XT Energy Group, Inc. (the “Company”
or “XT Energy”) was incorporated in the State of Delaware on September 2, 2008 as Goa Sweet Tours Ltd. On April 17, 2012,
the Company entered into certain share purchase agreements, by and among Luck Sky International Investment Holdings Limited (“Luck
Sky”), an entity owned and controlled by Zhou Deng Rong, the former Chief Executive Officer and director of the Company, and
certain of the Company’s former stockholders who owned, in the aggregate, 7,200,000 shares of the Company’s common stock (90% of
the then outstanding shares). On May 15, 2012, Luck Sky purchased all 7,200,000 shares for an aggregate of $235,000.
On May 30, 2014, the Company purchased
100% of the issued and outstanding shares of Luck Sky (Hong Kong) Aerodynamic Electricity Limited (“Xiangtian HK”) from
its sole shareholder, Zhou Jian, who is also the Chairman of the Company. As a result of the acquisition, Xiangtian HK became the
Company’s wholly owned subsidiary and the wholly owned subsidiary of Xiangtian HK in the People’s Republic of China (“China,”
or the “PRC”), Luck Sky (Shenzhen) Aerodynamic Electricity Limited (“Xiangtian Shenzhen”) became the Company’s
indirect subsidiary through Xiangtian HK.
Effective October 31, 2016, the Company
was reincorporated from Delaware into Nevada as a result of its merger with and into its wholly owned Nevada subsidiary.
The Company is engaged in a variety of
energy-related businesses through its subsidiaries and controlled entities in China carried out through the Company’s variable
interest entities (“VIEs”), formerly Sanhe Luck Sky Electrical Engineering Co., Ltd. (“Sanhe Xiangtian”) and
now Xianning Xiangtian Energy Holding Group Co. Ltd. (“Xianning Xiangtian”), formerly known as Xianning Sanhe Power Equipment
Manufacturing Co. Ltd. One of the businesses is in the field of Compressed Air Energy Storage in China and the Company produces
electricity generation systems that combine its compressed air storage technology with photovoltaic (“PV”) panels to
achieve a continuous supply of power under weather conditions that are unfavorable to the generation of electricity from PV panels
alone. The sales and installation of power generation systems and PV systems and the sales of PV panels, air compression equipment
and heat pump products have been carried out through Xianning Xiangtian.
In March 2018, Xianning Xiangtian formed
Xiangtian Zhongdian (Hubei) New Energy Co. Ltd. (“Xiangtian Zhongdian”), a joint venture in China, in which Xianning
Xiangtian holds a 70% ownership interest with the remaining 30% ownership held by Nanjing Zhongdian Photovoltaic Co. Ltd. Xiangtian
Zhongdian is in the business of manufacturing and sales of PV panels.
In April 2018, Xianning Xiangtian formed
a wholly owned subsidiary, Jingshan Sanhe Xiangtian New Energy Technology Co. Ltd. (“Jingshan Sanhe”), which is engaged
in the business of researching, manufacturing and sales of high-grade synthetic fuel products.
In June 2018, Xianning Xiangtian acquired
Hubei Jinli Hydraulic Co., Ltd. (“Hubei Jinli”), which is engaged in the business of manufacturing and sales of hydraulic
parts and electronic components, and acquired Tianjin Jiabaili Petroleum Products Co. Ltd. (“Tianjin Jiabaili”), which
is engaged in the business of manufacturing and sales of petroleum products (See Note 3 – Business combinations).
In August 2018, Xianning Xiangtian formed
a wholly owned subsidiary, Xianning Xiangtian Trade Co. Ltd. (“Xiangtian Trade”), which is engaged in trading general
merchandise.
In September and October 2018, January
2019 and March 2019, Mr. Jian Zhou, the Company’s Chairman and principal shareholder as well as a shareholder of Xianning Xiangtian,
and Zhou Deng Rong, the Company’s former Chief Executive Officer and director, injected an aggregate of Renminbi (“RMB”)
209,260,000 (approximately $30.8 million) as capital contribution to Xianning Xiangtian.
On November 5, 2018, the Company changed
its name to XT Energy Group, Inc. through a merger with and into a newly formed, wholly-owned subsidiary, which subsidiary was
formed for purposes of the name change.
