or
     
  enter into any swap or other agreement, arrangement, hedge or transaction that transfers to another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of our common stock or other capital stock or any securities convertible into or exercisable or exchangeable for our common stock or other capital stock,

 

whether any transaction described in any of the foregoing bullet points is to be settled by delivery of our common stock or other capital stock, other securities, in cash or otherwise, or publicly announce an intention to do any of the foregoing.

 

There are no existing agreements between the Underwriter and any person who will execute a lock-up agreement in connection with this offering providing consent to the sale of shares prior to the expiration of the lock-up period. The lock up does not apply to the issuance of shares upon the exercise of rights to acquire shares of common stock pursuant to any existing stock option or the conversion of any of our preferred convertible stock.

 

Procedures and Requirements for Subscription

 

If you decide to subscribe for any shares in this offering, you must:

 

  execute and deliver a subscription agreement; and
     
  deliver the subscription price to the Company by cashier’s check or wire transfer of immediately available funds.

 

The subscription agreement requires you to disclose your name, address, social security number, telephone number, email address, number of shares you are purchasing, and the price you are paying for your shares.

 

Upon the Company’s acceptance of a subscription and receipt of full payment, and subject to the timing qualification set forth above, the Company shall countersign the subscription agreement and issue a stock certificate along with a copy of the subscription agreement.

 

We have the right to accept or reject subscriptions in whole or in part, for any reason or for no reason. All monies from rejected subscriptions will be returned immediately by us to the subscriber, without interest or deductions. Subscriptions for securities will be accepted or rejected within three (3) business days after we receive them.

 

Offer Restrictions outside the United States

 

Other than in the United States, no action has been taken by us or the Underwriter that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

   

Australia. This prospectus is not a product disclosure statement, prospectus or other type of disclosure document for the purposes of Corporations Act 2001 (Commonwealth of Australia) (the “Act”) and does not purport to include the information required of a product disclosure statement, prospectus or other disclosure document under Chapter 6D.2 of the Act. No product disclosure statement, prospectus, disclosure document, offering material or advertisement in relation to the offer of the shares has been or will be lodged with the Australian Securities and Investments Commission or the Australian Securities Exchange.

 

Accordingly, (1) the offer of the shares under this prospectus may only be made to persons: (i) to whom it is lawful to offer the shares without disclosure to investors under Chapter 6D.2 of the Act under one or more exemptions set out in Section 708 of the Act, and (ii) who are “wholesale clients” as that term is defined in section 761G of the Act, (2) this prospectus may only be made available in Australia to persons as set forth in clause (1) above, and (3) by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (1) above, and the offeree agrees not to sell or offer for sale any of the shares sold to the offeree within 12 months after their issue except as otherwise permitted under the Act.

 

Canada. The shares may not be offered, sold or distributed, directly or indirectly, in any province or territory of Canada other than the provinces of Ontario and Quebec or to or for the benefit of any resident of any province or territory of Canada other than the provinces of Ontario and Quebec, and only on a basis that is pursuant to an exemption from the requirement to file a prospectus in such province, and only through a dealer duly registered under the applicable securities laws of such province or in accordance with an exemption from the applicable registered dealer requirements.

 

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Cayman Islands. This prospectus does not constitute a public offer of the shares, whether by way of sale or subscription, in the Cayman Islands. Each underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, any shares to any member of the public in the Cayman Islands.

 

European Economic Area. In relation to each Member State of the European Economic Area that has implemented the Prospectus Directive, or a Relevant Member State, from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, or the Relevant Implementation Date, an offer of the shares to the public may not be made in that Relevant Member State prior to the publication of a prospectus in relation to the shares that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and the competent authority in that Relevant Member State has been notified, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of the shares to the public in that Relevant Member State at any time,

 

to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

 

to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year, (2) a total balance sheet of more than €43,000,000, and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

 

to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive; or

 

in any other circumstances that do not require the publication by the company of a prospectus pursuant to Article 3 of the Prospectus Directive;

 

provided that no such offer of shares shall result in a requirement for the publication by the company of a prospectus pursuant to Article 3 of the Prospectus Directive.

 

For purposes of the above provision, the expression “an offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

 

Hong Kong.  The shares may not be offered or sold by means of this document or any other document other than (i) in circumstances that do not constitute an offer or invitation to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong) or the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances that do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), that is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

 

Malaysia

 

The shares have not been and may not be approved by the securities commission Malaysia, or SC, and this document has not been and will not be registered as a prospectus with the SC under the Malaysian capital markets and services act of 2007, or CMSA. Accordingly, no securities or offer for subscription or purchase of securities or invitation to subscribe for or purchase securities are being made to any person in or from within Malaysia under this document except to persons falling within any of paragraphs 2(g)(i) to (xi) of schedule 5 of the CMSA and distributed only by a holder of a capital markets services license who carries on the business of dealing in securities and subject to the issuer having lodged this prospectus with the SC within seven days from the date of the distribution of this prospectus in Malaysia. The distribution in Malaysia of this document is subject to Malaysian laws. Save as aforementioned, no action has been taken in Malaysia under its securities laws in respect of this document. This document does not constitute and may not be used for the purpose of a public offering or an issue, offer for subscription or purchase, invitation to subscribe for or purchase any securities requiring the approval of the sc or the registration of a prospectus with the SC under the CMSA.

 

People’s Republic of China. This prospectus may not be circulated or distributed in the PRC and the shares may not be offered or sold, and will not offer or sell to any person for re-offering or resale directly or indirectly to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. For the purpose of this paragraph, PRC does not include Taiwan and the special administrative regions of Hong Kong and Macau.

 

 

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Singapore

 

The securities represented may not be offered or sold, nor may any document or other material in connect with such securities be distributed, either directly or indirectly, (i) to persons in Singapore other than under circumstances in which such offer or sale does not constitute an offer or sale of such securities to the public in Singapore or (ii) to the public or any member of the public in Singapore other than pursuant to, and in accordance with the conditions of, an exemption invoked under division 5a or part iv of the companies act, chapter 50 of Singapore and to persons to whom the securities may be offered or sold under such exemption.

 

United Kingdom.  An offer of the shares may not be made to the public in the United Kingdom within the meaning of Section 102B of the Financial Services and Markets Act 2000, as amended, or the FSMA, except to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances that do not require the publication by the company of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority, or the FSA.

 

An invitation or inducement to engage in investment activity (within the meaning of Section 21 of FSMA) may only be communicated to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which Section 21 of FSMA does not apply to the company.

 

All applicable provisions of the FSMA with respect to anything done by the underwriter in relation to the shares must be complied with in, from or otherwise involving the United Kingdom.

 

LEGAL MATTERS

 

The validity of the common shares offered hereby will be passed upon for us by Ortoli Rosenstadt LLP. Certain legal matters as to PRC law will be passed upon for us by                      . Ortoli Rosenstadt LLP may rely upon                     with respect to matters governed by PRC law.

 

The current address of Ortoli Rosenstadt LLP is 366 Madison Avenue, 3rd Floor, New York, NY 10017. The current address of                     is                 .

 

EXPERT

 

The consolidated financial statements for each of the years ended December 31, 2018 and 2017, as set forth in this prospectus and elsewhere in the registration statement have been so included in reliance on the report of WWC, PC, an independent registered public accounting firm, given on their authority as experts in accounting and auditing. The current address of WWC, PC is located is 2010 Pioneer Court, San Mateo, CA 94403.

 

The consolidated financial statements for the years ended December 31, 2018 and 2017, as set forth in this prospectus and elsewhere in the registration statement have been so included in reliance on the report of WWC, PC, given on their authority as experts in accounting and auditing.

 

INTERESTS OF NAMED EXPERTS AND COUNSEL

 

No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant. Nor was any such person connected with the registrant as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We filed with the SEC a registration statement under the Securities Act for the common stock in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement.

 

We file annual, quarterly, and current reports and other information with the SEC. Our filings with the SEC are available to the public on the SEC’s website at www.sec.gov . Those filings are also available to the public on our corporate website at www.ccmus.com . The information we file with the SEC or contained on, or linked to through, our corporate website or any other website that we may maintain is not part of this prospectus or the registration statement of which this prospectus is a part. You may also read and copy, at the SEC’s prescribed rates, any document we file with the SEC, including the registration statement (and its exhibits) of which this prospectus is a part, at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.

 

63

 

  

INDEX TO FINANCIAL STATEMENTS

 

  PAGE
   
Report of Independent Registered Accounting Firm F-2
   
Consolidated Balance Sheets as of December 31, 2018 and 2017 F-3
   
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018 and 2017 F-4
   
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018 and 2017 F-5
   
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 F-6
   
Notes to Consolidated Financial Statements F-7 – F-28

 

Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018 (Audited) F-29
   
Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2019 and 2018 F-30
   
Condensed Statements of Changes in Stockholders’ Equity for the year ended December 31, 2018 and three months ended March 31, 2019

F-31
   
Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 F-32
   
Notes to Consolidated Financial Statements F-33 – F-55

 

F- 1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To: The Board of Directors and Stockholders of
  Muliang Agritech, Inc.

  

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Muliang Agritech, Inc. (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company had incurred substantial losses during the year, and has a working capital deficit, which raises substantial doubt about its ability to continue as a going concern. Management’s plan in regards to this matters are described in Note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

WWC, P.C.

Certified Public Accountants

 

San Mateo, CA

April 16, 2019

 

We have served as the Company’s auditor since March 15, 2016.

 

F- 2

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    December 31,     December 31,  
    2018     2017  
    Audited     Audited  
ASSETS            
Current Assets:            
Cash and cash equivalents   $ 12,778     $ 9,051  
Accounts receivable, net     4,090,887       358,516  
Inventories     446,630       412,648  
Prepayment     1,491,102       23,076  
Other receivables, net     102,733       67,597  
Total Current Assets     6,144,130       870,888  
                 
Property, plant and equipment, net     14,927,323       16,216,429  
Intangible assets, net     3,213,130       2,505,967  
Other assets and deposits     74,268       454,771  
Deferred tax asset     454,751       -  
                 
Total Assets   $ 24,813,602     $ 20,048,055  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
Current Liabilities:                
Short-term loans   $ 150,515     $ 159,074  
Current portion of long-term debt     5,453,435       1,998,033  
Accounts payable and accrued payables     4,585,732       3,975,899  
Advances from customers     211,114       21,986  
Income tax payable     430,181       -  
Other payables     816,724       982,909  
Due to related party     1,615,547       4,441,087  
Total Current Liabilities     13,263,248       11,578,988  
                 
Long-term loans     3,454,543       7,538,787  
Total Liabilities     16,717,791       19,117,775  
                 
Stockholders’ Equity:                
Common stock, $0.0001 par value, 500,000,000 shares authorized, 56,341,718 and 56,000,000 shares issued and outstanding as of December 31, 2018 and 2017, respectively.     5,634       5,600  
Additional paid in capital     19,398,854       16,817,585  
Accumulated deficit     (11,773,401 )     (16,118,404 )
Accumulated other comprehensive gain     344,187       240,402  
Stockholders’ Equity  - Muliang Agritech, Inc. and Subsidiaries     7,975,274       945,183  
Noncontrolling interest     120,537       (14,903 )
Total Stockholders’ Equity     8,095,811       930,280  
Total Liabilities and Stockholders’ Equity   $ 24,813,602     $ 20,048,055  

   

See accompanying notes to consolidated financial statements

 

F- 3

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

    For the Years Ended
December 31,
 
    2018     2017  
             
Revenues   $ 13,205,024     $ 737,563  
Cost of goods sold     7,660,026       591,236  
Gross profit     5,544,998       146,327  
                 
Operating expenses:                
General and administrative expenses     1,100,271       1,511,019  
Selling expenses     531,771       163,042  
Total operating expenses     1,632,042       1,674,061  
                 
Income (Loss) from operations     3,912,956       (1,527,734 )
                 
Other income (expense):                
Interest expense     (421,054 )     (508,818 )
Subsidy income     756,197       -  
Rental income, net     228,208       98,418  
Other income (expense), net     (28,030 )     (70,390 )
Total other income (expense)     535,321       (480,790 )
                 
Income (Loss) before income taxes     4,448,277       (2,008,524 )
                 
Income taxes     (25,542 )     26,334  
                 
Net income (loss)     4,473,819       (2,034,858 )
                 
Net income (loss) attributable to non-controlling interest     128,816       (18,406 )
Net income (loss) attributable to Muliang Agritech, Inc. common stockholders   $ 4,345,003     $ (2,016,452 )
                 
Other comprehensive income (loss):                
Unrealized foreign currency translation adjustment     103,785       147,936  
                 
