Notes to Consolidated Financial Statements

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

The consolidated financial statements include the financial statements of Shanghai Muliang Industrial Corp. (referred to herein as “Industrial Corp.”); its wholly-owned subsidiaries which are limited liability companies in People’s Republic of China (“PRC”), Shanghai Zongbao Environment Engineering Co., Ltd. (“Zongbao”) and Shanghai Muliang Agritech Development Co., Ltd. (“Muliang Agritech”); its 99% owned subsidiary, Weihai Fukang Bio-Fertilizer Co., Ltd. (“Fukang”), a PRC limited liability company.

On July 11, 2013, Industrial Corp. established a wholly owned subsidiary, Muliang Agritech in Shanghai, China. On November 6, 2013, Industrial Corp. sold 40% of the outstanding equity of Muliang Agritech to Mr. Jianping Zhang for consideration of approximately $65,000 or RMB 400,000. Muliang Agritech does not own any assets or conduct any operations. On July 17, 2013, Industrial Corp. acquired 100% of the outstanding equity of Zongbao from Zhongbao’s former shareholders with consideration of approximately $3.2 million or RMB 20 million. Zhongbao is engaged in the business of processing and distributing organic fertilizers. On May 27, 2013, Industrial Corp. entered into and consummated an equity purchase agreement whereby it acquired 99% of the outstanding equity of Fukang, a corporation organized under the laws of the People’s Republic of China. As a result of the completion of the transaction, Fukang became a 99% owned subsidiary of Industrial Corp., with the remaining 1% equity interest owned by Mr. Hui Song. Fukang is focused on distribute organic fertilizers and develop new bio-organic fertilizers. All of Industrial Corp.’s operations are conducted by Industrial Corp., Zhongbao and Fukang. Zhongbao and Fukang’s results of operations are consolidated into those of Industrial Corp., Zhongbao, Muliang Agritech, and Fukang are sometimes referred to as the “subsidiaries”. Industrial Corp. and its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.

Industrial Corp. was incorporated in PRC on December 7, 2006 as a limited liability company. The Company is engaged in the business of developing, manufacturing, and selling organic fertilizers and bio-organic fertilizers for use in agricultural industry. The Company operates a fertilizer production factory around Shanghai through one of its subsidiaries, Zongbao.

Zhongbao was incorporated in Shanghai on January 25, 2008. On July 17, 2013, Industrial Corp. entered into an equity purchase agreement with Zhongbao’s former shareholders whereby Industrial Corp. acquired 100% of the equity interest of Zhongbao. Industrial Corp. acquired Zhongbao and became the sole holder of 100% of the equity interest of Zhongbao, and Zhongbao effectively became the wholly-owned subsidiary of Industrial Corp.

On May 27, 2013, Industrial Corp. entered into a share purchase agreement with Fukang’s principal shareholder whereby Industrial Corp. would acquire 99% of the equity interest of Fukang. Fukang was incorporated in Weihai City, Shandong Province on January 6, 2009.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (continued)

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 nine months ended September 30, 2015 and 2014, the Company reported net losses of $2,661,262 and $2,454,321, respectively. The Company had working capital deficit of approximately $5.0 million and $16.1 million as of September 30, 2015 and December 31, 2014. In addition, the Company had cash outflows of $2,228,102 and $230,557 from its operating activities during the nine months ended September 30, 2015 and 2014. These conditions raise a substantial 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 new fertilizer factories start to operate. During the nine months ended September 30, 2015, the Company obtained capital contribution of approximately $16 million from its shareholders which successfully improved the Company’s financial position as of September 30, 2015. Additionally, one of the new fertilizer factories was completed and put in operations in August 2015 and another factory was expected to put in operation in June 2016. Management believes that if successfully executed, the foregoing actions would enable the Company to continue as a going-concern.

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 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”). All significant intercompany transactions and balances have been eliminated.

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.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Principles of Consolidation

We consolidate the following entities, including wholly-owned subsidiaries, Zhongbao and Muliang Agritech, and 99% owned subsidiary, Fukang. All material intercompany accounts and transactions have been eliminated in consolidation. The 1% equity interest holders in Fukang and the 40% equity interest holder of Muliang Agritech will be accounted as noncontrolling interest in the Company’s consolidated financial statements.

