UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-55421

 

MULLAN AGRITECH, INC.

(Exact name of registrant as specified in its charter)
Nevada		NA
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

1958 Qianming East Road,

Fengjingzhen, Jinshan District

Shanghai, China

(Address of principal executive offices) (Zip Code)

 

(86) 21-67355092

(Registrant's telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☒

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 14, 2016, the registrant had 280,000,000 shares of its common stock outstanding.

 

 

 

MULLAN AGRITECH, INC.

 

QUARTERLY REPORT ON FORM 10-Q

September 30, 2016

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION			Page
Item 1.		Financial Statements (unaudited)	1
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations	2
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	13
Item 4.		Controls and Procedures	13
PART II - OTHER INFORMATION
Item 1.		Legal Proceedings	14
Item1A.		Risk Factors	14
Item 2.		Unregistered Sales of Equity Securities	14
Item 3.		Defaults Upon Senior Securities	14
Item 4.		Mine Safety Disclosures	14
Item 5.		Other Information	14
Item 6.		Exhibits	14
		Signatures	15

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The following unaudited interim financial statements of Mullan Agritech, Inc. (referred to herein as the "Company," "we," "us" or "our") are included in this quarterly report on Form 10-Q:

 

 

INDEX TO FINANCIAL STATEMENTS

 

		PAGE
Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015		F-1
Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2016 (Unaudited) and 2015		F-2
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)		F-3
Notes to Consolidated Financial Statements		F-4

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2016				2015
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	76,311			$	13,217
Accounts receivable, net			247,974				454,118
Accounts receivable - related party			-				64,701
Inventories			579,394				548,043
Advances to suppliers			53,567				1,950
Prepaid expenses			12,915				2,828
Other receivables, net			107,970				155,438
Due from related party			1,506,545				-
Total Current Assets			2,584,676				1,240,295
Long term prepaid expense
Property, plant and equipment, net			16,716,798				5,185,217
Construction in progress			-				7,478,664
Intangible assets, net			2,517,300				2,631,562
Other assets and deposits			149,771				159,656
Total Assets		$	21,968,545			$	16,695,394
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term loans		$	1,199,508			$	-
Short-term loans - related party			-				76,522
Accounts payable and accrued payables			5,562,259				2,803,025
Accounts payable - related party			-				150,307
Advances from customers			9,809				8,249
Other payables			1,510,016				265,393
Due to related party			4,090,649				2,922,075
Total Current Liabilities			12,372,241				6,225,571
Long-term loans			6,072,510				7,455,674
Total Liabilities			18,444,751				13,681,245
Stockholders' Equity:
Common stock, $0.0001 par value, 500,000,000 shares authorized, 280,000,000 shares and 150,525,000 shares issued and outstanding as of September 30, 2016 and December 31,2015 respectively.			28,000				15,053
Additional paid-in capital			16,795,185				16,743,394
Accumulated deficit			(13,153,276	)			(13,535,298	)
Accumulated other comprehensive loss			(143,122	)			(200,358	)
Stockholders' Equity - Mullan Agritech, Inc. and Subsidiaries			3,526,787				3,022,791
Noncontrolling interest			(2,993	)			(8,642	)
Total Stockholders' Equity			3,523,794				3,014,149
Total Liabilities and Stockholders' Equity		$	21,968,545			$	16,695,394

 

See accompanying notes to consolidated financial statements

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2016				2015				2016				2015
Revenues		$	527,715				746,618			$	1,054,896				994,764
Cost of goods sold			338,126				376,558				725,813				619,080
Gross profit (loss)			189,589				370,060				329,083				375,684
Operating expenses:
General and administrative expenses			298,341				343,726				1,028,433				899,168
Selling expenses			75,481				40,779				187,807				140,249
Total operating expenses			373,822				384,505				1,216,240				1,039,417
Loss from operations			(184,233	)			(14,445	)			(887,157	)			(663,733	)
Other income (expense)
Interest expense			(139,350	)			(582,737	)			(167,065	)			(1,657,362	)
Subsidy income			83,549				168,174				1,460,664				168,174
Loss from disposal of fixed assets			(5,234	)			(490,423	)			(43,495	)			(490,423	)
Gain on recovery of receivables written-off			218,616				-				218,616				-
Gain on sale of equipment			32,875				-				32,875				-
Other income (expense), net			(589,443	)			(164,234	)			(200,119	)			(17,918	)
Total other income (expense)			(398,987	)			(1,069,220	)			1,301,476				(1,997,529	)
Income (Loss) before income taxes			(583,220	)			(1,083,665	)			414,319				(2,661,262	)
Income taxes			-				-				27,046				-
Net income (loss)			(583,220	)			(1,083,665	)			387,273				(2,661,262	)
Net loss attributable to noncontrolling interest			(1,251	)			(32,155	)			5,251				(17,866	)
Net loss attributable to Mullan Agritech, Inc. Stockholders			(581,969	)			(1,051,510	)			382,022				(2,643,396	)
Other comprehensive income (loss):
Unrealized foreign currency translation adjustment			135,836				(186,320	)			57,236				(61,380	)
Total Comprehensive loss		$	(477,384	)			(1,269,985	)		$	444,509				(2,704,776	)
Earnings per common share
Basic and diluted		$	0.00				(0.00	)		$	0.00				(0.01	)
Weighted average common shares outstanding
Basic and diluted			280,000,000				280,000,000				280,000,000				280,000,000