XT Energy Group, Inc. and Subsidiaries
In December 2018, Xianning Xiangtian acquired
90% of the equity interest in each of Hubei Rongentang Wine Co., Ltd. (“Wine Co.”), which is engaged in the business
of manufacturing and sales of wine, and Hubei Rongentang Herbal Wine Co., Ltd. (“Herbal Wine Co.,” collectively with
“Wine Co.,” “Rongentang”), which is engaged in the business of manufacturing and sales of herbal wine products
(See Note 3 – Business Combinations).
On January 6, 2020, the Company entered
into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”), which the Company agreed to sell its
90% ownership in Wine Co. and Herbal Wine Co. to the Buyers for approximately $9.6 million (RMB 67.5 million), of which, 54% ownership
are sold to Kairui Tong, the legal representative and general manager of Wine Co. and Herbal Wine Co, and 36% ownership are sold
to Hao Huang, an unrelated third party. The result of operations of Rongentang was presented as discontinued operations for the three and
six months ended January 31, 2020 unaudited condensed consolidated financial statements. (See Note 4 – Discontinued Operations).
On April 14, 2020, the Company’s
Board of Directors (the “Board”), discussed a plan to pursue the potential sale of all its ownership interest in Jingshan
Sanhe and Hubei Jinli due to the coronavirus outbreak might affect the Company’s future business operations and desired to
scale back its variety of businesses. Therefore the result of operations will be presented as discontinued operations for Jingshan
Sanhe and Hubei Jinli as of April 30, 2020 and for the three and nine months ended April 30, 2020 unaudited condensed consolidated
financial statements and thereafter until the business will be disposed.
On September 30, 2018, Xiangtian Shenzhen
terminated its variable interest entity agreements (the “VIE Agreements”) as part of its restructuring to facilitate
the shift of business focus between entities controlled by the Company. After the restructuring, the Company’s headquarters is
located in the city of Xianning, Hubei Province, and Sanhe Xiangtian, the Company’s previous headquarters, located in the city
of Sanhe, Hebei Province, became the Company’s sales office. The VIE Agreements include the following:
In connection with the termination of the
VIE Agreements, on September 30, 2018, Sanhe Xiangtian transferred its 100% equity interest of Xianning Xiangtian to the Sanhe
Xiangtian Shareholders and the Sanhe Xiangtian Shareholders transferred their 100% equity interest of Sanhe Xiangtian to Xianning
Xiangtian. As a result of the foregoing equity transfers, Sanhe Xiangtian became a wholly owned subsidiary of Xianning Xiangtian.
On the same day, the Company, through Xiangtian
Shenzhen and Xiangtian HK, entered into a new series of variable interest entity agreements (“New VIE Agreements”), pursuant
to which Xianning Xiangtian became the Company’s new contractually controlled affiliate. The New VIE Agreements allow the Company
to:
XT Energy Group, Inc. and Subsidiaries
Pursuant to the Framework Agreement on
Business Cooperation between Xiangtian Shenzhen and Xianning Xiangtian, the parties agreed to enter into a series of agreements,
including Agreement of Exclusive Management, Consulting and Training and Technical Service, Know-How Sub-License Agreement, Equity
Pledge Agreement, Exclusive Option Agreement and Power of Attorney. Specifically, Xiangtian Shenzhen will dispatch an operative
team to Xianning Xiangtian to assist with Xianning Xiangtian with its planning and managing and regular business operations. The
parties agreed to share the cooperation profits as set forth in the New VIE Agreements. The term of cooperation is 10 years and
may be unilaterally extended by Xiangtian Shenzhen.
Pursuant to the Agreement of Exclusive
Management, Consulting and Training and Technical Service between Xiangtian Shenzhen and Xianning Xiangtian, Xianning Xiangtian
engaged Xiangtian Shenzhen to provide consulting, training, management services and technical support exclusively for a term of
10 years, which may be unilaterally extended by Xiangtian Shenzhen. Xianning Xiangtian agrees to pay Xiangtian Shenzhen a service
fee equal to one hundred percent (100%) of Xianning Xiangtian’s net income determined pursuant to the generally accepted accounting
principles, payable quarterly.