Restrictions of Transfer of Assets Out of the PRC

Dividend payments by Industrial Corp. and its subsidiaries are limited by certain statutory regulations in the PRC. No dividends may be paid by the Company without first receiving prior approval from the Foreign Currency Exchange Management Bureau. Dividend payments are restricted to 90% of profits, after tax.

Control by Principal Stockholders

Our 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

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 in the PRC. As of September 30, 2015 and December 31, 2014, balances in banks in the PRC of $77,937 and $179,472, respectively, are uninsured.

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. At September 30, 2015 and December 31, 2014, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $69,797 and $63,575, respectively.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to 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. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company recorded inventory reserves of $91,975 and $95,201 at September 30, 2015 and December 31, 2014.

Advances to Suppliers

Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $35,014 and $1,263,252 as of September 30, 2015 and December 31, 2014, respectively.

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:

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Biological Assets

Biological assets consist primarily of 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 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—biological assets, a component of inventories.

Amortized expenses pertaining to biological assets 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 biological assets 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.

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 the 50 year life of 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 nine months ended September 30, 2015 and 2014.

Advances from Customers

Advances from customers at September 30, 2015 and December 31, 2014 amounted to $37,377 and $16,993, respectively, and 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.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenues from the sale of its fertilizer products upon shipment and transfer of title.

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 did not have any deferred tax assets or liabilities as of September 30, 2015 and December 31, 2014.

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. In addition the Company’s sales are subject to the 13% or 17% PRC’s VAT tax or the 5% business tax levied on incomes from services rendered.

Shipping and Handling Costs

Shipping costs are included in selling expenses and totaled $104,741 and $24,440 for the nine months ended September 30, 2015 and 2014, respectively.

Advertising Costs

Advertising is expensed as incurred and is included in selling, general and administrative expenses on the accompanying statements of income and comprehensive income and totaled $85,394 and $9,588 for the nine months ended September 30, 2015 and 2014, respectively.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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. All transactions are recorded at fair value of the goods or services exchanged.

Accumulated Other Comprehensive Income

Comprehensive income is comprised of net income 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. For the Company, comprehensive income for the nine months ended September 30, 2015 and 2014 included net income and unrealized gains from foreign currency translation adjustments.

Foreign Currency Translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company is the Chinese Renminbi (“RMB”). 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. The cumulative translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2015 and 2014 was 28,151 and $48,584, 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.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Asset and liability accounts at September 30, 2015 and December 31, 2014 were translated at 6.3538 RMB to $1 and 6.1385 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the nine months ended September 30, 2015 and 2014 were 6.1606 RMB and 6.1432 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

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.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Concentrations of 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 September 30, 2015 and December 31, 2014, the Company’s cash balances by geographic area were as follows:

Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessments inherently involve an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

Accrual of Environmental Obligations

ASC Section 410-30-25 “Recognition” of environmental obligations requires the accrual of a liability if both of the following conditions are met:

As of September 30, 2015 and December 31, 2014, the Company did not have any environmental remediation obligations, nor did it have any asset retirement obligations under ASC 410. Furthermore, the Company did not have any environmental remediation loss contingencies requiring recognition or disclosure in its financial statements.

Recent Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-9, “Revenue from Contracts with Customers” (“ASU 2014-9"). ASU 2014-9 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The updated guidance related to revenue recognition which affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for the Company starting on January 1, 2017. The Company is currently evaluating the impact this guidance will have on its combined financial position, results of operations and cash flows.

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard that raises the threshold for disposals to qualify as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The standard revised the definition of a discontinued operation to cover only asset disposals that are considered to be a strategic shift with a major impact on an entity’s operations and finances, such as the disposal of a major geographic area or a significant line of business. Application of the standard, which is to be applied prospectively, is required for fiscal years beginning on or after December 15, 2014, and for interim periods within that year.