 

See accompanying notes to consolidated financial statements

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended September 30,
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	387,273			$	(2,661,262	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			363,501				172,110
Bad debt expense			51,583				23,459
Write-down or loss on inventory			12,700				10,262
Loss from disposal of fixed assets			43,495				490,423
Changes in assets and liabilities:
Accounts receivable			145,122				(613,223	)
Accounts receivable - related party			63,841				266,493
Inventories			(59,282	)			(113,228	)
Advances to suppliers			(52,377	)			1,206,931
Advances to suppliers - related party			-				-
Prepaid expenses			(143,868	)			3,449
Other receivables			161,999				(412,903	)
Accounts payable and accrued payables			4,193,965				509,468
Accounts payable - related party			(148,308	)			(1,126,182	)
Advances from customers			1,804				21,618
Other payables			283,343				(5,517	)
Net cash provided by/ (used in) operating activities			5,304,791				(2,228,102	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of fixed assets			461				41,853
Disposal of investment in long term investment			7,600				-
Purchase of plant and equipment			(1,476,167	)			(44,634	)
Advance to related party			(1,527,199	)			-
Purchase of apple orchard			(196,653	)			(422,502	)
Investment in construction in progress			(3,128,334	)			(6,276,880	)
Net cash used in investing activities			(6,320,292	)			(6,702,163	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term loans			(1,200,754	)			(5,434,453	)
Proceeds from long-term loans			-				9,897,006
Capital borrowed from (repaid to) related parties			1,064,621				(960,908	)
Repayment of short-term loans			-				(18,732,370	)
Proceeds from short-term loans			1,215,953				8,063,306
Capital contribution from shareholders			-				15,979,546
Net cash provided by financing activities			1,079,820				8,812,127
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(1,225	)			28,151
NET INCREASE (DECREASE) IN CASH			63,094				(89,987	)
CASH, BEGINNING OF PERIOD			13,217				183,536
CASH, END OF PERIOD		$	76,311			$	93,549
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Cash paid for interest expense, net of capitalized interest		$	162,687			$	1,657,929
Cash paid for income tax		$	27,046			$	-
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES
Reclassification of long-term loans to short-term loans		$	1,199,508			$	876,538
Construction in Progress transferred to property, plant and equipment		$	10,507,535			$	-

 

See accompanying notes to consolidated financial statements

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Mullan Agritech, Inc. (Previously M&A Holding Corporation. “Mullan Agritech”) was incorporated under the laws of the State of Nevada on November 5, 2014. Mullan 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 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 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.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

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, 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 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 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.

 

Muliang HK, Shanghai Mufeng, Muliang Industry, Zongbao, Zongbao Cangzhou, Muliang Sales, Fukang, Agritech Development, Ningling Fertilizer, Mullan Agritech 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.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)

 

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.

 

Share Split

 

On June 30, 2015, a registration statement on Form S-1 was declared effective for the offer and sale of 30,525,000 shares (2,035,000 pre-split shares) to 39 new shareholders.

 

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, 2016 and 2015, the Company reported net income of $387,273 and net loss of $2,661,262, respectively. The Company had working capital deficit of approximately $9.79 million and $4.99 million as of September 30, 2016 and December 31, 2015. In addition, the Company had net cash inflows of $5,304,791 and net outflow $2,228,102 from its operating activities during the nine months ended September 30, 2016 and 2015. The Company have improved its operating result, but the Company still incurred a loss from operation of $887,157 offset by other income of $1,301,476 for the nine months ended September 30, 2016, which mainly included government subsidy income of $1,460,664. These conditions still 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. In 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, 2016. Additionally, one of the new fertilizer factories was completed and put in operations in August 2015 and another factory was also completed in June 2016. 

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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, 2015, 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, 2015.

 

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

 

Mullan 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 and 65% controlled Zhonglian. The 40% equity interest holder of Agritech Development, 1% equity interest holders in Fukang and 35% equity interest holders in Zhonglian 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.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

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.

 

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 Company recovered $12,649 of advances to suppliers that were written off for the nine months ended September 30, 2016.

 

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.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

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 estimated useful life of 50 years for the land use rights.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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, 2016 and 2015.

 

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

 

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 and environmental protection equipment upon shipment and transfer of title.

 

The Company currently leased part of the building of the Shanghai new plant to a third party 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.

 

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.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

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 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.

 

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 nine months ended September 30, 2016 and 2015 was $57,235 gain and $61,380 loss, 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.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

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 September 30, 2016 and December 31, 2015 were translated at 6.6694 RMB to $1 USD and 6.4917 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 nine months ended September 30, 2016 and 2015 were 6.5792 RMB and 6.1128 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 September 30, 2016 and December 31, 2015.

 

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.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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:

 

		September 30, 2016				December 31, 2015
Cash		$	76,311			$	13,217
Accounts receivables, net			247,974				454,118
Other receivables			107,970				155,438
Short term loan			1,199,508				—
Short term loan-related party			-				76,522
Long term loan			6,072,510				7,455,674
		$	7,704,273			$	8,154,969

 

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.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

Recent Accounting Pronouncement

 

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short term leases) at the commencement date: A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. 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 and lessors may not apply a full retrospective transition approach. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

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. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company is currently in the process of evaluating the impact of the adoption on its financial statements.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Accounting Pronouncement (Continued)

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments add further guidance on identifying performance obligations and also to improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The Company is currently in the process of evaluating the impact of the adoption on its financial statements.