Total Comprehensive loss   $ 4,577,604     $ (1,886,922 )
Total comprehensive (income) loss attributable to non-controlling interests     135,440       6,214  
Total comprehensive (income) loss attributable to Muliang Agritech, Inc. common stockholders     4,442,164       (1,893,136 )
                 
Earnings per common share                
Basic and diluted     0.08       (0.04 )
                 
Weighted average common shares outstanding                
Basic     56,170,859       56,000,000  
Diluted     56,170,859       56,000,000  

   

See accompanying notes to consolidated financial statements

  

F- 4

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

    Common Stock     Additional
Paid-in
    Accumulated     Accumulated
Other
Comprehensive
    Non-
controlling
       
    Shares     Amount     Capital     Deficit     Income (Loss)     Interest     Total  
Balance, December 31, 2016     56,000,000     $ 5,600     $ 16,817,585     $ (14,101,952 )   $ 92,466     $ (2,711 )   $ 2,810,988  
                                                         
Net income     -       -       -       (2,016,452 )             (18,406 )     (2,034,858 )
Foreign currency translation adjustment     -       -       -       -       147,936       6,214       154,150  
                                                         
Balance, December 31, 2017     56,000,000     $ 5,600     $ 16,817,585     $ (16,118,404 )   $ 240,402     $ (14,903 )   $ 930,280  
                                                         
Issuance of common stock     341,718       34       2,581,269       -       -       -       2,581,303  
Net income     -       -       -       4,345,003       -       128,816       4,473,819  
Foreign currency translation adjustment     -       -       -       -       103,785       6,624       110,409  
                                                         
Balance, December 31, 2018     56,341,718     $ 5,634     $ 19,398,854     $ (11,773,401 )   $ 344,187     $ 120,537     $ 8,095,811  

     

See accompanying notes to consolidated financial statements

  

F- 5

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Year  Ended  
    December 31,  
    2018     2017  
             
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income (loss)   $ 4,473,819     $ (2,034,858 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                
Depreciation and amortization     849,792       649,976  
Bad debt expense(reverse)     (6,880 )     104,888  
Deferred income tax assets     (472,749 )        
Changes in assets and liabilities:                
Restricted cash     -       1,063  
Accounts receivable     (3,893,269 )     17,859  
Inventories     (58,409 )     143,989  
Prepayment     20,319       (268,096 )
Other receivables     (40,308 )     (46,077 )
Accounts payable and accrued payables     36,002       (1,339,649 )
Advances from customers     197,844       12,321  
Income tax payable     447,207       -  
Other payables     270,176       1,042,996  
Net cash provided by (used in) operating activities     1,823,544       (1,715,588 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of intangible assets     (936,238 )     (651 )
Purchase of biological assets     (18,877 )     -  
Investment in construction in progress     (1,514,586 )     -  
Net cash used in investing activities     (2,469,701 )     (648 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Borrowing  of short-term loans     -       547,580  
Proceeds from third party individual     1,812,718       -  
Proceeds from (Repayment to) related party     (3,109,372 )     2,191,534  
Repayment of short-term loans     (754,422 )     (1,030,783 )
Capital contribution from shareholders     2,599,413       -  
Net cash provided by financing activities     548,337       1,708,331  
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     101,547       (254 )
                 
NET INCREASE (DECREASE) IN CASH     3,727       (8,162 )
CASH, BEGINNING OF YEAR     9,051       17,213  
CASH, END OF YEAR     12,778       9,051  
                 
SUPPLEMENTAL DISCLOSURES:                
Cash paid during the period for:                
Cash paid for interest expense, net of capitalized interest   $ 1,579,634     $ 589,163  
Cash paid for income tax   $ -     $ -  
                 
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES                
Long term loan transfer to short term loan   $ 4,459,831     $ -  
Debt to stock   $ 326,550     $ -  

   

See accompanying notes to consolidated financial statements

 

F- 6

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Muliang Agritech, Inc. formerly known as Mullan Agritech, Inc and previously M&A Holding Corporation. (“Muliang Agritech”) was incorporated under the laws of the State of Nevada on November 5, 2014. Muliang Agritech’s core business activities of developing, manufacturing, and selling organic fertilizers and bio-organic fertilizers for use in agricultural industry are conducted through several indirectly owned subsidiaries in China.

 

On June 9, 2016, Mullan Agritech filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada, changing its name from “M & A Holding Corporation,” to “Mullan Agritech, Inc.” On April 5, 2019, Company filed another Certificate of Amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada, changing its name from “Mullan Agritech, Inc.” to “Muliang Agritech, Inc.”

 

On July 11, 2016, the Financial Industry Regulatory Authority (FINRA) effected in the marketplace the change of the corporate name from “M & A Holding Corporation,” to “Mullan Agritech, Inc.”, and effective on such date. Mullan Agritech trades under its new name, Mullan Agritech, Inc.

 

History

 

Shanghai Muliang Industry Co., Ltd. (referred to herein as “Muliang Industry”) was incorporated in PRC on December 7, 2006 as a limited liability company, owned 95% by Lirong Wang and 5% by Zongfang Wang. Muliang Industry through its own operations and its subsidiaries is engaged in the business of developing, manufacturing, and selling organic fertilizers and bio-organic fertilizers for use in the agricultural industry.

 

On May 27, 2013, Muliang Industry entered into and consummated an equity purchase agreement whereby it acquired 99% of the outstanding equity of Weihai Fukang Bio-Fertilizer Co., Ltd. (“Fukang”), a corporation organized under the laws of the People’s Republic of China. Fukang was incorporated in Weihai City, Shandong Province on January 6, 2009. Fukang is focused on the distribution of organic fertilizers and the development of new bio-organic fertilizers. As a result of the completion of the transaction, Fukang became a 99% owned subsidiary of Muliang Industry, with the remaining 1% equity interest owned by Ms. Hui Song.

 

On July 11, 2013, Muliang Industry established a wholly owned subsidiary, Shanghai Muliang Agritech Development Co., Ltd. (“Agritech Development”) in Shanghai, China. On November 6, 2013, Muliang Industry sold 40% of the outstanding equity of Agritech Development to Mr. Jianping Zhang for consideration of approximately $65,000 or RMB 400,000. Agritech Development does not currently conduct any operations.

 

On July 17, 2013, Muliang Industry entered into an equity purchase agreement to acquire 100% of the outstanding equity of Shanghai Zongbao Environmental Construction Co., Ltd. (“Zongbao”) with consideration of approximately $3.2 million or RMB 20 million, effectively becoming the wholly-owned subsidiary of Muliang Industry. Zongbao was incorporated in Shanghai on January 25, 2008. Zongbao processes and distributes organic fertilizers. Zongbao wholly owns, Shanghai Zongbao Environmental Construction Co., Ltd. Cangzhou Branch (“Zongbao Cangzhou”).

 

On August 21, 2014, Muliang Agricultural Limited (“Muliang HK”) was incorporated in Hong Kong as an investment holding company.

 

January 27, 2015, Muliang HK incorporated a wholly foreign-owned enterprise, Shanghai Mufeng Investment Consulting Co., Ltd (“Shanghai Mufeng”), in the People’s Republic of China (“PRC”).

 

F- 7

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

  

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)

 

On July 8, 2015, Mullan Agritech entered into certain stock purchase agreement with Muliang Agriculture, Inc., pursuant to which Mullan Agritech, for a consideration of $5,000, acquired 100% interest in Muliang HK and its wholly-owned subsidiary Shanghai Mufeng. Both Muliang HK and Shanghai Mufeng are controlled by the Company’s sole officer and director, Lirong Wang.

 

On July 23, 2015, Muliang Industry established a wholly owned subsidiary, Shanghai Muliang Agricultural Sales Co., Ltd. (“Muliang Sales”) in Shanghai, China.

 

On September 3, 2015, Muliang Agritech effected a split of its outstanding common stock resulting in an aggregate of 30,105,000 shares outstanding of which 24,000,000 were owned by Chenxi Shi the founder of Muliang Agritech and its sole officer and director. The remaining 6,105,000 were held by a total of 39 investors.

 

On January 11, 2016, Muliang Agritech issued 25,895,000 shares of its common stock to Lirong Wang for an aggregate consideration of $64,737.50. On the same date, Chenxi Shi, the sole officer and director of Muliang Agritech on that date, transferred 24,000,000 shares of the common stock of the Company held by him to Lirong Wang for $800 pursuant to a transfer agreement.

 

On February 10, 2016, Shanghai Mufeng entered into a set of contractual agreements known as Variable Interest Entity (“VIE”) Agreements, including (1) Exclusive Technical Consulting and Service Agreement, (2) Equity Pledge Agreement, and (3) Call Option Cooperation Agreement, with Muliang Industry, and its Principal Shareholders. As a result of the Stock Purchase Agreement and the set of VIE Agreements, Shanghai Muliang Industry Co., Ltd., along with its consolidated subsidiaries, became entities controlled by Muliang Agritech whereby Muliang Agritech would derive all substantial economic benefit generated by Muliang Industry and its subsidiaries.

 

As a result, Muliang Agritech has a direct wholly-owned subsidiary, Muliang HK and an indirectly wholly owned subsidiary Shanghai Mufeng. Through its VIE Agreements, Muliang Agritech exercises control over Muliang Industry. Muliang Industry has two wholly-owned subsidiaries (Zongbao and Muliang Sales), one 99% owned subsidiary (Fukang), one 60% owned subsidiary (Agritech Development), and one indirectly wholly owned subsidiary Zongbao Cangzhou.

 

On June 6, 2016, Muliang Industry established a wholly-owned subsidiary, namely, Muliang (Ningling) Bio-chemical Fertilizer Co. Ltd (“Ningling Fertilizer”) in Henan Province, the central plain of China. Ningling Fertilizer, with registered capital of RMB 20,000,000, is setup for a new production line of bio-chemical fertilizer and has not begun any operation yet. Ningling Fertilizer was subsequently deregistered as the Company had no further plans to begin operations.

 

On July 7, 2016, Muliang Industry established a subsidiary, namely, Zhonglian Huinong (Beijing) Technology Co., Ltd. (“Zhonglian”) in Beijing, China. Muliang Industry owns 65% shares of Zhonglian, and a third-party company, Zhongrui Huilian (Beijing) Technology Co., Ltd. owns the other 35% shares. Zhonglian, with registered capital of RMB 10,000,000, was established to develop and operate an online agricultural products trading platform.

 

On October 27, 2016, Muliang Industry established a wholly-owned subsidiary, Yunnan Muliang Animal Husbandry Development Co., Ltd. (“Yunnan Muliang”) in Yunnan Province, China. Muliang Industry owns 55% shares of Yunnan Muliang, and a third-party company, Shuangbai County Development Investment Co., Ltd. owns the other 45% shares. On December 8, 2018, Muliang Industry acquired 25% shares of Yunnan Muliang with a consideration of $727,125(RMB5,000,000) from Shuangbai County Development Investment Co., Ltd. And the other 20% shares were acquired by Lirong Wang. Yunnan Muliang, with registered capital of RMB 20,000,000, was established for the development of sales in the western region of China.

 

F- 8

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)

 

Muliang HK, Shanghai Mufeng, Muliang Industry, Zongbao, Zongbao Cangzhou, Muliang Sales, Fukang, Agritech Development, Muliang Agritech, Zhonglian, and Yunnan Muliang are referred to as subsidiaries the Company and its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.

 

The consolidated financial statements were prepared assuming that the Company has controlled Muliang HK and its intermediary holding companies, operating subsidiaries, and variable interest entities: Shanghai Mufeng, Muliang Industry, Zongbao, Zongbao Cangzhou, Muliang Sales, Fukang, and Agritech Development, from the first period presented. The transactions detailed above have been accounted for as reverse takeover transaction and a recapitalization of the Company; accordingly, the Company (the legal acquirer) is considered the accounting acquiree and Muliang HK (the legal acquiree) is considered the accounting acquirer. No goodwill has been recorded. As a result of this transaction, the Company is deemed to be a continuation of the business of Muliang HK, Shanghai Mufeng, and Muliang Industry.

 

Liquidity and Going Concern

 

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going-concern basis. The going-concern basis assumes that assets are realized , and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. The Company’s ability to continue as a going concern depends upon the liquidation of current assets. For the years ended December 31, 2018 and 2017, the Company reported net income of $4,473,819 and net loss of $2,034,858, respectively. The Company had working capital deficit of approximately $7.12 million and $10.71 million as of December 31, 2018 and December 31, 2017. Although the Company had net cash inflow of $1,823,544 and net cash outflow of $1,715,588 from its operating activities during the years ended December 31, 2018 and 2017. The Company generated income from operation of $3,912,956 and incurred interest expense of $421,054 for the year ended December 31, 2018. The overall situation of the Company still raises doubt as to whether the Company may continue as a going concern.