Pursuant to the Exclusive Option Agreement
among Xiangtian Shenzhen, Xiangtian HK, Xianning Xiangtian and the shareholders holding an aggregate of 100% of Xianning Xiangtian’s
equity interest (“Xianning Xiangtian Shareholders”), the Xianning Xiangtian Shareholders irrevocably granted Xiangtian
Shenzhen and Xiangtian HK an exclusive option to purchase from them, at its discretion, to the extent permitted under the PRC law,
all or part of their equity interest in Xianning Xiangtian, and the purchase price will be the lowest price permitted by applicable
PRC laws. The timing, method and times of exercise of this option to purchase are within Xiangtian Shenzhen and Xiangtian HK’s
sole discretion. In addition, each of the Xianning Xiangtian Shareholders agreed to waive their respective preemptive rights when
the other shareholder transfers the equity interest of Xianning Xiangtian to Xiangtian Shenzhen or its designated party. The Xianning
Xiangtian Shareholders further agreed, among other things, without the prior written consent of Xiangtian Shenzhen and Xiangtian
HK, not to transfer, sell or pledge their equity interest of Xianning Xiangtian. Without the prior written consent of Xiangtian
Shenzhen and Xiangtian HK, Xianning Xiangtian may not amend its articles of association, change the amount and structure of its
registered capital or sell any of its assets or beneficial interest.
XT Energy Group, Inc. and Subsidiaries
Pursuant to the Equity Pledge Agreement
among Xiangtian Shenzhen, Xianning Xiangtian and the Xianning Xiangtian Shareholders, the Xianning Xiangtian Shareholders pledged
all of their respective equity interest in Xianning Xiangtian to Xiangtian Shenzhen to guarantee the performance of Xianning Xiangtian’s
obligations under the New VIE Agreements, other than the Equity Pledge Agreement. Xiangtian Shenzhen will be deemed to have created
the encumbrance of the first order in priority on the pledged equity interest. In the event of any breach of the VIE Agreements,
other than this Equity Pledge Agreement, or failure to satisfy the guaranteed obligations, Xiangtian Shenzhen will have the right
to dispose of the pledged equity interest. The Xianning Xiangtian Shareholders may receive dividends or share profits only with
prior consent from Xiangtian Shenzhen, and such dividends and profits will be deposited into a bank account designated by and under
supervision of Xiangtian Shenzhen and to be used for repayment of any liability due to any breach of the VIE Agreements by Xianning
Xiangtian or the Xianning Xiangtian Shareholders. The agreement will remain effective until the termination of the VIE Agreements,
other than this Equity Pledge Agreement.
Pursuant to the Know-How Sub-License Agreement
between Xiangtian Shenzhen and Xianning Xiangtian, Xiangtian Shenzhen agreed to grant an exclusive and non-transferable sublicense
to use the patents, patent applications and all related trade secrets and technology and improvements on photovoltaic installation
and the air energy storage power generation technology (“Technology”) but without sublease right in the territory of
China, exclusive of the Hong Kong Special Administrative Region, the Macao Special Administrative Region and the Taiwan Region
for the purpose of the agreement. Xianning Xiangtian agreed to pay Xiangtian Shenzhen a quarterly royalty fee equal to five percent
(5%) of Xianning Xiangtian’s gross revenue of each quarter. The shareholders of Xianning Xiangtian pledged all of their equity
interest of Xianning Xiangtian as collateral for the royalty fee payable under this agreement. The agreement will remain effective
throughout the entire duration of Xianning Xiangtian operations, unless terminated by Xiangtian Shenzhen with a 30-day prior written
notice.
Pursuant to the Powers of Attorney executed
by the Xianning Xiangtian Shareholders, each of the shareholders irrevocably appointed Xiangtian Shenzhen as his attorney-in-fact
to exercise any and all rights as a shareholder of Xianning Xiangtian, including, but not limited to, the right to attend shareholders’
meetings, to execute shareholders’ resolutions, to sell, assign, transfer or pledge any or all of his equity interest of Xianning
Xiangtian, to vote as a shareholder for all matters, as well as full power to execute equity transfer agreement as referenced in
the Exclusive Option Agreement and to perform under the Exclusive Option Agreement and Equity Pledge Agreement without limitation.
Xiangtian Shenzhen is also authorized to transfer, allocate or use any cash dividends and non-cash income in accordance with the
respective shareholder’s instructions and to exercise all the necessary rights associated with the equity interest at Xiangtian
Shenzhen’s sole discretion and without the consent of the Xianning Xiangtian Shareholders. The Powers of Attorney will remain effective
as long as the Xianning Xiangtian Shareholders remain the shareholders of Xianning Xiangtian.