 

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 is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

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.

 

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.

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following:

 

		September 30, 2016				December 31, 2015
Accounts receivable		$	299,557			$	522,432
Less: allowance for doubtful accounts			(51,583	)			(68,314	)
Total, net		$	247,974			$	454,118

 

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 $51,583 and $23,459 for the nine months ended September 30, 2016 and 2015. The Company recovered accounts receivables written-off of $53,973 for the nine months ended September 30, 2016.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – INVENTORIES

 

Inventories consisted of the following:

 

		September 30, 2016				December 31, 2015
Raw materials		$	202,523			$	294,794
Finished goods			376,871				253,249
Total, net		$	579,394			$	548,043

 

The Company recognized a loss of $12,700 from inventory valuation for the nine months ended September 30, 2016, and a loss of $10,262 on physical inventory for the nine months ended September 30, 2015.

 

NOTE 5 – OTHER RECEIVABLES

 

Other receivable consisted of the following:

 

		September 30, 2016				December 31, 2015
Construction deposit		$	-			$	64,961
Loan receivables			-				15,404
Deposit for equipment purchase			-				198,668
Advance to employees			51,879				-
Others			56,091				64,492
			107,970				343,525
Less: allowance for doubtful accounts			-				(188,087	)
		$	107,970			$	155,438

 

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 did not take allowance for accounts as of September 30, 2016 The Company recovered other receivables written-off of $151,994 for the nine months ended September 30, 2016.

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at September 30, 2016 and December 31, 2015 consisted of:

 

		September 30, 2016				December 31, 2015
Building		$	13,293,582			$	2,960,386
Operating equipment			3,285,663				1,996,675
Vehicle			57,062				43,057
Office equipment			19,109				10,535
Apple Orchard			826,058				649,367
			17,481,474				5,660,020
Less: accumulated depreciation			(764,676	)			(474,803	)
		$	16,716,798			$	5,185,217

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

 

For the nine months ended September 30, 2016 and 2015, depreciation expense amounted to $314,437 and $172,110, 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.

 

For the nine months ended September 30, 2016 and 2015, no amortization expense of the apple orchard was reported.

 

During the nine months ended September 30, 2016, the Company disposed an operating equipment at a cost of $51,247, with a $7,752 accumulated depreciation for proceeds of $465, in resulting a loss on disposal of $43,495.

 

An organic fertilizer processing facility, located in Shanghai, was completed in June 2016, with the annual production capacity of 100,000 tons organic fertilizers. The facility was designed with 4 production lines, with total contractual payment of approximately $11 million or RMB 67.7 million. This facility has not put in operations since its completion. Part of the plant was rent to Huayu Sandian Automobile Air Conditioner Co. Ltd as warehouse from June 1, 2016 to May 31, 2017, with a total rent of $235,705. The Company recognized rent revenue of $127,400 for the nine months ended September 31, 2016.

 

NOTE 7 – INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

		September 30, 2016				December 31, 2015
Land use rights		$	2,802,202			$	2,878,907
Others			14,994				15,404
			2,817,196				2,894,311
Less: accumulated amortization			(299,896	)			(262,749	)
		$	2,517,300			$	2,631,562

 

For the nine months ended September 30, 2016 and 2015, amortization of intangible assets amounted to $37,147 and $32,929, respectively.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – BANK LOAN

 

Short-term bank loans represent amounts due to lenders that are due less than one year, which consisted of the following:

 

		September 30, 2016				December 31, 2015
Loan payable to Agricultural Bank of China, annual interest rate of 5.7%, due by February 25, 2017 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.		$	449,815			$	-
Loan payable to Agricultural Bank of China, annual interest rate of 5.70%, due by August 25, 2017 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.			749,693				-
		$	1,199,508			$	-

 

Long-term loans represent amounts due to lenders that are due more than one year, which consisted of the following:

 

		September 30, 2016				December 31, 2015
Loan payable to Agricultural Bank of China, annual interest rate of 6%, due by February 25, 2018 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.		$	-			$	770,214
Loan payable to Agricultural Bank of China, annual interest rate of 5.70%, due by February 25, 2018 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.			749,693				770,213
Loan payable to Agricultural Bank of China, annual interest rate of 6%, due by August 25, 2018 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.			1,199,508				1,232,343
Loan payable to Agricultural Bank of China, annual interest rate of 5.75%, due by February 25, 2019 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.			1,049,570				1,078,300
Loan payable to Agricultural Bank of China, annual interest rate of 6.90%, due by September 25, 2019 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.			599,754				616,171
Loan payable to Agricultural Bank of China, annual interest rate of 6.60%, due by September 25, 2019 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.			659,730				677,789
Loan payable to Agricultural Bank of China, annual interest rate of 6.00%, due by September 25, 2019 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.			149,939				154,043
Loan payable to Agricultural Bank of China, annual interest rate of 6.60%, due by September 25, 2019 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.			89,963				92,426
Loan payable to Agricultural Bank of China, annual interest rate of 5.70%, due by September 25, 2019 with land use rights as collateral and guaranteed by Mr. Lirong Wang, the CEO.			749,693				1,540,429
Loan payable to Rushan City Rural Credit Union, annual interest rate of 10.76%, due by June 18, 2016.			824,660				523,746
		$	6,072,510			$	7,455,674

 

The Company recognized interest expenses of $167,065 and $1,657,362 for the nine months ended September 30, 2016 and 2015, respectively.