 

In an effort to improve its financial position, the Company is working to obtain new loans from banks and related parties, renew its current loans, and to improve its operations upon its modified fertilizer factories. The Company obtained capital contribution of approximately $16 million in 2015 and $2.7 in the first half of 2018 from its shareholders. The Company expects to have more capital contribution from its shareholders in the near future. 

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in conformity with US GAAP. The basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The differences between US GAAP and PRC GAAP have been adjusted in these consolidated financial statements. The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”).

 

F- 9

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of these financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates. Significant estimates include the useful lives of property and equipment, land use rights, assumptions used in assessing collectability of receivables and impairment for long-term assets.

 

Principles of Consolidation

 

Muliang Agritech consolidates the following entities, including wholly-owned subsidiaries, Muliang HK, Shanghai Mufeng, and its wholly controlled variable interest entities, Muliang Industry, and Zhongbao, 60% controlled Agritech Development, 99% controlled Fukang, 65% controlled Zhonglian and 80% controlled Yunnan Muliang. The 40% equity interest holder of Agritech Development, 1% equity interest holders in Fukang, 35% equity interest holders in Zhonglian, and 20% interest in Yunnan Muliang are accounted as non-controlling interest in the Company’s consolidated financial statements.

 

The variable interest entities consolidated for which the Company is deemed the primary beneficiary. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Control by Principal Stockholders

 

The Company’s directors and executive officers and their affiliates or related parties own, beneficially and in the aggregate, the majority of the voting power of the outstanding shares of our common stock. Accordingly, if our directors and executive officers and their affiliates or related parties vote their shares uniformly, they would have the ability to control the approval of most corporate actions, including increasing our authorized capital stock and the dissolution or merger of our company or the sale of our assets.

 

Cash and Cash Equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash with various financial institutions.

 

Accounts Receivable

 

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.

 

F- 10

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

  

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Inventories

 

Inventories, consisting of raw materials, work in process, and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method.

 

Property, Plant and Equipment

 

Plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

Included in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation of the assets. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.

 

Estimated useful lives of the Company’s assets are as follows:

 

  Useful Life
Building   20 years
Operating equipment   5-10 years
Vehicle   3-5 years
Electronic equipment   3-20 years
Office equipment   3-20 years
Apple orchard   10 years

 

The apple orchard includes rental for an apple farm, labor cost, fertilizers, apple seeds, apple seedlings and others. The costs to purchase and cultivate apple trees and the expenditures related to labor and materials to plant apple trees until they become commercially productive are capitalized, which require a two-year period. The estimated production life for apple tree is 10 years, and the costs are depreciated without a residual value. Expenses incurred maintaining apple trees during the growth cycle until seedling apple trees or grafted varieties are fruited are capitalized into inventory and included in Work In Process—apple orchard, a component of inventories.

 

Depreciation expenses pertaining to apple trees will be included in inventory costs for those apples to be sold and ultimately become a component of cost of goods sold. Similar to other assets, the failure of our apple trees to be serviceable over the entirety of their anticipated useful lives or to be sold at their anticipated residual value will negatively impact our operating results.

 

F- 11

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

  

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Intangible Assets

 

Included in the intangible assets are land use rights and non-patented technology. According to the laws of the PRC, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Useful life for non-patented technology refers to the period during which economic benefits can be generated. Intangible assets are being amortized using the straight-line method over their lease terms or estimated useful life.

 

Estimated useful lives of the Company’s intangible assets are as follows:

 

  Useful Life
Land use rights   50 years
Non-patented technology   10 years

 

The Company carries intangible assets at cost less accumulated amortization. In accordance with US GAAP, the Company examines the possibility of decreases in the value of intangible assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company computes amortization using the straight-line method over estimated useful life of 50 years for the land use rights.

 

Impairment of Long-lived Assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company recorded no impairment charge for the years ended December 31, 2018 and 2017.

 

Advances from Customers

 

Advances from customers consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s revenue recognition policy.

 

Non-controlling Interest

 

Non-controlling interests in the Company’s subsidiaries are recorded in accordance with the provisions of ASC 810 and are reported as a component of equity, separate from the parent’s equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-controlling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Results for the reporting period beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.

 

Management has determined that the adoption of ASC 606 did not impact the Company’s previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to opening retained earnings.

 

Revenue for sale of products is derived from contracts with customers, which primarily include the sale of fertilizer products and environmental protection equipment. The Company’s sales arrangements do not contain variable consideration. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the products has been transferred to the customer. For vast majority of the Company’s product sales, the performance obligations and control of the products transfer to the customer when products are delivered, and customer acceptance is made.

  

Pursuant to the guidance of ASC Topic 840, rent shall be reported as income by lessors over the lease term as it becomes receivable. The Company currently leased part of the building of the Shanghai new plant to third parties as warehouse. The Company recognizes building leasing revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned. 

 

The Company recognized rental income from leasing a portion of its manufacturing facility located in Shanghai to third parties. For the years ended December 31, 2018 and 2017, rental income of $388,309 and $248,431 were recognized as other income.

 

F- 12

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Cost of Sales

 

Cost of goods sold consists primarily of raw materials, utility and supply costs consumed in the manufacturing process, manufacturing labor, depreciation expense and direct overhead expenses necessary to manufacture finished goods as well as warehousing and distribution costs such as inbound freight charges, shipping and handling costs, purchasing and receiving costs.

 

Income Taxes

 

The Company accounts for income taxes under the provisions of Section 740-10-30 of the FASB Accounting Standards Codification, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns.

 

The Company is subject to the Enterprise Income Tax law (“EIT”) of the People’s Republic of China. The Company’s operations in producing and selling fertilizers are subject to the 25% enterprise income tax.

 

Related Parties

 

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions.

 

Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) comprised of net income (loss) and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. The Company’s comprehensive income (loss) consist of net income (loss) and unrealized gains from foreign currency translation adjustments.

 

F- 13

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Foreign Currency Translation

 

The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss. The translation adjustment for the years ended December 31, 2018 and 2017 was gains of $105,755 and $147,936, respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

All of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

 

Asset and liability accounts at December 31, 2018 and 2017 were translated at 6.8764 RMB to $1 USD and 6.5064 RMB to $1 USD, respectively, which were the exchange rates on the balance sheet dates. The average translation rates applied to the statements of income for the years ended December 31, 2018 and 2017 were 6.6146 RMB and 6.7570 RMB to $1 USD, respectively.

 

Earnings (Loss) per Share

 

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted earnings per share gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Earnings per share excludes all potential dilutive shares of common stock if their effect is anti-dilutive. There were no potential dilutive securities at December 31, 2018 and 2017.

 

F- 14

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value of Financial Instruments

 

The Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, inventories, advances to suppliers, prepaid expenses, short-term loans, accounts payable, accrued expenses, advances from customers, VAT and service taxes payable and income taxes payable approximate their fair market value based on the short-term maturity of these instruments.

 

ASC Topic 825-10 “ Financial Instruments ” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

The following table summarizes the carrying values of the Company’s financial instruments:

 

    December 31,
2018
    December 31,
2017
 
             
Short-term loan   $ 150,515     $ 159,074  
Current portion of long-term loan     5,453,435       1,998,033  
Long-term loan     3,454,543       5,102,668  
    $ 9,058,493     $ 7,259,775  

 

Government Contribution Plan

 

Pursuant to the laws applicable to PRC law, the Company is required to participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond its monthly contribution.

 

F- 15

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Statutory Reserve

 

Pursuant to the laws applicable to the PRC, the Company must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund” cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). If the Company has accumulated loss from prior periods, the Company is able to use the current period net income after tax to offset against the accumulate loss.

 

Segment Information

 

The standard, “Disclosures about Segments of an Enterprise and Related Information,” codified with ASC-280, requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. The Company believes that it operates in two business segments and in one geographical segment (China), as all of the Company’s current operations are carried in China.

 

F- 16

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Accounting Pronouncement

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, “ Classification of Certain Cash Receipts and Cash Payments”, which is intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The ASU also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

F- 17

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

In January 2017, the Financial Accounting Standard Board (“FASB”) issued guidance, which simplifies the accounting for goodwill impairment. The updated guidance eliminates Step 2 of the impairment test, which requires entities to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value.

 

In January 2017, the FASB issued guidance, which amended the existing accounting standards for business combinations. The amendments clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

 

In January 2017, the FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) ”. This pronouncement amends the SEC’s reporting requirements for public filers in regard to new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.

 

In August 2017, the FASB issued guidance, which amends the existing accounting standards for derivatives and hedging. The amendment improves the financial reporting of hedging relationships to better represent the economic results of an entity’s risk management activities in its financial statements and made certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP.

 

In August 2018, the FASB issued ASU 2018-13, ” Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement ,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The amendments in this Update modify the disclosure requirements on fair value measurements based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential impacts of ASU 2018-13 on its consolidated financial statements.

 

The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

 

F- 18

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recently adopted accounting pronouncements

 

In March 2016, the FASB issued ASU 2016-08, “ Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ”. The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and transition of ASU 20140-9, “Revenue from Contracts with Customers (Topic 606)”. Public entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein.

 

In May 2016, the FASB issued ASU 2016-12, “ Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ”. The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The Company adoptedASU 2016-12 from January 1, 2018.

 

In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” . The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 including Loan Guarantee Fees, Contract Costs, Provisions for Losses on Construction-Type and Production-Type Contracts, Disclosure of Remaining Performance Obligations, Disclosure of Prior Period Performance Obligations, Contract Modifications, Contract Asset vs. Receivable, Refund Liabilities, Advertising Costs, Fixed Odds Wagering Contracts in the Casino Industry, and Costs Capitalized for Advisors to Private Funds and Public Funds. The effective date of these amendments are at the same date that Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). The Company adopted ASU 2016-20 from January 1, 2018.

 

The Company adopted the Revenue from Contracts with Customers (Topic 606) from January 1, 2018.

  

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following:

 

    December 31,
2018
    December 31,
2017
 
             
Accounts receivable   $ 4,370,620     $ 683,758  
Less: Allowance for doubtful accounts     (279,733 )     (325,242 )
Total, net   $ 4,090,887     $ 358,516  

  

The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. After evaluating the collectability of individual receivable balances, the Company recognized bad debt allowance of $279,733 and $325,242 for the years ended December 31, 2018 and 2017.

 

F- 19

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – INVENTORIES

 

Inventories consisted of the following:

 

    December 31,
2018
    December 31,
2017
 
             
Raw materials   $ 124,069     $ 118,198  
Finished goods     322,561       294,450  
Total, net   $ 446,630     $ 412,648  

  

NOTE 5 – PREPAYMENT

 

The prepayment balance of $1,491,102 as of December 31, 2018 mainly represents the advanced payment for the construction of the black goat slaughtering and processing project located in Shuangbai County, Chuxiong City, Yunnan Province, PRC. The remaining balance represents the advance to the suppliers for business purpose.

  

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at December 31, 2018 and 2017 consisted of:

  

    December 31,     December 31,  
    2018     2017  
Building   $ 12,838,100     $ 13,603,224  
Operating equipment     2,754,463       2,968,880  
Vehicle     104,121       58,492  
Office equipment     59,897       18,500  
Apple Orchard     1,026,505       1,029,230  
Construction in progress     341,173       -  
      17,124,259       17,678,326  
Less: Accumulated depreciation     (2,196,936 )     (1,461,897 )
    $ 14,927,323     $ 16,216,429  

 

F- 20

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

 

For the years ended December 31, 2018 and 2017, depreciation expense amounted to $788,881 and $575,190, respectively. Depreciation is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances will be classified to their respective property and equipment category.

 

The construction in progress of $341,173 represents the investment of a black goat processing plant located in Shuangbai County, Chuxiong City, Yunnan Province, PRC.

  

NOTE 7 – INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

    December 31,     December 31,  
    2018     2017  
             
Land use rights   $ 3,618,441     $ 2,279,140  
Non-patented technology     14,542       608,632  
      3,632,983       2,887,772  
Less: Accumulated amortization     (419,853 )     (381,805 )
    $ 3,213,130     $ 2,505,967  

 

The total cost of $3,618,441 represents the three industrial land use rights located in Shanghai City, Weihai City, Shandong Province, and Chuxiong City, Yunnan Province.

 

For the years ended December 31, 2018 and 2017, amortization of intangible assets amounted to $60,911 and $74,786, respectively.

  

NOTE 8 – DEFERRED TAX ASSETS, NET

 

The components of the deferred tax assets are as follows:

 

   

December 31, 

2018

   

December 31,

2017

 
Deferred tax assets, non-current            
Deficit carried-forward   $ 416,836     $      -  
Allowance for doubtful accounts     37,915       -  
Deferred tax assets     454,751       -  
Less: valuation allowance     -       -  
Deferred tax assets, non-current   $ 454,751     $ -  

 

Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.