Pursuant to the Spousal Consent Letters,
each of the spouses of the Xianning Xiangtian Shareholders unconditionally and irrevocably agreed to the execution of the Equity
Pledge Agreement, Exclusive Option Agreement and Power of Attorney entered by her spouse and the disposal of equity interest of
Xianning Xiangtian held by her spouse. Each of the spouses also agreed that she will not assert any rights over the equity interest
in Xianning Xiangtian held by and registered in the name of her respective spouse. The Xianning Xiangtian Shareholders’ actions
to perform, amend or terminate the above-mentioned agreement do not need their spouses’ authorization or consent. In addition,
in the event that any of the spouses obtains any equity interest in Xianning Xiangtian held by her respective spouse for any reason,
such spouse agrees to enter into similar contractual arrangements.
XT Energy Group, Inc. and Subsidiaries
The accompanying unaudited condensed consolidated
financial statements reflect the activities of XT Energy and each of the following entities:
XT Energy Group, Inc. and Subsidiaries
In assessing the Company’s liquidity,
the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity
needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Debt financing from
related parties have been utilized to finance the working capital requirements of the Company and acquisitions of businesses. As
of January 31, 2020, the Company’s working capital deficit was approximately $3.9 million and the Company had cash of approximately
$2.9 million. Excluding other payables to related parties and director of approximately $7.5 million, the Company’s working
capital was approximately $3.6 million. Although the Company believes that it can realize its current assets in the normal course
of business, the Company’s ability to repay its current obligations will depend on the future realization of its current
assets and the future operating revenues generated from its operations.
The Company’s management has considered
whether there is a going concern issue due to the Company’s recurring losses from operations. Management has determined there
is substantial doubt about its ability to continue as a going concern. If the Company is unable to generate significant revenue,
the Company may be required to cease or curtail its operations. Management is trying to alleviate the going concern risk through
the following sources:
The unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”). The Company’s unaudited condensed consolidated financial statements are expressed in U.S. dollars.
In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair presentation of the Company’s financial position,
its results of operations and its cash flows, as applicable, have been made. Interim results are not necessarily indicative of
results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with information
included in the Company’s July 31, 2019 annual report on Form 10-K filed on October 15, 2019.
The unaudited condensed consolidated
financial statements include the financial statements of the Company, its subsidiaries, the VIEs for which the Company or its subsidiary
is the primary beneficiary and the VIEs’ subsidiaries. All inter-company accounts and transactions have been eliminated in
consolidation.
The preparation of unaudited condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited condensed
consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting
estimates reflected in the Company’s unaudited condensed consolidated financial statements include the estimated cost
used to calculate the percentage of completion recognized in the Company’s revenues, the useful lives of property, plant
and equipment, impairment of long-lived assets, right-of-use assets, lease classification and liabilities, allowance for accounts
receivable doubtful accounts, allowance for other accounts receivable doubtful accounts, allowance for inventory obsolescence reserve,
allowance for deferred tax assets, fair value of the assets and the liabilities of the entities acquired through its business combination,
valuation of warranty reserves, and the accrual of potential liabilities. Actual results could differ from these estimates.
XT Energy Group, Inc. and Subsidiaries
On September 30, 2018, Xiangtian Shenzhen
terminated the VIE Agreements as part of its restructuring to facilitate the shift of business focus between entities controlled
by the Company. After the restructuring, the Company’s headquarter is now located in the city of Xianning, Hubei Province,
and Sanhe Xiangtian, the Company’s previous headquarters, located in the city of Sanhe, Hebei Province, has become the Company’s
sales office. The VIE Agreements include the following:
In connection with the termination of the
VIE Agreements, on September 30, 2018, Sanhe Xiangtian transferred its 100% equity interest of Xianning Xiangtian to the Sanhe
Xiangtian Shareholders and the Sanhe Xiangtian Shareholders transferred their 100% equity interest of Sanhe Xiangtian to Xianning
Xiangtian. As a result of the foregoing equity transfers, Sanhe Xiangtian became a wholly owned subsidiary of Xianning Xiangtian.
On the same day, the Company, through Xiangtian
Shenzhen and Xiangtian HK, entered into the New VIE Agreements, pursuant to which Xianning Xiangtian became the Company’s
new contractually controlled affiliate.