 

The Company capitalized interest expenses relating to construction in progress of $207,783 and $250,348 for the nine months ended September 30, 2016 and 2015, respectively.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 – 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 September 3, 2015, the Board of Directors affected a forward split of the outstanding common stock the Company, such that each one share of outstanding common stock be converted into fifteen shares of common stock as of September 3, 2015, the record date. All relevant information relating to numbers of shares and per share information have been retrospectively adjusted to reflect the reverse stock split for all periods presented

 

Common Share Issuances

 

On January 11, 2016, pursuant to an Investment Agreement, the Company issued 129,475,000 shares of its common stock for an aggregate consideration of $64,738.

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

*Account receivable and sales from related parties

 

The Company did not make sales to any related party for the nine months ended September 30, 2016, but have an accounts receivable balance of $0 and $64,701 from Yantai Zongbao Tele-Agriculture Service Co., Ltd, as of September 30, 2016 and December 31, 2015 respectively. Refer to table below.

 

*Due from Related Parties

 

On June 30, 2016, the Company sold an environmental protection equipment to Shanghai Aoke Chemicals Co., Ltd for $1,241,034 as a one-time trade. The Company recognized a gain of $32,875 on the sale as other income. The outstanding receivable of $1,432,372 including VAT, is expected to be collected by the end of this year.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED)

 

Other amount due from related parties below are advance to related parties which are due on demand, non-interest bearing and without maturity date.

 

		September 30, 2016				December 31, 2015				Relationship
Shanghai Aoke Chemicals Co., Ltd.			1,432,372				-			The Company’s CEO is one of Aoke’s shareholders
Yantai remote Agricultural Technology Service Co., Ltd.			62,978				-			Song hui, one of the related person is one of the important shareholders of Yantai remote Agricultural Technology Service Co., Ltd.
Mr. Guohua Lin			11,195				-			One of the Company’s shareholders
Total			1,506,545				-

 

*Account payable and purchase from related parties

 

The payable to Shanghai Aoke Chemicals Co., Ltd, a related party of the Company, of $150,307 had been settled during the nine months ended September 30, 2016.

 

The Company did not purchase material or service from related parties for the nine months ended September 30, 2016.

 

*Due to related party

 

Other amounts due to related parties below are advances from related parties for working capital of the Company which are due on demand, non-interest bearing and without maturity date.

 

		September 30, 2016				December 31, 2015				Relationship
Jilin Jiliang Zongbao Biological Technology Co., Ltd.			502,987				611,276			One of management team members had actual control over this entity
Shanghai Aoke Chemicals Co., Ltd.			-				15,466			The Company’s CEO is 95% equity owner of the entity
Mr. Lirong Wang			2,801,230				1,488,827			The CEO and Chairman of the Company
Ms. Hui Song			556,802				572,044			One of management team members
Ms. Xueying Sheng			229,630				226,443			The CFO of the Company
Mr. Guohua Lin			-				8,019			One of the Company’s shareholders
Total			4,090,649				2,922,075

 

 

 MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 – 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 nine months ended September 30, 2016 and 2015.

 

				For the nine months ended September 30
Customers				2016								2015
					Amount				%				Amount				%
	A				1,241,034				51	%			N/A				N/A
	B				N/A				N/A				662,273				67	%

 

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 nine months ended September 30, 2016 and 2015.

 

				For the nine months ended September 30
Suppliers				2016								2015
				Amount				%				Amount				%
	A				1,307,150				38	%			N/A				N/A
	B				N/A				N/A				129,533				22	%
	C				N/A				N/A				67,105				11	%
	D				N/A				N/A				61,379				10	%

 

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, 2016 and December 31, 2015, the Company’s cash balances by geographic area were as follows:

 

		September 30, 2016								December 31, 2015
United States		$	—				0.00	%		$	7				0.05	%
China			76,311				100	%			13,210				99.95	%
Total cash and cash equivalents		$	76,311				100	%		$	13,217				100	%

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – COMMITMENTS, CONTINGENCIES, RISKS AND UNCERTAINTIES

 

Lease Commitments

 

The total future minimum lease payments under the operating leases as follows:

 

Periods		Amounts
For year ended December 31, 2016		$	17,371
For year ended December 31, 2017			29,143
For year ended December 31, 2018			26,614
For year ended December 31, 2019			11,089
Thereafter			-
Total		$	84,217

 

Rent expenses for the leases were $7,752 and $3,067 for the nine months ended September 30, 2016 and 2015, respectively.

 

NOTE 13 – INCOME TAXES

 

United States

 

Mullan Agritech is established in the State of Nevada in United States and is subject to Nevada State and US Federal tax laws. Mullan Agritech has approximately $102,000 of unused net operating losses (“NOLs”) available for carry 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.

 

Hong Kong

 

Muliang HK is established in Hong Kong and its income is subject to a 16% profit tax rate for income sourced within the country. During the nine months ended September 30, 2016 and 2015, 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, Ningling and Zhongliang are established in China and its income is subject to income tax rate of 25%.