 

F- 21

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 – LOAN PAYABLE

 

Short-term loan of $150,515 represents balance due to Shanghai Jinshan Limin Micro Loan Co., Ltd., with annualized interest rate of 16%. This loan was borrowed on March 3, 2017 and due on March 2, 2018. The Company extended this loan twice until the end of June 2019 with the same terms.

 

Current portion of long-term loans amounted to $5,453,435 representing balance due to Agricultural Bank of China, with an annual interest rate of 5.70% + (HongkongInterBank Offered Rate (“HIBOR”)).

 

Long-term loans represent amounts due to lenders that are due more than one year, whose balance was $3,454,543 and $7,538,787 as of December 31, 2018 and 2017, respectively.

 

Long -term loan and current portion of long-term loan consisted of the following:  

 

    December 31,     December 31,  
    2018     2017  
Loan payable to Agricultural Bank of China, annual interest rate of 5.70% + HIBOR, due by August 25, 2019.   $ 4,362,748     $ 5,379,319  
Loan payable to Rushan City Rural Credit Union, annual interest 8.3125%, due by July 25, 2019.     1,090,687       1,152,711  
Long-term loans and interest payable to individuals and entities without interest     3,454,543       3,004,790  
      8,907,978       9,536,820  
Less: Current portion of long-term loans payable     5,453,435       1,998,033  
Total, net   $ 3,454,543     $ 7,538,787  

 

As of December 31, 2018, the Company’s future loan obligations according to the terms of the loan agreement are as follows:

 

Year 1   $ 5,603,950  
Year 2     3,454,543  
Total   $ 9,058,493  

  

The long-term bank loan with Agricultural Bank of China was collateralized with land use rights and guaranteed by Mr. Lirong Wang, the CEO. 

 

The Company recognized interest expenses of $421,054 and $508,818 for the years ended December 31, 2018 and 2017, respectively.

 

F- 22

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – STOCKHOLDERS DEFICIT

 

Authorized Stock

 

The Company has authorized 500,000,000 common shares with a par value of $0.0001 per share.  Each common share entitles the holder to one vote, in person or proxy, on any matter on which action of the stockholders of the corporation is sought.

 

Common Share Issuances

 

On June 29, 2018, the outstanding amount $326,348 due to Mr. Wang, CEO and Chairman of the Company, were converted into 43,200 shares of Common Shares at $ 7.55 per share.

 

On June 29, 2018 the Company issued 298,518 common shares of the Company at $7.55 for proceeds of $2,255,111 to Mr. Wang, CEO and Chairman of the Company.

 

As of December 31, 2018, the Company had 56,341,718 common shares outstanding.

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved a 5 to 1 reverse stock split of all of the issued and outstanding shares of the Company’s common stock (the “Stock Split”). The common shares outstanding have been retroactively restated to reflect the reverse stock split.

 

NOTE 11 – RELATED PARTY TRANSACTIONS

 

Ms. Hui Song was the Company’s former sales director. In 2013, Ms. Hui Song resigned, and she no longer has any significant control or influence over the Company, therefore she was no longer considered a related party. Jilin Jiliang Zongbao Biological Technology Co., Ltd., an entity controlled by Ms. Hui Song, and Yantai Zongbao Tele-Agriculture Service Co., Ltd., a related company of Ms. Hui Song, were also no longer considered as related parties of the Company.

 

*Account receivable and sales to Ms. Hui Song and its associated

 

For the year ended December 31, 2018, the Company sold fertilizer manufacturing equipment to Jilin Jiliang Zongbao Biological Technology Co., Ltd., in the amount of $164,968, with related cost of $103,371. This transaction was reflected in the revenue and cost of goods sold.

 

As of December 31, 2018 and December 31, 2017, the Company has account receivable balance of $185,665 and $0 from Jilin Jiliang Zongbao Biological Technology Co., Ltd., respectively.

 

As of December 31, 2018 and December 31, 2017, the Company has account receivable balance of $61,082 and $64,555 from Yantai Zongbao Tele-Agriculture Service Co., Ltd., respectively. 

 

*Account payable and purchase from Ms. Hui Song and its associated

 

For the year ended December 31, 2018, the Company purchased fertilizer of $3,651,430 from Jilin Jiliang Zongbao Biological Technology Co., Ltd., an entity controlled by Ms. Hui Song . As of December 31, 2018, account payable to Jilin Jiliang Zongbao Biological Technology Co., Ltd. was $72,712.

 

As of December 31, 2018, long-term loan payable balances for Jilin Jiliang Zongbao Biological Technology Co., Ltd. and Ms. Hui Song were of $807,780 and $266,855, respectively.

 

* Account receivable and sales from related parties

 

The Company did not make sales to any related party for the year ended December 31, 2018 and 2017. And the Company has no account receivable balance as of December 31, 2018 and December 31, 2017.

 

* Account payable and purchase from related parties

 

For the year ended December 31, 2018, the Company purchased fertilizer manufacturing equipment of $120,945 from Shanghai Aoke Chemicals Co., Ltd, an entity controlled by Mr. Lirong Wang, CEO and majority shareholder of the Company. As of December 31, 2018, account payable to Shanghai Aoke Chemicals Co., Ltd. were $116,340.  

 

The Company did not purchase other material or service from related parties for the year ended December 31, 2018 and 2017.

 

* Due from Related Parties

 

The Company does not have balances due from related parties as of December 31, 2018 and 2017, respectively.

 

F- 23

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 – RELATED PARTY TRANSACTIONS (CONTINUED)

 

* Due to related party

 

Outstanding balance due to Mr. Lirong Wang and Mr. Guihua Lin below are advances from related parties for working capital of the Company which are mainly due on demand, non-interest bearing, and unsecured, unless further disclosed.

 

    December 31,     December 31,      
    2018     2017     Relationship
Mr. Lirong Wang ①     1,442,751       4,025,356     The CEO and Chairman of the Company
Ms. Xueying Sheng③④⑤⑥     169,743       230,730     Controller/Accounting Manager of the Company
Mr. Guohua Lin②     3,054       102,462     One of the Company’s shareholders
Total     1,615,547       4,441,087      

 

For the year ended December 31, 2018, the Company borrowed $3,829,415 from Mr. Lirong Wang, and repaid $6,404,317. On June 29, 2018, the amount due to Mr. Wang of $326,348 was converted into common shares.
     
For the year ended December 31, 2018, the Company borrowed $171,911 from Mr. Guohua Lin, and repaid $257,931.
     
On November 8, 2017, the Company borrowed $31,993 from Ms. Xueying Sheng. The loan is unsecured, without maturity, and bears an interest rate of 20%.
     
On December 12, 2017, the Company borrowed $11,634 from Ms. Xueying Sheng and repaid in March 2018. The loan is unsecured and bears an interest rate of 20%.
     
For the year ended December 31, 2018, the Company borrowed $194,272 from Ms. Xueying Sheng. This loan is unsecured, without maturity and non-interest bearing.
     
  For the year ended December 31, 2018, the Company repaid $245,653 to Ms. Xueying, Sheng.

   

NOTE 12 – DISPOSAL OF SUBSIDIARY

 

On October 12, 2017, the Company ceased operation of its 100% owned subsidiary Ningling Fertilizer and deregistered Ningling Fertilizer with the Administration for Industry and Commerce. The Company closed Ningling Fertilizer with net assets of $2,275 and accumulated deficit of $34,739 as of October 12, 2017. Ningling has historically been reported as a component of the Company’s operations and incurred $33,323 to loss before income taxes provisions for the year ended December 31, 2017. The ceased operation does not constitute a strategic shift that will have a major effect on the Company’s operations or financial results and as such, the disposal is not classified as discontinued operations in the Company’s consolidated financial statements. The loss from the investment of the subsidiary has been recorded in other expenses.

 

NOTE 13 – CONCENTRATIONS

 

Customers Concentrations

 

The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the years ended December 31, 2018 and 2017.

 

    For the year ended December 31,  
Customers   2018     2017  
    Amount     %     Amount     %  
A     N/A       N/A       358,710       48 %
B     N/A       N/A       92,446       12 %
C     2,096,121       16 %     N/A       N/A  
D     1,952,652       15 %     N/A       N/A  

 

F- 24

 

  

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – CONCENTRATIONS (CONTINUED)

 

Suppliers Concentrations

 

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchase for the years ended December 31, 2018 and 2017.

 

    For the year ended December 31,  
Suppliers   2018     2017  
    Amount     %     Amount     %  
A     3,651,430       43 %     N/A       N/A  
B     N/A       N/A       212,453       46 %
C     N/A       N/A       49,578       11 %
D     840,657       10 %     N/A       N/A  

 

Credit Risks

 

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 environment 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 North America. 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.

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. At December 31, 2018 and 2017, the Company’s cash balances by geographic area were as follows:

 

    December 31,     December 31,  
    2018     2017  
United States   $ -       0 %   $ -       0 %
China     12,778       100 %     9,051       100 %
Total cash and cash equivalents   $ 12,778       100 %   $ 9,051       100 %

 

F- 25

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

   

NOTE 14 – INCOME TAXES

 

United States

 

Muliang Agritech is established in the State of Nevada in the United States and is subject to Nevada State and US Federal tax laws. Muliang Agritech has approximately $102,000 of unused net operating losses (“NOLs”) available for carrying forward to future years for U.S. federal income tax reporting purposes. The benefit from the carry forward of such NOLs will begin expiring during the year ended December 31, 2034. Because United States tax laws limit the time during which NOL carry forwards may be applied against future taxable income, the Company may be unable to take full advantage of its NOLs for federal income tax purposes should the Company generate taxable income. Further, the benefit from utilization of NOL carry forwards could be subject to limitations due to material ownership changes that could occur in the Company as it continues to raise additional capital. Based on such limitations, the Company has significant NOLs for which realization of tax benefits is uncertain.

 

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. The Company has considered the accounting impact of the effects of the Act during the year ended December 31, 2018 including a reduction in the corporate tax rate from 34% to 21% among other changes.

 

Hong Kong

 

Muliang HK is established in Hong Kong and its income is subject to a 16.5% profit tax rate for income sourced within the country. For the years ended December 31, 2018 and 2017, Muliang HK did not earn any income derived in Hong Kong, and therefore was not subject to Hong Kong Profits Tax.

 

China, PRC

 

Shanghai Mufeng and its subsidiaries Muliang Industry, Zongbao, Zongbao Cangzhou, Muliang Sales, Fukang, Agritech Development, Zhongliang and Yunnan Muliang are established in China and its income is subject to income tax rate of 25%.

 

The reconciliation of effective income tax rate as follows:

 

    For the Years Ended  
    December 31,     December 31,  
    2018     2017  
US Statutory income tax rate     21.00 %     35.00 %
PRC income tax adjustment     4.00 %     (10.00 )%
Valuation allowance     (12.51 )%     (25.00 )%
Effect of expenses not deductible for tax purpose     0.02 %     0.00 %
Effect of income tax exemptions and reliefs     (10.63 )%     0.00 %
Others     (2.45 )%     0.00 %
Total     (0.57 )%     0.00 %

 

F- 26

 

  

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 14 – INCOME TAXES (CONTINUED)

  

The provision for income taxes consists of the following:

 

   

For the Years Ended

December 31,

 
    2018     2017  
Current   $ 447,207     $ -  
Deferred     (472,749 )     -  
Total   $ (25,542 )   $ -  

 

Accounting for Uncertainty in Income Taxes

 

The tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises complete their relevant tax filings. Therefore, the Company’s PRC entities’ tax filings results are subject to change. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s PRC entities’ tax filings, which may lead to additional tax liabilities.

 

ASC 740 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s tax positions and concluded that no provision for uncertainty in income taxes was necessary as of December 31, 2018 and 2017.

 

NOTE 15 – BUSINESS SEGMENTS

 

The revenues and cost of goods sold from operation consist of the following:

 

    Revenues     Cost of Sales  
    For the Years Ended     For the Years Ended  
    December 31,     December 31,     December 31,     December 31,  
    2018     2017     2018     2017  
Fertilizer and forage grass   $ 12,054,335     $ 731,512     $ 6,577,557     $ 492,385  
Agricultural products (food) sales     1,150,689       6,501       1,082,469       98,851  
Total   $ 13,205,024     $ 737,563     $ 7,660,026     $ 591,236  

 

F- 27

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16  COMMITMENTS AND CONTINGENCIES

  

On October 18, 2018, the Company signed a building construction agreement with Yunnan Junxiong Construction Engineering Co., Ltd. for the black goat slaughtering and processing project located in Shuangbai County, Chuxiong City, Yunnan Province, PRC. The total contract price is $1,599,674(RMB11,000,000), all of which is unpaid as of December 31, 2018.