Based on the Company’s initial assessment of the standard, the Company expects that any potential future disposals of any one of its hog farms will not be reported as discontinued operations and that the results of operations of any such disposed hog farms, including revenues, costs and any gains or losses on disposal, will be classified as continuing operations within the Consolidated Statements of Operations and Comprehensive Income for all periods presented through the date of disposition.

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 increased the allowance for doubtful accounts in the amount of $8,639 and $12,489 for the nine months ended September 30, 2015 and 2014, respectively.

For the nine months ended September 30, 2015 and 2014, the Company reported ($10,262) and $75,411 as gain (loss) on its physical inventory, respectively.

NOTE 5 – OTHER RECEIVABLES

At September 30, 2015 and December 31, 2014, the Company reported other receivables of $465,795 and $82,615, respectively, including an allowance for doubtful receivables of $129,214 and $118,873.

The balances of other receivables as of September 30, 2015 and December 31, 2014 included the following:

The Company reviews the other receivables 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 increased the allowance for doubtful accounts in the amount of $14,820 and $0 for the nine months ended September 30, 2015 and 2014.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 6 – LONG-TERM INVESTMENT

As of September 30, 2015 and December 31, 2014, the Company did not have any long-term investment. No gain or loss recognized from the investment during the nine months ended September 30, 2015 and 2014.

At September 16, 2013, the Company entered into an investment agreement to establish a PRC limited liability company, Yantai Zongbao Tele-Agriculture Service Co., Ltd. (“Yantai Zongbao”), located in Yantai City, Shandong Province. Yantai Zongbao was engaged in providing agricultural planting consulting services to farm owners. The Company invested in approximately $0.5 million or RMB 3 million for 30% of the equity of Yantai Zongbao. On August 26, 2014, the Company sold the 30% equity of interest of Yantai Zongbao to Ms. Hui Song, a member of the Company’s management team, for consideration of approximately $0.5 million or RMB 3 million. Until August 26, 2014 (the disposal date), Yantai Zongbao did not have any operating activities.

For the nine months ended September 30, 2015 and 2014, depreciation expense amounted to $123,099 and $168,981, 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.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 8 – CONSTRUCTION IN PROGRESS

Construction in progress consists of amounts expended for the constructions of two new fertilizer factories. Once construction is completed and the facilities are approved to be used, the construction in progress assets are placed into production and transferred into plant and equipment, whereupon they are depreciated over their estimated useful lives. As of September 30, 2015 and December 31, 2014, the construction in progress was $7,464,197 and $5,535,611, respectively. Included in this amount were:

For the nine months ended September 30, 2015 and 2014, no amortization expense was reported.

NOTE 10 – INTANGIBLE ASSETS

There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land use rights have a term of 50 years. The Company amortizes the land use rights over the term of the respective land use right. For the nine months ended September 30, 2015 and 2014, amortization of intangible assets amounted to $49,011 and $47,496, respectively. At September 30, 2015 and December 31, 2014, intangible assets consisted of the following:

The estimated amortization expense of intangible assets over each of the next five years and thereafter will be $65,348.

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 12 – RELATED PARTY TRANSACTIONS

Loans from Related Parties

During the year ended December 31, 2014, we obtained an aggregate financial supports of approximately $17,878,000 from our related parties for the Company’s working capital purpose. We had repaid approximately $15,061,000 during the year. The balance of those payables was $7,815,637 as of December 31, 2014. These loans were due upon demand and no interest was charged. The detail of these loans from related parties was as follow:

During the nine months ended September 30, 2015, we obtained financial supports of $33,525,618 from our related parties and repayments of $34,473,631 made to our related parties which were recorded in the loans from related party account. The balance of those payables was $3,043,152 as of September 30, 2015. These loans were due upon demand and no interest was charged. The detail of these loans from related parties was as follow:

Loans to Related Parties

During the year ended December 31, 2014, we loaned an aggregate of approximately $12,061,000 to our related parties and collected approximately $8,209,000 during the same period. The ending balance of due from related parties was $3,785,377 as of December 31, 2014. These loans were due upon demand and no interest was charged. The detail of our loans to related parties was as follow:

During the nine months ended September 30, 2015, we did not neither make a new loan to our related parties nor make collections during the same period. The ending balance of due from related parties was $81,147 as of September 30, 2015. These loans were due upon demand and no interest was charged. The detail of our loans to related parties was as follow:

The above loans would be in violation of the Sarbanes-Oxley Act of 2002, including Section 402’s prohibition against personal loans to directors and executive officers, either directly or indirectly, had they occurred after Industrial Corp. became a variable interest entity of our Company. Management is aware of the ramifications, and has committed to avoiding it by implementing controls that will prevent this type of violation from happening in the future. Please see “Policies and Procedures for Review, Approval or Ratification of Transactions with Related Persons.”

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 12 – RELATED PARTY TRANSACTIONS (continued)

Sales to Related Parties

In the year ended December 31, 2014, the Company made sales of fertilizer products to Jilin Jiliang Zongbao Biological Technology Co., Ltd. and Yantai Shangying Taimeng Advertising Co., Ltd. The detail of sale transactions with its related parties was as follow:

In the nine months ended September 30, 2015, the Company made sales of fertilizer products to Yantai Zongbao Tele-Agriculture Service Co., Ltd. and Yantai Shangying Taimeng Advertising Co., Ltd. The detail of sale transactions with our related parties was as follow:

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 12 – RELATED PARTY TRANSACTIONS (continued)

Advances to Related Party Supplier

In the year ended December 31, 2014, the Company prepaid certain amount of prepayments to its related parties for undelivered goods and services. The detail of prepayment transactions with its related parties was as follow:

In the nine months ended September 30, 2015, the Company prepaid $6,493 to Cangzhou Zongbao Fertilizer Co., Ltd. for the inventory purchase. One of management team members had direct investment in this entity. As of September 30, 2015, the Company reported prepayments of $11,913 to Cangzhou Zongbao Fertilizer Co., Ltd.

Inventories and Services Purchased from Related Parties

In the year ended December 31, 2014, the Company purchased raw materials and marketing services from its related parties, Shanghai Aoke Chemicals Co., Ltd. and Yantai Shangying Taimeng Advertising Co., Ltd. The detail of inventory and service purchase transactions with the related parties was as follow:

Shanghai Muliang Industrial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 12 – RELATED PARTY TRANSACTIONS (continued)

In the nine months ended September 30, 2015, the Company purchased raw materials from its related parties, Aoke. The detail of inventory purchase transactions with the related party was as follow:

NOTE 13 – CONCENTRATIONS

Customers

The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the nine months ended September 30, 2015 and 2014.

Suppliers

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchase for the nine months ended September 30, 2015 and 2014.

NOTE 14 – SUBSEQUENT EVENTS

On February 10, 2016, Shanghai Muliang Industrial Corp. (“Industrial Corp.”) entered into an entrusted management agreement with Muliang Agriculture Ltd.’s wholly owned subsidiary, Shanghai Mufeng Investment Consulting Co., Ltd. (“Consulting Corp.”), which provides that Consulting Corp. will be entitled to the full guarantee for the performance of such entrusted management agreement entered into by the Company. Muliang Agriculture Ltd. (“Agriculture”) was incorporated in Hong Kong, PRC on August 21, 2014. Other than the equity interest in Consulting Corp., Agriculture does not own any assets or conduct any operations. Consulting Corp. is also entitled to receive the residual return of the Company. As a result of the agreement, Consulting Corp. will absorb 100% of the expected gains or losses of the Company, which results in Consulting Corp. being the primary beneficiary of the Company.

Consulting Corp. also entered into a pledge of equity agreement with the principal shareholders of the Company (the “Principal Shareholders”), who pledged all their equity interest in the entity to Consulting Corp. The pledge of equity agreement, which were entered into by each Principal Shareholder, pledged each of the Principal Shareholders’ equity interest in the Company as a guarantee for the entrustment payment under the Entrusted Management Agreements. In addition, Consulting Corp. entered into an option agreement to acquire the Principal Shareholders’ equity interest in these entities if or when permitted by the PRC laws.