 

 

MULLAN AGRITECH, INC. AND SUBSIDIARIES

NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – INCOME TAXES (CONTINUED)

 

The reconciliation of effective income tax rate as follows:

 

		For the Nine Months Ended
		September 30,				September 30,
		2016				2015
US Statutory income tax rate			35	%			35	%
Lower rates in PRC, net			(10	)%			(10	)%
Valuation allowance			(25	)%			(25	)%
Total			—				—

 

The tax effects of temporary differences that give rise to the Company’s net deferred tax assets as follows: 

 

			September 30, 2016
PRC income tax at statutory rate			—
Less: valuation allowance			—
Net deferred tax asset			—

 

NOTE 14 – BUSINESS SEGMENTS

 

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

 

		Revenues								Cost of Sales
		For the Nine Months Ended								For the Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2016				2015				2016				2015
Fertilizer		$	948,500			$	994,764			$	638,379			$	619,080
Pasture			106,396				-				87,434				-
Apple orchard			-				-				-				-
Total		$	1,054,896			$	994,764			$	725,813			$	619,080

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The information set forth in this Management's Discussion and Analysis of Financial Condition and Results of  Operations (“MD&A”) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, 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 Quarterly 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 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 Quarterly Report.

 

 

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

 

Overview

 

During the period from our formation on November 2014 to October 2015, we did not generate any significant revenue, and accumulated no significant assets, as we explored various business opportunities.

 

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

 

Shanghai Mufeng 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 Shanghai Mufeng. 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, Shanghai Mufeng entered into an option agreement to acquire the Principal Shareholders’ equity interest in these entities if or when permitted by the PRC laws.

 

Based on these exclusive agreements, the Company will be treated as a variable interest entity (“VIE”) of Muliang HK as required by generally accepted accounting principles in the United States (“US GAAP”), because Muliang HK is the primary beneficiary of the VIE. The profits and losses of the Company are allocated based upon the Entrusted Management Agreement.

 

On February 10, 2016, we entered into a Share Exchange Agreement (the “Exchange Agreement”) with Muliang HK. Pursuant to the terms of the Exchange Agreement, the shareholders of Muliang HK transferred to Mullan Agritech all of the Muliang HK Shares in exchange for the issuance of 150,525,000 shares of our common stock (the “Share Exchange”). As a result of the Share Exchange, Muliang HK became a wholly-owned subsidiary of us and the shareholders of Muliang HK acquired approximately 100% of our issued common shares.

 

The effect of the Share Exchange is such that effectively a reorganization of the entities has occurred for accounting purposes and is deemed to be a reverse acquisition. Subsequent to the Share Exchange the financial statements presented are those of a combined Muliang HK and its subsidiaries, including its VIE, Muliang Industry, as if the Share Exchange had been in effect retroactively for all periods presented. As previously noted the “Company” for financial statement purposes was the consolidation of Muliang HK, Shanghai Mufeng, Muliang Industry and Muliang Industry’s subsidiaries. Muliang Industry’s subsidiaries include 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. (“Agritech Development”); its 99% owned subsidiary, Weihai Fukang Bio-Fertilizer Co., Ltd. (“Fukang”), a PRC limited liability company, and Shanghai Muliang Agricultural Sales Co., Ltd. (Muliang Sales), a PRC limited liability company found in July 2015.

 

Subsequent to the Share Exchange the “Company” is referred to as the consolidation of Muliang HK, Shanghai Mufeng, Muliang Industry, Zongbao, Fukang, Agritech Development, Muliang sales, and Mullan Agritech, with Mullan Agritech as the legal acquirer in Share Exchange, and subsequent to the Share Exchange the parent company of the consolidated entity. For financial reporting purposes, Muliang HK was considered the acquirer in such transaction.

 

 

We are principally engaged in the meat and food processing and distribution business in the People’s Republic of China (“PRC”). Currently, we have one fertilizer processing plant located in Shanghai in the PRC. Our current maximum production capacity is 30,000 metric tons a year. We are currently building 2 new fertilizer plants in Weihai City, Shandong Province and in Shanghai in the PRC. One of the new plants located in Weihai City was in operations in August 2015 with annual production capacity of 100,000 metric tons. Another new plant located in Shanghai has been completed in June 2016 with annual production capacity of 100,000 metric tons. This facility was designed with 4 production lines, with total contractual payment of approximately $11 million or RMB 67.7 million. While this facility has not put in operations since its completion. Part of the plant was rent to Huayu Sandian Automobile Air Conditioner Co. Ltd as warehouse from June 1 2016 to May 31, 2017, with a total rent of $235,705. We have an organic fertilizer processing facility, located in Weihai City, Shandong Province, with the annual production capacity of 50,000 tons organic fertilizers. The facility was designed with 2 production lines, with total contractual payment of approximately $4.6 million or RMB 28 million, and had been completed on August 2015.

 

Our products are sold under the “Zongbao” brand name. Our customers are mainly located in provinces of Jiangsu, Zhejiang and Shandong.

 

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 an online agricultural product trading platform.

 

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 $13,153,276 and $13,535,298 as of September 30, 2016 and December 31, 2015. Our cash balances as of September 30, 2016 and December 31, 2015 were $76,311 and $13,217, respectively. We had short-term payable of $12.37 million at September 30, 2016 which would due in the next 12 months. In addition, we had a working capital deficit of $9,787,566 and $4,985,276 at September 30, 2016 and December 31, 2015 respectively. These matters raise substantial doubt about the company’s ability to continue as a going concern. 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

 

The consolidated financial statements include the accounts of Mullan Agritech, Muliang HK, Shanghai Mufeng, Muliang Industry, Zongbao, Fukang, Agritech Development, Zongbao Cangzhou, Ningling Fertilizer, Muliang Sales and Zhonglian. All intercompany transactions and account balances are eliminated in consolidation.