 

In addition, the Company signed a set of construction agreements with third parties in 2018 for the black goat slaughtering and processing project, including surveying and mapping contract, equipment installation contract, and electricity installation contract, etc. As of December 31, 2018, a total amount of $436,275(RMB3,000,000) is unpaid.

 

The Company has future minimum capital expenditure obligations as of December 31, 2018 as follows:

 

2019     1,221,570  
2020     814,379  
2021     -  
2022     -  
2023     -  
Thereafter     -  
Total   $ 2,035,949  

 

NOTE 17 – SUBSEQUENT EVENTS

 

Reverse Stock Split

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved a 5 to 1 reverse stock split of all of the issued and outstanding shares of the Company’s common stock (the “Stock Split”),  No fractional shares of Common Stock will be issued as a result of the reverse stock split.The Stock Split does not affect the par value or the number of authorized shares of common stock of the Company. The Stock Split will become effective upon approval of Financial Industry Regulatory Authority.

 

As a result of this reverse stock split, all references in the financial statements and notes thereto to the number of shares outstanding, per share amounts, of the Company’s Common Stock have been restated to reflect the effect of the stock split for all periods presented.

 

Name Change

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved change of corporate name from “Mullan Agritech Inc.” to “Muliang Agritech Inc.” (the “Name Change”). On April 5, 2019, Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the Name Change.

 

Blank Check Preferred Stock

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved creation of one hundred million (100,000,000) shares of Blank Check Preferred Stock, $0.0001 par value. To the fullest extent permitted by the laws of the State of Nevada, as the same now exists or may hereafter be amended or supplemented, the Board of Directors may fix and determine the designations, rights, preferences or other variations of each class or series within each class of preferred stock of the Company. The Company may issue the shares of stock for such consideration as may be fixed by the Board of Directors.

 

On April 5, 2019, the Company filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the Name Change and to authorize the creation of Blank Check Preferred Stock.

 

Common stock authorized

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved that the capital stock shall consist of 500,000,000 shares of common stock, par value $0.0001 per share.

 

F- 28

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2019 AND DECEMBER 31 2018

 

    March 31,     December 31,  
    2019     2018  
          Audited  
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 6,317     $ 12,778  
Accounts receivable, net     4,057,060       4,090,887  
Inventories     789,051       446,630  
Prepayment     1,519,834       1,491,102  
Other receivables, net     187,701       102,733  
Total Current Assets     6,559,963       6,144,130  
                 
Property, plant and equipment, net     15,142,871       14,927,323  
Intangible assets, net     3,273,406       3,213,130  
Other assets and deposits     67,434       74,268  
Deferred tax asset     465,952       454,751  
                 
Total Assets   $ 25,509,626     $ 24,813,602  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
Current Liabilities:                
Short-term loans   $ 154,222     $ 150,515  
Current portion of long-term debt     5,572,857       5,453,435  
Accounts payable and accrued payables     4,733,636       4,469,392  
Accounts payable - related party     119,205       116,340  
Advances from customers     242,087       211,114  
Income tax payable     539,151       430,181  
Other payables     857,610       816,724  
Due to related party     926,724       1,615,547  
Total Current Liabilities     13,145,492       13,263,248  
                 
Long-term loans     3,602,640       3,454,543  
Total Liabilities     16,748,132       16,717,791  
                 
Stockholders’ Equity:                
Common stock, $0.0001 par value, 500,000,000 shares authorized, 56,341,718 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively.     5,634       5,634  
Additional paid in capital     19,398,854       19,398,854  
Accumulated deficit     (11,330,741 )     (11,773,401 )
Accumulated other comprehensive loss     563,268       344,187  
Stockholders’ Equity – Muliang Agritech, Inc. and Subsidiaries     8,637,015       7,975,274  
Noncontrolling interest     124,479       120,537  
Total Stockholders’ Equity     8,761,494       8,095,811  
Total Liabilities and Stockholders’ Equity   $ 25,509,626     $ 24,813,602  

  

See accompanying notes to consolidated financial statements

 

F- 29

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

 

    For the Three Months Ended
March 31,
 
    2019     2018  
             
Revenues   $ 2,225,368     $ 1,188,020  
Cost of goods sold     1,338,876       682,779  
Gross profit (loss)     886,492       505,241  
                 
Operating expenses:                
Selling expenses     177,000       23,317  
General and administrative expenses     341,556       392,510  
Total operating expenses     518,556       415,827  
                 
Income (Loss) from operations     367,936       89,414  
                 
Other income (expense):                
Interest expense     (94,596 )     (108,081 )
Subsidy income     146,560       2,188  
Rental income, net     122,960       73,526  
Other income (expense), net     587       (9,176 )
Total other income (expense)     175,511       (41,543 )
                 
Income (Loss) before income taxes     543,447       47,871  
                 
Income taxes     97,860       -  
                 
Net income     445,587       47,871  
                 
Net income (loss) attributable to Muliang Agritech, Inc. common stockholders     442,660       77,522  
Net income (loss) attributable to noncontrolling interest     2,927       (29,651 )
                 
Other comprehensive income (loss):                
Unrealized foreign currency translation adjustment     219,081       24,289  
                 
Total Comprehensive loss     664,668       72,160  
Total comprehensive (income) loss attributable to non-controlling interests     3,942       (23,129 )
Total comprehensive (income) loss attributable to Muliang Agritech Inc. common stockholders   $ 660,726     $ 95,289  
                 
Earnings per common share                
Basic and diluted     0.01       0.00  
                 
Weighted average common shares outstanding                
Basic     56,341,718       56,000,000  
Diluted     56,341,718       56,000,000  

 

See accompanying notes to consolidated financial statements

 

F- 30

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2018 AND THREE MONTHS ENDED MARCH 31, 2019 (Unaudited)

 

    Common Stock     Additional Paid-in     Accumulated     Accumulated Other Comprehensive     Non-controlling        
    Shares     Amount     Capital     Deficit     Income (Loss)     Interest     Total  
Balance, December 31, 2017     56,000,000     $ 5,600     $ 16,817,585     $ (14,101,952 )   $ 92,466     $ (2,711 )   $ 2,810,988  
Issuance of common stock     341,718       34       2,581,269       -       -       -       2,581,303  
Net income     -       -       -       4,345,003       -       128,816       4,473,819  
Foreign currency translation adjustment     -       -       -       -       103,785       6,624       110,409  
Balance, December 31, 2018     56,341,718     $ 5,634     $ 19,398,854     $ (11,773,401 )   $ 344,187     $ 120,537     $ 8,095,811  
                                                         
Net income     -       -         -       442,660       -       2,927       445,587  
Foreign currency translation adjustment     -       -       -       -       219,081       1,015       220,096  
Balance, March 31, 2019     56,341,718     $ 5,634     $ 19,398,854     $ (11,330,741 )   $ 563,268     $ 124,479     $ 8,761,494  

 

See accompanying notes to consolidated financial statements

 

F- 31

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

 

    For the Three Months Ended  
    March 31,  
    2019     2018  
             
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income (loss)   $ 445,587     $ 47,871  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                
Depreciation and amortization     291,069       223,491  
Changes in assets and liabilities:                
Accounts receivable     133,884       (568,309 )
Accounts receivable - related party     -       (377,045 )
Inventories     (329,687 )     37,661  
Prepayment     149,975       (60,136 )
Other receivables     (82,007 )     (45,676 )
Accounts payable and accrued payables     145,941       (489,512 )
Accounts payable - related party     -       125,853  
Advances from customers     25,638       540,560  
Income tax payable     97,860       -  
Other payables     38,911       1,560,502  
Net cash provided by operating activities     917,171       995,260  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of biological assets     (18,508 )     (7,313 )
Investment in construction in progress     (228,458 )     (745,084 )
Net cash used in investing activities     (246,966 )     (752,397 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from third party individual     62,679       786,584  
Proceeds from (Repayment to) related party     (724,803 )     (222,615 )
Repayment of short-term loans     (14,823 )     (786,584 )
Net cash used in financing activities     (676,947 )     (222,615 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     281       570  
                 
NET INCREASE (DECREASE) IN CASH     (6,461 )     20,818  
CASH, BEGINNING OF PERIOD     12,778       9,051  
CASH, END OF PERIOD   $ 6,317     $ 29,869  
      -          
SUPPLEMENTAL DISCLOSURES:                
Cash paid during the period for:                
Cash paid for interest expense, net of capitalized interest   $ 23,110     $ 108,081  
Cash paid for income tax   $ -     $ -  
                 
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES                
Long term loan transfer to short term loan   $ -     $ 1,101,218  
Property addition in connection with liability   $ 7,411     $ -  

 

See accompanying notes to consolidated financial statements

 

F- 32

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Muliang Agritech, Inc. formerly known as M & A Holding Corporation. (“Muliang Agritech”) was incorporated under the laws of the State of Nevada on November 5, 2014. Muliang Agritech’s core business activities of developing, manufacturing, and selling organic fertilizers and bio-organic fertilizers for use in agricultural industry are conducted through several indirectly owned subsidiaries in China.

 

On June 9, 2016, Muliang Agritech filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada, changing its name from “M & A Holding Corporation,” to “Mullan Agritech, Inc.”  

 

On July 11, 2016, the Financial Industry Regulatory Authority (FINRA) effected in the marketplace the change of the corporate name from “M & A Holding Corporation,” to “Mullan Agritech, Inc.”, and effective on such date.

 

On April 4, 2019, the Company changed its corporate name from “Mullan Agritech Inc.” to “Muliang Agritech Inc.” The name change took effect on May 7, 2019. In connection with the name change, our stock symbol changed to “MULG”. Muliang Agritech trades under its new name, Muliang Agritech, Inc.

  

History

 

Shanghai Muliang Industry Co., Ltd. (referred to herein as “Muliang Industry”) was incorporated in PRC on December 7, 2006 as a limited liability company, owned 95% by Lirong Wang and 5% by Zongfang Wang. Muliang Industry through its own operations and its subsidiaries is engaged in the business of developing, manufacturing, and selling organic fertilizers and bio-organic fertilizers for use in the agricultural industry.

 

On May 27, 2013, Muliang Industry entered into and consummated an equity purchase agreement whereby it acquired 99% of the outstanding equity of Weihai Fukang Bio-Fertilizer Co., Ltd. (“Fukang”), a corporation organized under the laws of the People’s Republic of China. Fukang was incorporated in Weihai City, Shandong Province on January 6, 2009. Fukang is focused on the distribution of organic fertilizers and the development of new bio-organic fertilizers. As a result of the completion of the transaction, Fukang became a 99% owned subsidiary of Muliang Industry, with the remaining 1% equity interest owned by Mr. Hui Song.

 

On July 11, 2013, Muliang Industry established a wholly owned subsidiary, Shanghai Muliang Agritech Development Co., Ltd. (“Agritech Development”) in Shanghai, China. On November 6, 2013, Muliang Industry sold 40% of the outstanding equity of Agritech Development to Mr. Jianping Zhang for consideration of approximately $65,000 or RMB 400,000. Agritech Development does not currently conduct any operations.

 

On July 17, 2013, Muliang Industry entered into an equity purchase agreement to acquire 100% of the outstanding equity of Shanghai Zongbao Environmental Construction Co., Ltd. (“Zongbao”) with consideration of approximately $3.2 million or RMB 20 million, effectively becoming the wholly-owned subsidiary of Muliang Industry. Zongbao was incorporated in Shanghai on January 25, 2008. Zongbao processes and distributes organic fertilizers. Zongbao wholly owns, Shanghai Zongbao Environmental Construction Co., Ltd. Cangzhou Branch (“Zongbao Cangzhou”).

 

On August 21, 2014, Muliang Agricultural Limited (“Muliang HK”) was incorporated in Hong Kong as an investment holding company.

 

F- 33

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)

 

January 27, 2015, Muliang HK incorporated a wholly foreign-owned enterprise, Shanghai Mufeng Investment Consulting Co., Ltd (“Shanghai Mufeng”), in the People’s Republic of China (“PRC”).

 

On July 8, 2015, Muliang Agritech entered into certain stock purchase agreement with Muliang Agriculture, Inc., pursuant to which Muliang Agritech, for a consideration of $5,000, acquired 100% interest in Muliang HK and its wholly-owned subsidiary Shanghai Mufeng. Both Muliang HK and Shanghai Mufeng are controlled by the Company’s sole officer and director, Lirong Wang.

 

On July 23, 2015, Muliang Industry established a wholly owned subsidiary, Shanghai Muliang Agricultural Sales Co., Ltd. (“Muliang Sales”) in Shanghai, China.

 

On September 3, 2015, Muliang Agritech effected a split of its outstanding common stock resulting in an aggregate of 150,525,000 shares outstanding of which 120,000,000 were owned by Chenxi Shi the founder of Muliang Agritech and its sole officer and director. The remaining 30,525,000 were held by a total of 39 investors.

 

On January 11, 2016, Muliang Agritech issued 129,475,000 shares of its common stock to Lirong Wang for an aggregate consideration of $64,737.50. On the same date, Chenxi Shi, the sole officer and director of Muliang Agritech on that date, transferred 120,000,000 shares of the common stock of the Company held by him to Lirong Wang for $800 pursuant to a transfer agreement.

 

On February 10, 2016, Shanghai Mufeng entered into a set of contractual agreements known as Variable Interest Entity (“VIE”) Agreements, including (1) Exclusive Technical Consulting and Service Agreement, (2) Equity Pledge Agreement, and (3) Call Option Cooperation Agreement, with Muliang Industry, and its Principal Shareholders. As a result of the Stock Purchase Agreement and the set of VIE Agreements, Shanghai Muliang Industry Co., Ltd., along with its consolidated subsidiaries, became entities controlled by Muliang Agritech whereby Muliang Agritech would derive all substantial economic benefit generated by Muliang Industry and its subsidiaries.

 

As a result, Muliang Agritech has a direct wholly-owned subsidiary, Muliang HK and an indirectly wholly owned subsidiary Shanghai Mufeng. Through its VIE Agreements, Muliang Agritech exercises control over Muliang Industry. Muliang Industry has two wholly-owned subsidiaries (Zongbao and Muliang Sales), one 99% owned subsidiary (Fukang), one 60% owned subsidiary (Agritech Development), and one indirectly wholly owned subsidiary Zongbao Cangzhou.

 

On June 6, 2016, Muliang Industry established a wholly-owned subsidiary, namely, Muliang (Ningling) Bio-chemical Fertilizer Co. Ltd (“Ningling Fertilizer”) in Henan Province, the central plain of China. On October 12, 2017, the Company ceased operation of Ningling Fertilizer and deregistered Ningling Fertilizer with the Administration for Industry and Commerce as the Land use right was not approved by the government. The Company closed Ningling Fertilizer with net assets of $2,275 and accumulated deficit of $34,739 as of October 12, 2017. The ceased operation does not constitute a strategic shift that will have a major effect on our operations or financial results and as such, the disposal is not classified as discontinued operations in our consolidated financial statements.

 

On July 7, 2016, Muliang Industry established a subsidiary, namely, Zhonglian Huinong (Beijing) Technology Co., Ltd (“Zhonglian”) in Beijing City, China. Muliang Industry owns 65% shares of Zhonglian, and a third-party company, Zhongrui Huilian (Beijing) Technology Co., Ltd owns the other 35% shares. Zhonglian has no operating activity as of December 31, 2018.

 

F- 34

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)

 

On October 27, 2016, Muliang Industry established a subsidiary, namely, Yunnan Muliang Animal Husbandry Development Co., Ltd (“Yunnan Muliang”) in Yunnan Province, China. Muliang Industry owns 55% shares of Yunnan Muliang, and a third-party company, Shuangbai County Development Investment Co., Ltd. owns the other 45% shares. On December 8, 2018, Muliang Industry acquired 25% shares of Yunnan Muliang with a consideration of $727,125 (RMB5,000,000) from Shuangbai County Development Investment Co., Ltd. And the other 20% shares were acquired by Lirong Wang. Yunnan Muliang was setup for goat slaughtering and processing project located in Shuangbai County, Chuxiong City, Yunnan Province, PRC.

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved a 5 to 1 reverse stock split of all of the issued and outstanding shares of the Company’s common stock, change of corporate name from “Mullan Agritech Inc.” to “Muliang Agritech Inc.”, and creation of one hundred million (100,000,000) shares of Blank Check Preferred Stock.

 

On April 5, 2019, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the Name Change and to authorize the creation of Blank Check Preferred Stock. As a result, the capital stock of the Company consists of 500,000,000 shares of common stock, $0.0001 par value, and 100,000,000 shares of blank check preferred stock, $0.0001 par value.

 

On April 16, 2019, we filed a Certificate of Change to our Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the reverse stock split. Any fractional shares are to be rounded up to whole shares. The reverse stock split does not affect the par value or the number of authorized shares of common stock of the Company.

 

The reverse stock split and the name change took effect on May 7, 2019.

 

Muliang Agritech, Muliang HK, Shanghai Mufeng, Muliang Industry, Zongbao, Zongbao Cangzhou, Muliang Sales, Fukang, Agritech Development, Yunnan Muliang, and Zhonglian are referred to as subsidiaries the Company and its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.

 

The consolidated financial statements were prepared assuming that the Company has controlled Muliang HK and its intermediary holding companies, operating subsidiaries, and variable interest entities: Shanghai Mufeng, Muliang Industry, Zongbao, Zongbao Cangzhou, Muliang Sales, Fukang, and Agritech Development, from the first period presented. The transactions detailed above have been accounted for as reverse takeover transaction and a recapitalization of the Company; accordingly, the Company (the legal acquirer) is considered the accounting acquiree and Muliang HK (the legal acquiree) is considered the accounting acquirer. No goodwill has been recorded. As a result of this transaction, the Company is deemed to be a continuation of the business of Muliang HK, Shanghai Mufeng, and Muliang Industry.

 

Liquidity and Going Concern

 

As reflected in the accompanying consolidated financial statements, we had net accumulated deficit of $11,330,741 and $11,773,401 as of March 31, 2019 and December 31, 2018, respectively. Our cash balances as of March 31, 2019 and December 31, 2018 were $6,317 and $12,778, respectively. We had current liabilities of $13,145,493 at March 31, 2019 which would be due within the next 12 months. In addition, we had a working capital deficit of $6,585,530 and $7,119,118 at March 31, 2019 and December 31, 2018, respectively.

 

The company plans to continue its expansion and investments, which will require continued improvements in revenue, net income, and cash flows.

 

The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise additional capital, and generate more revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

F- 35

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in conformity with US GAAP. The basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The differences between US GAAP and PRC GAAP have been adjusted in these consolidated financial statements. The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). 

 

Interim Financial Statements

 

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) applicable to interim financial information and the requirements of Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosure required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2018, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements for the year ended December 31, 2018.

 

Use of Estimates

 

The preparation of these financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates. Significant estimates include the useful lives of property and equipment, land use rights, assumptions used in assessing collectability of receivables and impairment for long-term assets.

 

Principles of Consolidation

 

Muliang Agritech consolidates the following entities, including wholly-owned subsidiaries, Muliang HK, Shanghai Mufeng, and its wholly controlled variable interest entities, Muliang Industry, and Zhongbao, 60% controlled Agritech Development, 99% controlled Fukang, 65% controlled Zhonglian and 80% controlled Yunnan Muliang. The 40% equity interest holder of Agritech Development, 1% equity interest holders in Fukang, 35% equity interest holders in Zhonglian, and 20% interest in Yunnan Muliang are accounted as non-controlling interest in the Company’s consolidated financial statements.

 

The variable interest entities consolidated for which the Company is deemed the primary beneficiary. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

F- 36

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Cash and Cash Equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash with various financial institutions.

 

Accounts Receivable

 

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.

 

Inventories

 

Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method.

 

Property, Plant and Equipment

 

Plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

Included in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation of the assets. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.

 

F- 37

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  

Estimated useful lives of the Company’s assets are as follows:

 

    Useful Life
Building   20 years
Operating equipment   5-10 years
Vehicle   3-5 years
Electronic equipment   3-20 years
Office equipment   3-20 years
Apple orchard   10 years

 

The apple orchard includes rental for an apple farm, labor cost, fertilizers, apple seeds, apple seedlings and others. The costs to purchase and cultivate apple trees and the expenditures related to labor and materials to plant apple trees until they become commercially productive are capitalized, which require a two-year period. The estimated production life for apple tree is 10 years, and the costs are depreciated without a residual value. Expenses incurred maintaining apple trees during the growth cycle until seedling apple trees or grafted varieties are fruited are capitalized into inventory and included in Work in Process—apple orchard, a component of inventories.

 

Depreciation expenses pertaining to apple trees will be included in inventory costs for those apples to be sold and ultimately become a component of cost of goods sold. Similar to other assets, the failure of our apple trees to be serviceable over the entirety of their anticipated useful lives or to be sold at their anticipated residual value will negatively impact our operating results.

 

Intangible Assets

 

Included in the intangible assets are land use rights. According to the laws of the PRC, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Intangible assets are being amortized using the straight-line method over their lease terms or estimated useful life.

 

Estimated useful lives of the Company’s intangible assets are as follows:

 

    Useful Life
Land use rights   50 years
Non-patented technology   10 years

 

The Company carries intangible assets at cost less accumulated amortization. In accordance with US GAAP, the Company examines the possibility of decreases in the value of intangible assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company computes amortization using the straight-line method over estimated useful life of 50 years for the land use rights.

 

Impairment of Long-lived Assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company recorded no impairment charge for the three months ended March 31, 2019 and 2018. 

 

F- 38

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  

Advances from Customers

 

Advances from customers consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s revenue recognition policy.

 

Non-controlling Interest

 

Non-controlling interests in the Company’s subsidiaries are recorded in accordance with the provisions of ASC 810 and are reported as a component of equity, separate from the parent’s equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-controlling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Results for the reporting period beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.

 

Management has determined that the adoption of ASC 606 did not impact the Company’s previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to opening retained earnings.

 

Revenue for sale of products is derived from contracts with customers, which primarily include the sale of fertilizer products and environmental protection equipment. The Company’s sales arrangements do not contain variable consideration. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the products has been transferred to the customer. For vast majority of the Company’s product sales, the performance obligations and control of the products transfer to the customer when products are delivered, and customer acceptance is made.

  

Pursuant to the guidance of ASC Topic 840, rent shall be reported as income by lessors over the lease term as it becomes receivable. The Company currently leased part of the building of the Shanghai new plant to third parties as warehouse. The Company recognizes building leasing revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned. 

 

The Company recognized rental income from leasing a portion of its manufacturing facility located in Shanghai to third parties. For the three months ended March 31, 2019 and 2018, rental income of $165,711 and $118,962 were recognized as other income.

 

Cost of Sales

 

Cost of goods sold consists primarily of raw materials, utility and supply costs consumed in the manufacturing process, manufacturing labor, depreciation expense and direct overhead expenses necessary to manufacture finished goods as well as warehousing and distribution costs such as inbound freight charges, shipping and handling costs, purchasing and receiving costs.

 

F- 39

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Income Taxes

 

The Company accounts for income taxes under the provisions of Section 740-10-30 of the FASB Accounting Standards Codification, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns.

 

The Company is subject to the Enterprise Income Tax law (“EIT”) of the People’s Republic of China. The Company’s operations in producing and selling fertilizers are subject to the 25% enterprise income tax.

 

Related Parties

 

Parties are related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions.

 

Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) comprised of net income (loss) and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. The Company’s comprehensive income (loss) consist of net income (loss) and unrealized gains from foreign currency translation adjustments.

 

Reclassification

 

Certain prior year balances have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings or financial position.

 

Foreign Currency Translation

 

The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss. The translation adjustment for three months ended March 31, 2019 and 2018 were gain of $219,080 and gain of $24,289, respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

F- 40

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

All of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

 

Asset and liability accounts at March 31, 2019 and December 31, 2018 were translated at 6.7111 RMB to $1 USD and 6.8764 RMB to $1 USD, respectively, which were the exchange rates on the balance sheet dates. The average translation rates applied to the statements of income for the three months ended March 31, 2019 and 2018 were 6.7464 RMB and 6.3566 RMB to $1 USD, respectively.

 

Earnings (Loss) per Share

 

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted earnings per share gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Earnings per share excludes all potential dilutive shares of common stock if their effect is anti-dilutive. There were no potential dilutive securities at March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018.

 

Fair Value of Financial Instruments

 

The Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, inventories, advances to suppliers, prepaid expenses, short-term loans, accounts payable, accrued expenses, advances from customers, VAT and service taxes payable and income taxes payable approximate their fair market value based on the short-term maturity of these instruments.

   

ASC Topic 825-10 “ Financial Instruments ” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

F- 41

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The following table summarizes the carrying values of the Company’s financial instruments:  

 

    March 31,     December 31,  
    2019     2018  
             
Short-term loan     154,222       150,515  
Current portion of long-term debt     5,572,857       5,453,435  
Long-term loan     3,602,640       3,454,543  

 

Government Contribution Plan

 

Pursuant to the laws applicable to PRC law, the Company is required to participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond its monthly contribution.

 

Statutory Reserve

 

Pursuant to the laws applicable to the PRC, the Company must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund” cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). If the Company has accumulated loss from prior periods, the Company is able to use the current period net income after tax to offset against the accumulate loss.