 

 

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 plus 50% for receivables outstanding for six months old. 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 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—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

 

Our revenue recognition policies are in compliance with Securities Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104 (codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605). Sales revenue is recognized after delivery is complete, customer acceptance of the product occurs and collectability is reasonably assured. Payments received before satisfaction of all relevant criteria for revenue recognition are recorded as unearned revenue. Unearned revenue consists of payments received from customers prior to customer acceptance of our products.

 

Sales revenue represents the invoiced value of goods, net of value-added tax, or VAT. Our products sold and services provided in China are subject to VAT of 13% of gross sales price. This VAT may be offset by VAT paid by us on raw materials and other materials included in the cost of producing the finished product. We recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.

 

 

Income Taxes

 

We account for income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes.” We compute our provision for income taxes based on the statutory tax rates and tax planning opportunities available to us in the PRC. Significant judgment is required in evaluating our tax positions and determining our annual tax position.

 

New Accounting Standards

 

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments Overall (Subtopic 82510): Recognition and Measurement of Financial Assets and Financial Liabilities". The amendments in ASU 201601, among other things, requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) ; Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose fair value information about financial instruments measured at amortized cost. 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)". Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short term leases) at the commencement date: A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. 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 and lessors may not apply a full retrospective transition approach. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

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. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments add further guidance on identifying performance obligations and also to improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

 

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 is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

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.

 

Results of Operations

 

We focus on the implementation of our strategic plan to complete our new fertilizer production facilities. Those 2 new facilities were designed with 50,000 metric tons and 100,000 metric tons of fertilizer production capacities. With completion of the 2 new factories, we would be able to expand our market shares in Jiangsu, Zhejiang and Shandong Province, PRC. One of our 2 new fertilizer factories located in Weihai City, Shandong Province was completed in May 2015 and put in operations in August 2015. However, due to a lack of funding, we have put on hold of our another new factory construction which was located in Shanghai with a design annual production capacity of 100,000 metric tons of fertilizer products and will continue to do so until additional funding is secured. As of the date of this report, we had invested approximately $6.6 million or RMB 40 million in the Shanghai new factory construction. To complete the Shanghai new factory construction, we may need additional $4.4 million or RMB 27.7 million to install equipment.

 

 

For the Three Months Ended September 30, 2016 and 2015

 

		For Three Months Ended September 30,								Amount
		2016				2015				Net Change				%
Revenues		$	527,715			$	746,618			$	(218,903	)			-29	%
Cost of goods sold			338,126				376,558				(38,432	)			-10	%
Gross profit			189,589				370,060				(180,471	)			-49	%
Gross margin percentage			36	%			50	%
Selling, G&A expenses			373,822				384,505				(10,683	)			-3	%
Loss from operations			(184,233	)			(14,445	)			(68,808	)			1,175	%
Interest expense			(139,350	)			(582,737	)			443,387				-76	%
Government subsidy income			83,549				168,174				(84,625	)			-50	%
Loss from disposal of fixed asset			(5,234	)			(490,423	)			485,189				-99	%
Gain on recovery of receivables written-off			218,616				-				218,616				100	%
Gain on sale of equipment			32,875				-				32,875				100	%
Other expense, net			(589,443	)			(164,234	)			(425,209	)			259	%
Net other expense			(398,987	)			(1,069,220	)			(670,233	)			-63	%
Loss before income taxes			(583,220	)			(1,083,665	)			500,445				-46	%
Income taxes			-				-				-				N/A
Net loss		$	(583,220	)		$	(1,083,665	)		$	500,445				-46	%

  

Revenue. Total revenue decreased from $746,618 for the three months ended September 30, 2015 to $527,715 for the same period in 2016, which represented a decrease of $218,903, or approximately 29%. Considering our old fertilizer plant located in Shanghai was not cost effective and our new Weihai plant was in operations since August 2015 which was designed with modern equipment and better production capacity, therefore, we put more marketing efforts in Shandong Province where our new Weihai plant locates to leverage our sale forces.

 

Cost of sales. Cost of sales decreased from $376,558 for the three months ended September 30, 2015 to $338,126 for the three months ended September 30, 2016, which represented a decrease of approximately $38,432, or 10%.

 

Gross Profit (loss). The gross profit decreased from $370,060 for the three months ended September 30, 2015 to $189,589 for the three months ended September 30, 2016. The gross profit margin was decreased from 50% to 36% during the three months ended September 30, 2016 and 2015. Our fertilizer products were facing strong competition from our competitors with lower selling prices. We reduced the prices for some products to re-position our products in the market which was the main reason for the lower gross margin for the three months ended September 30, 2016.

 

Expenses. We incurred $75,481 in selling expenses for the three months ended September 30, 2016, compared to $40,779 for the three months ended September 30, 2015. We incurred $298,341 in general and administrative expenses for the three months ended September 30, 2016, compared to $343,726 for the three months ended September 30, 2015. Selling, general and administrative expenses decreased by $10,683, or 3% for the three months ended September 30 2016 as compared to the same period in 2015. Our selling expenses increased by $34,702 and our general and administrative expenses decreased by $45,385. The major increase in our selling expenses was from our shipping cost.