 

Segment Information

 

The standard, “Disclosures about Segments of an Enterprise and Related Information,” codified with ASC-280, requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. The Company believes that it operates in two business segments and in one geographical segment (China), as all of the Company’s current operations are carried in China.

 

F- 42

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Accounting Pronouncement

 

In January 2017, the Financial Accounting Standard Board (“FASB”) issued guidance, which simplifies the accounting for goodwill impairment. The updated guidance eliminates Step 2 of the impairment test, which requires entities to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value.

 

In January 2017, the FASB issued guidance, which amended the existing accounting standards for business combinations. The amendments clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

 

In January 2017, the FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) ”. This pronouncement amends the SEC’s reporting requirements for public filers in regard to new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.

 

In August 2017, the FASB issued guidance, which amends the existing accounting standards for derivatives and hedging. The amendment improves the financial reporting of hedging relationships to better represent the economic results of an entity’s risk management activities in its financial statements and made certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP.

 

In August 2018, the FASB issued ASU 2018-13, ” Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement ,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The amendments in this Update modify the disclosure requirements on fair value measurements based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential impacts of ASU 2018-13 on its consolidated financial statements.

 

The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

 

Recently adopted accounting pronouncements

 

In May 2016, the FASB issued ASU 2016-12, “ Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ”. The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The Company adoptedASU 2016-12 from January 1, 2018.

 

In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” . The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 including Loan Guarantee Fees, Contract Costs, Provisions for Losses on Construction-Type and Production-Type Contracts, Disclosure of Remaining Performance Obligations, Disclosure of Prior Period Performance Obligations, Contract Modifications, Contract Asset vs. Receivable, Refund Liabilities, Advertising Costs, Fixed Odds Wagering Contracts in the Casino Industry, and Costs Capitalized for Advisors to Private Funds and Public Funds. The effective date of these amendments are at the same date that Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). The Company adopted ASU 2016-20 from January 1, 2018.

 

The Company adopted the Revenue from Contracts with Customers (Topic 606) from January 1, 2018.  

F- 43

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following:

 

    March 31,     December 31,  
    2019     2018  
             
Accounts receivable   $ 4,337,460     $ 4,370,620  
Less : Allowance for doubtful accounts     (280,400 )     (279,733 )
Total, net   $ 4,057,060     $ 4,090,887  

 

The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. After evaluating the collectability of individual receivable balances, the Company recognized bad debt allowance expense of $0 and $0 for the three months ended March 31, 2019 and 2018.

 

NOTE 4 – INVENTORIES

 

Inventories consisted of the following:

 

    March 31,     December 31,  
    2019     2018  
             
Raw materials   $ 138,892     $ 124,069  
Finished goods     650,159       322,561  
Total, net   $ 789,051     $ 446,630  

 

The Company did not recognized loss from inventory impairment for the three months ended March 31, 2019 and 2018.

 

F- 44

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 – PREPAYMENT

 

The prepayment balance of $1,519,834 as of March 31, 2019 mainly represents the advanced payment for the construction of the black goat slaughtering and processing project located in Shuangbai County, Chuxiong City, Yunnan Province, PRC. The remaining balance represents the advance to the suppliers for business purpose.

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at March 31, 2019 and December 31, 2018 consisted of:

 

    March 31,     December 31,  
    2019     2018  
Building   $ 13,155,540     $ 12,838,100  
Operating equipment     2,896,937       2,754,463  
Vehicle     82,547       104,121  
Office equipment     21,501       59,897  
Apple Orchard     1,070,395       1,026,505  
Construction in progress     384,529       341,173  
      17,611,449       17,124,259  
Less : Accumulated depreciation     (2,468,578 )     (2,196,936 )
    $ 15,142,871     $ 14,927,323  

 

For the three months ended March 31, 2019 and 2018, depreciation expense amounted to $272,302 and $208,051, respectively. Depreciation is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances will be classified to their respective property and equipment category.

 

The construction in progress of $384,529 represents the investment of a black goat processing plant located in Shuangbai County, Chuxiong City, Yunnan Province, PRC.

 

F- 45

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 7 – INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

    March 31,     December 31,  
    2019     2018  
             
Land use rights   $ 3,707,565     $ 3,618,441  
Non-patented technology     14,901       14,542  
      3,722,466       3,632,983  
Less : Accumulated amortization     (449,060 )     (419,853 )
    $ 3,273,406     $ 3,213,130  

 

For the three months ended March 31, 2019 and 2018, amortization of intangible assets amounted to $18,767 and $15,440, respectively.

 

NOTE 8 – DEFERRED TAX ASSETS, NET

 

The components of the deferred tax assets are as follows:

 

    March 31,     December 31,  
    2019     2018  
Deferred tax assets, non-current            
Deficit carried-forward   $ 427,103     $ 416,836  
Allowance for doubtful accounts     38,849       37,915  
Deferred tax assets     465,952       454,751  
Less : valuation allowance     -       -  
Deferred tax assets, non-current   $ 465,952     $ 454,751  

 

Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.

 

F- 46

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 9 – LOANS PAYABLE

 

Short-term loan of $154,222 represents balance due to Shanghai Jinshan Limin Micro Loan Co., Ltd., with annualized interest rate of 16%. This loan was borrowed on March 3, 2017 and due on March 2, 2018. The Company extended this loan twice until the end of June 2019 with the same terms.

 

Current portion of long-term loans amounted to $5,572,857 representing balance due to Agricultural Bank of China, with an annual interest rate of 5.70% + (HongkongInterBank Offered Rate (“HIBOR”)).

 

Long-term loans represent amounts due to lenders that are due in more than one year, whose balance was $3,602,640 and $3,454,543 as of March 31, 2019 and December 31, 2018, respectively.

 

Long-term loan and current portion of long-term loan consisted of the following:  

 

    March 31,     December 31,  
    2019     2018  
Loan payable to Agricultural Bank of China, annual interest rate of 5.70% + HIBOR, due by August 25, 2019.   $ 4,455,305     $ 4,362,748  
Loan payable to Rushan City Rural Credit Union, annual interest 8.3125%, due by July 25, 2019.     1,117,552       1,090,687  
Long-term loans and interest payable to individuals and entities without interest     3,602,640       3,454,543  
      9,175,497       8,907,978  
Less : Current portion of long-term loans payable     (5,572,857 )     (5,453,435 )
Total, net   $ 3,602,640     $ 3,454,543  

 

As of March 31, 2019, the Company’s future loan obligations according to the terms of the loan agreement are as follows:

 

Year 1   $ 5,727,079  
Year 2     3,602,640  
Total   $ 9,329,719  

 

The long-term bank loan with Agricultural Bank of China was collateralized with land use rights and guaranteed by Mr. Lirong Wang, the CEO. 

 

The Company recognized interest expenses of $94,596 and $108,081 for the three months ended March 31, 2019 and 2018, respectively.

 

F- 47

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 10 – STOCKHOLDERS DEFICIT

 

Authorized Stock

 

The Company has authorized 500,000,000 common shares with a par value of $0.0001 per share.  Each common share entitles the holder to one vote, in person or proxy, on any matter on which action of the stockholders of the corporation is sought.

 

On April 5, 2019, the Company filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the creation of Blank Check Preferred Stock. As a result, the capital stock of the Company consists of 500,000,000 shares of common stock, $0.0001 par value, and 100,000,000 shares of blank check preferred stock as of March 31, 2019.

 

Common Share Issuances

 

On June 29, 2018, the outstanding amount $326,348 due to Mr. Wang, CEO and Chairman of the Company, were converted into 43,200 shares of Common Shares at $ 7.55 per share.

 

On June 29, 2018 the Company issued 298,518 common shares of the Company at $7.55 for proceeds of $2,255,111 to Mr. Wang, CEO and Chairman of the Company.

  

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved a 5 to 1 reverse stock split of all of the issued and outstanding shares of the Company’s common stock (the “Reverse Stock Split”).

 

On April 16, 2019, the Company filed a Certificate of Change to our Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the Reverse stock Split. The common shares outstanding have been retroactively restated to reflect the reverse stock split.

 

As a result of the Reverse Stock Split, the total issued and outstanding shares of common stock the Company is 56,341,953 as of March 31, 2019.

 

F- 48

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 11 – RELATED PARTY TRANSACTIONS

 

Ms. Hui Song was the Company’s former sales director. In 2013, Ms. Hui Song resigned and she no longer has any significant control or influence over the Company therefore she was no longer considered a related party. Jilin Jiliang Zongbao Biological Technology Co., Ltd., an entity controlled by Ms. Hui Song, and Yantai Zongbao Tele-Agriculture Service Co., Ltd., a related company of Ms. Hui Song, were also no longer considered as related parties of the Company.

 

*Account receivable from and sales to Ms. Hui Song and her associated

 

For the three months ended March 31, 2019, the Company did not sell any products to Ms. Hui Song and her associated.

 

The Company sold fertilizer manufacturing equipment to Jilin Jiliang Zongbao Biological Technology Co., Ltd., in the amount of $171,664, with related cost of $107,567 for the three months ended March 31, 2018. This transaction was reflected in the revenue and cost of goods sold.

 

As of March 31, 2019 and December 31, 2018, the Company has account receivable balance of $190,238 and $185,665 from Jilin Jiliang Zongbao Biological Technology Co., Ltd., respectively.

 

As of March 31, 2019 and December 31, 2018, the Company has account receivable balance of $37,252 and $61,082 from Yantai Zongbao Tele-Agriculture Service Co., Ltd., respectively. 

 

*Account payable to and purchase from Ms. Hui Song and its associated

 

For the three months ended March 31, 2019 and 2018, the Company purchased fertilizer of $518,943 and $459,421 from Jilin Jiliang Zongbao Biological Technology Co., Ltd., respectively . As of March 31, 2019 and December 31, 2018, account payable to Jilin Jiliang Zongbao Biological Technology Co., Ltd. was $596,176 and $72,712 respectively.

 

As of March 31, 2019, long-term loan payable balances for Jilin Jiliang Zongbao Biological Technology Co., Ltd. and Ms Hui Song were $827,676 and $273,428, respectively.

 

As of December 31, 2018, long-term loan payable balances for Jilin Jiliang Zongbao Biological Technology Co., Ltd. and Ms. Hui Song were $807,780 and $266,855, respectively.

 

F- 49

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 11 – RELATED PARTY TRANSACTIONS (CONTINUED)

 

*Account payable to and purchase from related parties

 

The Company did not make any purchase from related parties for the three months ended March 31, 2019.

 

The Company purchased fertilizer manufacturing equipment of $107,567 from Shanghai Aoke Chemicals Co., Ltd. for the three months ended March 31, 2018. Shanghai Aoke Chemicals Co., Ltd. was 95% controlled by Mr. Lirong Wang, CEO and majority shareholder of the Company. 

 

As of March 31, 2019 and December 31, 2018, account payable to Shanghai Aoke Chemicals Co., Ltd. were $119,205 and $116,340.   

 

*Due to related party

 

Outstanding balance due to Mr. Lirong Wang and Mr. Guohua Lin below are advances from related parties for working capital of the Company which are due on demand, non-interest bearing, and unsecured, unless further disclosed.

 

    March 31,     December 31,      
    2019     2018     Relationship
Mr. Lirong Wang     680,238       1,442,751     The CEO and Chairman / Actual controlling person
Ms. Xueying Sheng     161,403       169,743     Controller/Accounting manager of the Company
Mr. Guohua Lin     85,083       3,054     Senior management / One of the Company’s shareholders
Total     926,724       1,615,547      

 

For the three months ended March 31, 2019, the Company borrowed $574,295 from Mr. Lirong Wang, and repaid $1,114,501.

 

For the three months ended March 31, 2019, the Company borrowed $83,742 from Mr. Guohua Lin, and repaid $271.  

 

On November 8, 2017, the Company borrowed $31,993 from Ms. Xueying Sheng. The loan is unsecured, without maturity, and bears an interest rate of 20%.

 

For the three months ended March 31, 2019, the Company borrowed $25,976 from Ms. Xueying Sheng and repaid $38,431.

 

These loan are due on demand, non-interest bearing, and unsecured.

 

F- 50

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 12 – CONCENTRATIONS

 

Customers Concentrations

 

The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the three months ended March 31, 2019 and 2018.

 

    For the three months ended  
    March 31,  
Customer   2019     2018  
    Amount     %     Amount     %  
A     414,488       22 %     N/A       N/A  
B     386,325       20 %     N/A       N/A  
C     266,809       14 %     N/A       N/A  
D     222,341       12 %     N/A       N/A  
E     N/A       N/A       626,267       52 %
F     N/A       N/A       314,634       26 %
G     N/A       N/A       171,664       14 %

 

 

Suppliers Concentrations

 

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchase for the three months ended March 31, 2019 and 2018.

 

    For the three months ended  
    March 31,  
Suppliers   2019     2018  
    Amount     %     Amount     %  
A     401,440       34 %     N/A       N/A  
B     142,476       12 %     N/A       N/A  
C     518,943       44 %     459,421       76 %
D     N/A       N/A       107,567       18 %

 

F- 51

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 12 – CONCENTRATIONS (CONTINUED)

 

Credit Risks

 

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 environment 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 North America. 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.

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. At March 31, 2019 and December 31, 2018, the Company’s cash balances by geographic area were as follows:

 

    March 31,
2019
    December 31,
2018
 
China   $ 6,317       100 %   $ 12,778       100 %
Total cash and cash equivalents   $ 6,317       100 %   $ 12,778       100 %

 

F- 52

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 13 – INCOME TAXES

 

United States

 

Muliang Agritech is established in the State of Nevada in the United States and is subject to Nevada State and US Federal tax laws. Muliang Agritech has approximately $102,000 of unused net operating losses (“NOLs”) available for carrying forward to future years for U.S. federal income tax reporting purposes. The benefit from the carry forward of such NOLs will begin expiring during the year ended December 31, 2034. Because United States tax laws limit the time during which NOL carry forwards may be applied against future taxable income, the Company may be unable to take full advantage of its NOLs for federal income tax purposes should the Company generate taxable income. Further, the benefit from utilization of NOL carry forwards could be subject to limitations due to material ownership changes that could occur in the Company as it continues to raise additional capital. Based on such limitations, the Company has significant NOLs for which realization of tax benefits is uncertain.

 

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. The Company has considered the accounting impact of the effects of the Act during the year ended December 31, 2018 including a reduction in the corporate tax rate from 34% to 21% among other changes.

 

Hong Kong

 

Muliang HK is established in Hong Kong and its income is subject to a 16.5% profit tax rate for income sourced within the country. For the years ended December 31, 2018 and 2017, Muliang HK did not earn any income derived in Hong Kong, and therefore was not subject to Hong Kong Profits Tax.

 

China, PRC

 

Shanghai Mufeng and its subsidiaries Muliang Industry, Zongbao, Zongbao Cangzhou, Muliang Sales, Fukang, Agritech Development, Zhongliang and Yunnan Muliang are established in China and its income is subject to income tax rate of 25%.

 

The reconciliation of effective income tax rate as follows:

 

    For the Three Months Ended  
    March 31,     March 31,  
    2019     2018  
US Statutory income tax rate     21 %     21 %
Lower rates in PRC, net     -       -  
Valuation allowance     (21 )%     (21 )%
Total     -       -  

 

F- 53

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 13 – INCOME TAXES (CONTINUED)  

 

The provision for income taxes consists of the following:

 

   

For the Three Months Ended
March 31,

 
    2019     2018  
Current   $ 97,860     $ -  
Deferred     -       -  
Total   $ 97,860     $ -  

 

Accounting for Uncertainty in Income Taxes

 

The tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises complete their relevant tax filings. Therefore, the Company’s PRC entities’ tax filings results are subject to change. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s PRC entities’ tax filings, which may lead to additional tax liabilities.

 

ASC 740 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s tax positions and concluded that no provision for uncertainty in income taxes was necessary as of March 31, 2019 and December 31, 2018.

 

NOTE 14 – BUSINESS SEGMENTS

 

The revenues and cost of goods sold from operation consist of the following:

 

    Revenues     Cost of Sales  
    For the Three Months Ended     For the Three Months Ended  
    March 31,     March 31,     March 31,     March 30,  
    2019     2018     2019     2018  
Fertilizer sales   $ 1,915,973     $ 1,188,020     $ 1,024,937     $ 682,779  
Agricultural products (food) sales     309,395       -       313,939       -  
Total   $ 2,225,368     $ 1,188,020     $ 1,338,876     $ 682,779  

 

F- 54

 

 

MULIANG AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 15 – SUBSEQUENT EVENT

 

Reverse Stock Split

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved a 5 to 1 reverse stock split of all of the issued and outstanding shares of the Company’s common stock (the “Reverse Stock Split”),  No fractional shares of Common Stock will be issued as a result of the reverse stock split. The Stock Split does not affect the par value or the number of authorized shares of common stock of the Company.

 

On April 16, 2019, the Company filed a Certificate of Change to the Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the reverse stock split.

 

The reverse stock split took effect on May 7, 2019

 

As a result of this reverse stock split, all references in the financial statements and notes thereto to the number of shares outstanding, per share amounts, of the Company’s Common Stock have been restated to reflect the effect of the stock split for all periods presented.

 

Name Change

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved change of corporate name from “Mullan Agritech Inc.” to “Muliang Agritech Inc.” (the “Name Change”). On April 5, 2019, Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada to reflect the Name Change. The name change took effect on May 7, 2019

 

Blank Check Preferred Stock

 

On April 4, 2019, the Company’s Board of Directors and majority shareholder approved creation of one hundred million (100,000,000) shares of Blank Check Preferred Stock, $0.0001 par value. To the fullest extent permitted by the laws of the State of Nevada, as the same now exists or may hereafter be amended or supplemented, the Board of Directors may fix and determine the designations, rights, preferences or other variations of each class or series within each class of preferred stock of the Company. The Company may issue the shares of stock for such consideration as may be fixed by the Board of Directors.

 

On April 5, 2019, the Company filed a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the State of Nevada to authorize the creation of Blank Check Preferred Stock.

 

F- 55

 

 

                                       Shares of Common Stock

 

 

 

 

 

 

 

 

Muliang Agritech, Inc.

 

 

 

 

 

 

PROSPECTUS

 

 

 

 

 

 

 

           , 2019

 

 

 

Through and including         , 2019 (the 25 th day after the date of this offering), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

 

 

PART II — INFORMATION NOT REQUIRED IN THE PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

 

Set forth below is an itemization of the total expenses, excluding underwriters’ discounts and commissions, that we expect to incur in connection with this offering. With the exception of the SEC registration fee, the FINRA filing fee and the Nasdaq listing fee, all amounts are estimates.

 

Securities and Exchange Commission Registration Fee   $

 2,000

 
Nasdaq Listing Fee   $ 50,000  
FINRA   $

 3,000

 
Legal Fees and Expenses   $  
Accounting Fees and Expenses   $  
Printing and Engraving Expenses   $  
Miscellaneous Expenses   $  
Total Expenses   $  

 

All amounts are estimates other than the SEC’s registration fee. We are paying all expenses of the offering listed above.

 

Item 14. Indemnification of Directors and Officers.

 

To the fullest extent permitted by the laws of the State of Nevada, our Articles of Incorporation and Bylaws, we may indemnify an officer or director who is made a party to any proceeding, including a lawsuit, because of his/her position, if he/she acted in good faith and in a manner he/she reasonably believed to be in our best interest. We may advance expenses incurred in defending a proceeding. To the extent that the officer or director is successful on the merits in a proceeding as to which he/she is to be indemnified, we must indemnify him/her against all expenses incurred, including attorney’s fees. With respect to a derivative action, indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court order.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is theretofore unenforceable.

 

Item 15. Recent Sales of Unregistered Securities.

 

For the past three years, we have issued and sold the securities described below without registering the securities under the Securities Act. None of these transactions involved any underwriters’ underwriting discounts or commissions, or any public offering. We believe that each of the following issuances was exempt from registration under the Securities Act in reliance on Regulation S promulgated under the Securities Act regarding sales by an issuer in offshore transactions, Regulation D under the Securities Act, Rule 701 under the Securities Act or pursuant to Section 4(a)(2) of the Securities Act regarding transactions not involving a public offering.

 

We completed a 5-for-1 reverse stock split on May 7, 2019. All share and per share information in this Item 15 has been adjusted to reflect this reverse stock split.

 

On June 29, 2018, the outstanding amount $326,348 due to Mr. Wang, CEO and Chairman of the Company, were converted into 43,200 shares of common stock at $7.55 per share.

 

On June 29, 2018, the Company issued 298,518 shares of common stock of the Company at $7.55 per share, to Mr. Wang, CEO and Chairman of the Company , for aggregate proceeds of $2,255,111.

 

Item 16. Exhibits.

 

Exhibit
Number
  Description
3.1 (1)   Certificate of Incorporation
3.2 (2)   Certificate of Amendment filed with the Secretary of the State of Nevada on April 5, 2019
3.3 (2)   Certificate of Change filed with the Secretary of the State of Nevada on April 16, 2019
3.4 (1)   Bylaws
4.1*   Specimen Common Stock Certificate
5.1*   Opinion of Ortoli Rosenstadt LLP, counsel to Mullan Agritech, Inc., as to the validity of the common stock
8.1*   Opinion of                        regarding certain PRC tax matters (included in Exhibit 99.1)
14.1*   Code of Business Conduct and Ethics of the Company
21.1†   List of Subsidiaries
23.1†   Consent of WWC, PC
23.2*   Consent of Ortoli Rosenstadt LLP (included in Exhibit 5.1).
23.3*   Consent of                        Law Firm
99.1*   Audit Committee Charter
99.2*   Compensation Committee Charter
99.3*   Nominating Committee Charter

 

(1) Incorporated by reference to the Registration Statement on Form S-1 filed with the SEC on January 5, 2015.

(2) Incorporated by reference to the Annual Report on Form 8-K filed with the SEC on May 10, 2019.

* To be filed by amendment

Filed herewith.

II- 1

 

 

Item 17. Undertakings.

 

The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

The undersigned registrant hereby undertakes:

 

  (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

  (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

 

  (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

 

  (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

  (2) That for the purpose of determining any liability under the Securities Act of 1933 each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

  (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

  (4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

  (5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

 

The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

  (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

II- 2

 

 

  (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

  

  (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

  (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

  (6) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

  (7) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

  (8) The undersigned Registrant hereby undertakes:

 

  (1) That for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  (2) That for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

II- 3

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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. In the City of New York, New York on June 26, 2019.

 

  MULLAN AGRITECH, INC.
     
  By: /s/ LirongWang
    LirongWang
    Chief Executive Officer and
Chief Financial Officer
    (Principal Executive Officer and
Principal Financial Officer)

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

    Title   Date
/s/ Lirong Wang   Chairman of the Board & Chief Executive Officer   June 26 , 2019
Lirong Wang   (Principal Executive Officer)    

 

 

II-4

 

Exhibit 21.1

 

SUBSIDIAIRES OF MULIANG AGRITECH, INC.

 

 

Subsidiaries   Place of Incorporation Percentage Ownership
Muliang Agricultural Limited   Hong Kong, People’s Republic of China 100%

Shanghai Mufeng Investment Consulting Co., Ltd.

上海牧枫投资咨询有限公司

  People’s Republic of China 100%

 

 

Consolidated Variable Interest Entity (“VIE”)   Place of Incorporation Percentage Ownership

Shanghai Muliang Industry Co., Ltd.

上海牧粮实业有限公司

  People’s Republic of China Contractual Relationship

 

 

 

Subsidiaries of Consolidated VIE   Place of Incorporation Percentage Ownership

Shanghai Zongbao Environmental Construction Co., Ltd.

上海综宝环境工程有限公司

  People’s Republic of China 100% owned by VIE

Shanghai Zongbao Environmental Construction Co., Ltd. Cangzhou Branch

上海综宝环境工程有限公司沧州分公司

  People’s Republic of China 100% owned by VIE

Shanghai Muliang Agritech Development Co., Ltd.

上海牧粮农业科技发展有限公司

  People’s Republic of China 60% owned by VIE

Weihai Fukang Bio-Fertilizer Co., Ltd.

威海富康生物肥料有限公司

  People’s Republic of China 99.9% owned by VIE

Shanghai Muliang Agricultural Sales Co., Ltd.

上海牧粮农资销售有限公司

  People’s Republic of China 100% owned by VIE

Zhonglian Huinong (Beijing) Technology Co., Ltd.

中联慧农(北京)科技有限公司

  People’s Republic of China 65% owned by VIE

Yunnan Muliang Animal Husbandry Development Co., Ltd.

云南牧粮畜牧发展有限公司

  People’s Republic of China 80% owned by VIE

 

 

 

 

 

Exhibit 23.1

 

 

Consent of Independent Registered Public Accounting Firm

 

We hereby consent to the incorporation in the Registration Statement on Form S-1 of Muliang Agritech, Inc. of our report dated April 16, 2019, relating to the audit of the consolidated financial statements of Muliang Agritech, Inc. (the “Company”) as of December 31, 2018 and for the year then ended.

 

 

  /s/ WWC, P.C.
San Mateo, California WWC, P.C.
June 26, 2019 Certified Public Accountants