 

Interest income (expense). We incurred $139,350 in interest expense during the three months ended September 30, 2016, compared with interest expense of $582,737 for the three months ended September 30, 2015.

 

 

Net Loss. Our net loss was $583,220 for the three months ended September 30, 2016, compared with net loss of $1,083,665 for the three months ended September 30, 2015, representing a significant decrease of $500,445 in net loss. The decrease in net loss were due to the decrease in interest expense, additional income from short-term rental of factory, and gain from recovery of receivables written-off for the three months ended September 30, 2016.

 

For the Nine Months Ended September 30, 2016 and 2015

 

		For Nine Months Ended September 30,								Amount
		2016				2015				Net Change				%
Revenues		$	1,054,896			$	994,764			$	60,132				6	%
Cost of goods sold			725,813				619,080				106,733				15	%
Gross profit			329,083				375,684				(46,601	)			12	%
Gross margin			31	%			38	%
Selling, G&A expenses			1,216,240				1,039,417				176,823				17	%
Loss from operations			(887,157	)			(663,733	)			(223,424	)			34	%
Interest expense			(167,065	)			(1,657,362	)			1,490,297				-90	%
Government subsidy income			1,460,664				168,174				1,292,490				769	%
Loss from disposal of fixed asset			(43,495	)			(490,423	)			446,928				-91	%
Gain on recovery of receivables written-off			218,616				-				218,616				100	%
Gain on sale of equipment			32,875				-				32,875				100	%
Other expense, net			(200,119	)			(17,918	)			(182,201	)			1017	%
Net other income (expense)			1,301,476				(1,997,529	)			3,299,005				-165	%
Income/(loss) before income taxes			414,319				(2,661,262	)			3,075,581				-116	%
Income taxes			27,046				-				27,046				100	%
Net income (loss)		$	387,273			$	(2,661,262	)		$	3,048,535				-115	%

 

Revenue. Total revenue increased from $994,764 for the nine months ended September 30, 2015 to $1,054,896 for the same period in 2016, which represented an increase of $60,132, or approximately 6%. The increase in revenues was primarily due to the new plant in operation. Considering our old fertilizer plant located in Shanghai was not cost effective and our new Weihai plant was in operations since August 2015 which was designed with modern equipment and better production capacity, therefore, we put more marketing efforts in Shandong Province where our new Weihai plant locates to leverage our sale forces.

Cost of sales. Cost of sales increased from $619,080 for the nine months ended September 30, 2015 to $725,813 for the nine months ended September 30, 2016, which represented an increase of approximately $106,733, or 15%. The increase in cost of sales was in line with the decrease in our revenue from fertilizer sales for the same period

Gross Profit. The gross profit decreased from $375,684 for the nine months ended September 30, 2015 to $329,083 for the nine months ended September 30, 2016. The gross profit margin was decreased from 38% to 31% during the nine months ended September 30, 2016 and 2015. Our fertilizer products were facing strong competition from our competitors with lower selling prices. We reduced the prices for some products to re-position our products in the market which was the main reason for the lower gross margin for the nine months ended September 30, 2016.

 

 

Expenses. We incurred $187,807 in selling expenses for the nine months ended September 30, 2016, compared to $140,249 for the nine months ended September 30, 2015. We incurred $1,028,433 in general and administrative expenses for the nine months ended September 30, 2016, compared to $899,168 for the nine months ended September 30, 2015. Selling, general and administrative expenses increased by $176,823, or 17%, for the nine months ended September 30 2016 as compared to the same period in 2015. Our selling expenses increased $47,558 and our general and administrative expenses increased $129,265. The major increase in our selling expenses was from our shipping cost. The increase in our general and administrative expenses was mainly due to our additional inputs in hiring more professional personnel to operate our new Weihai plant.

 

Interest income (expense). We incurred $167,065 interest expense during the nine months ended September 30, 2016, and we incurred interest expense of $1,657,362 in the same period of 2015.

 

Income Taxes. The effective tax rate in the PRC on income generated from the sale of prepared products is 25%. At September 30, 2016, we had a net operating loss carry-forward for Chinese income tax purposes aggregating approximately $13,233,554 which will expire through the year 2020.

 

Net Income (Loss). Our net income was $387,273 for the nine months ended September 30, 2016, compared with net loss of $2,661,262 for the nine months ended September 30, 2015, representing a significant increase of $3,048,535 in net income. The breakthrough in net income were due to gain on recovery of receivables written-off, rental income from short-term rental of factory, and government subsidy of $1,460,664 for the nine months ended September 30, 2016.

 

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 September 30, 2016 and December 31, 2015 our working capital deficit was $9,787,566 and $4,985,276, respectively, mainly reflecting increases in our current assets, including $1,506,545 in due from related party, $31,351 in inventory, which were partly offset by increases in our current liabilities, including $1,167,574 in due to related party

 

We have financed our operations over the nine months ended September 30, 2016 and 2015 primarily through cash from borrowings under our lines of credit with various lenders and related parties in the PRC.

 

The components of cash flows are discussed below:

		For the Nine Months Ended September 30,
		2016				2015
Net cash provided by (used in) operating activities		$	5,304,791			$	(2,228,102	)
Net cash used in investing activities			(6,320,292	)			(6,702,163	)
Net cash provided by financing activities			1,079,820				8,812,127
Exchange rate effect on cash			(1,225	)			28,151
Net cash inflow (outflow)		$	63,094			$	(89,987	)

 

Cash Used in Operating Activities

 

Net cash provided by operating activities was $5,304,791 for the nine months ended September 30, 2016. Cash provided by operating activities for the nine months ended September 30, 2016 consisted primarily of net income of $387,273 which was adjusted by depreciation and amortization of $363,501, bad debt expense of $51,583, write-down or loss from inventory of $12,700. The Company had a decrease of $145,122 in account receivable, an increase of $46,582 in our inventories, a decrease of $143,868 in prepaid expense, a decrease of $161,999 in other receivable which were offset by an increase of $283,343 in other payable and an increase of $4,193,965 in account payable - related party.

 

 

Net cash used in operating activities was $2,228,102 for the nine months ended September 30, 2015. Cash used in operating activities for the nine months ended September 30, 2015 consisted primarily of net loss of $2,661,262 which was adjusted by depreciation and amortization of $172,110, loss from disposal of fixed assets of $490,423. The Company had a decrease of $1,206,931 in advance to suppliers, an increase of $509,468 in Accounts payable and accrued payables, a decrease of $266,493 in accounts receivable - related party, which were offset by an increase of $613,223 in account receivable, a decrease of $1,126,182 in accounts payable - related party, and an increase of $102,966 in inventory.

 

Cash Used in Investing Activities

 

Net cash used in investing activities was $6,320,292 for the nine months ended September 30, 2016. The activities primarily consisted of our investments of $3,128,334 in the new fertilizer factory construction projects in Shanghai City, purchase of plant and equipment of $1,527,199, and the advance to our related party of $1,527,199 for the nine months ended September 30, 2016. Our Weihai factory was completed in May 2015 and put in operations in August 2015. The construction project was completed and $10,507,535 was transferred to fixed asset.

 

Net cash used in investing activities was $6,702,163 for the nine months ended September 30, 2015. The investments included primarily our investment of $6,276,880 in two new fertilizer factory construction projects in Weihai and Shanghai City.

 

Cash Provided by Financing Activities

 

Net cash provided by financing activities was $1,079,820 for the nine months ended September 30, 2016. During the period, cash used in financing activities consisted of the capital borrowing of $1,064,621 from related parties, proceeds of $1,215,953 from short term borrowing, offset by repayment of $1,200,754 in long term loan.

 

Net cash provided by financing activities was $8,812,127 for the nine months ended September 30, 2015. During the period, cash provided by financing activities included the proceeds of $8,063,306 from our short-term loans and $9,897,006 from our long-term loans, which were partly offset by repayments of $18,732,370 in our short-term loans, repayment of $5,434,453 in long 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 September 30, 2016 and the effect those obligations are expected to have on our liquidity and cash flow in future periods.

 

		Payments Due by Period as of September 30, 2016
		Total				Less than 1 Year				1 – 3 Years				3 – 5 Years				Over 5 Years
Contractual obligations
Loans		$	7,272,018			$	1,199,508			$	6,072,510			$	—			$	—
Others			—				—				—				—				—
		$	7,272,018			$	1,199,508			$	6,072,510			$	—			$	—

 

Commitments for Capital Expenditure

 

We have completed building a new fertilizer factory in June 2016. The new plant, located in Shanghai, has annual production capacity of 100,000 metric tons. During the nine months ended September 30, 2016 and 2015, we had invested approximately $0.28 million and $4.73 million, respectively, in constructing this new fertilizer plants in Shanghai. This facility has not put in operations since its completion. Part of the plant was rent to Huayu Sandian Automobile Air Conditioner Co. Ltd as warehouse from June 1 2016 to May 31, 2017, with a total rent of $235,705.

 

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable because we are a smaller reporting company. 

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are not effective as of September 30, 2016 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure for the reason described below.

 

 

Because of our limited operations, we have limited number of employees which prohibits a segregation of duties. In addition, we lack a formal audit committee with a financial expert. As we grow and expand our operations we will engage additional employees and experts as needed. However, there can be no assurance that our operations will expand.

 

Changes in Internal Control Over Financial Reporting

 

During the nine months ended September 30, 2016, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We will continue to monitor the deficiencies identified in internal controls and make changes that our management deems necessary.  

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

There are no other actions, suits, proceedings, inquiries or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect. 

 

Item 1A. Risk Factors.

 

Not required because we are a smaller reporting company. 

 

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

 

There were no unregistered sales of the Company’s equity securities during the nine months ended September 30, 2016, that were not otherwise disclosed in a Current Report on Form 8-K.  

 

Item 3. Defaults Upon Senior Securities.

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company. 

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information. 

 

There is no other information required to be disclosed under this item which was not previously disclosed.

 

 

Item 6. Exhibits.

 

Exhibit Number		Description
31.1		Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+		Certifications of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2+		Certifications of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

 

+ In accordance with the SEC Release 33-8238, deemed being furnished and not filed.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

Date: November 14, 2016	MULLAN AGRITECH, INC.
	By:	/s/ Lirong Wang
	Name:	Lirong Wang
	Title:	Chief Executive Officer & Chief Financial Officer
		(Principal Executive and Accounting Officer)

 

 

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