The principal terms of the New VIE Agreements
entered into among Xianning Xiangtian and Xiangtian Shenzhen, the primary beneficiary, are described below:
XT Energy Group, Inc. and Subsidiaries
The Framework Agreement and the Exclusive
Management Agreement have initial terms of ten years but each contains a renewal provision that allows Xiangtian Shenzhen to extend
the term of such agreements at its sole option by written notice with no limitation as to such extensions. The Know-How Sub-License
Agreement is valid for the duration of Xianning Xiangtian’s operation. The other agreements are of unlimited duration.
XT Energy Group, Inc. and Subsidiaries
The Company’s total assets and liabilities
presented in the accompanying unaudited condensed consolidated financial statements represent substantially all of total assets
and liabilities of the VIE because the other entities in the consolidation are non-operating holding entities with nominal assets
and liabilities. The following financial statement amounts and balances of the VIE were included in the accompanying unaudited
condensed consolidated financial statements as of January 31, 2020 and July 31, 2019 and for the three and six months ended January
31, 2020 and 2019, respectively:
The purchase price of an acquired company
is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their
estimated fair values, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired
business are included in the Company’s operating results from the date of acquisition.
Cash denominated in RMB with a U.S. dollar
equivalent of $2,458,140 and $3,250,535 at January 31, 2020 and July 31, 2019, respectively, were held in accounts at financial
institutions located in the PRC‚ which is not freely convertible into foreign currencies. $1,810,643 and $2,333,681 of these
balances are not covered by insurance as the deposit insurance system in China only insured each depositor per bank for a maximum
of approximately $71,000 (RMB500,000). While management believes that these financial institutions are of high credit quality,
it also continually monitors their credit worthiness. The Company, its subsidiaries and VIE have not experienced any losses in
such accounts and do not believe the cash is exposed to any significant risk. As of January 31, 2020 and July 31, 2019, cash balance
of $404,964 and $177,107, respectively, were maintained at U.S. financial institutions, and were insured by the Federal Deposit
Insurance Corporation or other programs subject to certain limitations up to $250,000 per depositor. As of January 31, 2020 and
July 31, 2019, cash balance of $28,781 and $26,288, respectively, were maintained at financial institutions in Hong Kong, and all
were insured by the Hong Kong Deposit Protection Board up to a limit of HK $500,000 (approximately $64,000).
XT Energy Group, Inc. and Subsidiaries
Restricted cash represents cash held by
banks as guarantee deposit collateralizing notes payable pending release back to unrestricted cash upon completion of administrative
process.
In November 2016, the FASB issued ASU No.
2016-18, Statement of Cash Flows (230): Restricted Cash. The amendments in this update require that a statement of cash flows explain
the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. For public business entities, the amendments in this update are effective for fiscal years beginning after December
15, 2017, and interim periods within those annual periods. Earlier adoption is permitted. The amendments in this update should
be applied using a retrospective transition method to each period presented. On August 1, 2018, the Company adopted this guidance
on a retrospective basis.
Short-term investment consists of time
deposit placed with a bank, which contains a fixed or variable interest rate and has original maturity within one year. Such investment
is permitted to be redeemed early without penalties prior to maturity. Given the short-term nature, the carrying value of short-term
investment approximates its fair value. The Company does not intend to withdraw early. There was no other-than-temporary impairment
of short-term investment for the three and six months ended January 31, 2020 and 2019.
Notes receivable represents commercial
notes due from various customers where the customers’ banks have guaranteed the payments. The notes are noninterest bearing
and normally paid within three to six months. The Company has the ability to submit requests for payments to the customer’s
banks earlier than the scheduled payments date, but will incur an interest charge and a processing fee.
Accounts receivables, net, are recognized
and carried at the original invoiced amount less an allowance for any uncollectible accounts. The Company uses the aging method
to estimate the valuation allowance for anticipated uncollectible receivable balances. Under the aging method, bad debts determined
by management are based on historical experience as well as the current economic climate and are applied to customers’ balances
categorized by the number of months the underlying invoices have remained outstanding. Management reviews its receivables on a
regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account
balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection
is not probable. The Company’s management continues to evaluate the reasonableness of the valuation allowance policy and
update it if necessary.
Inventories, net, consist of raw materials,
work in progress and finished goods and are stated at the lower of cost or net realizable value using the weighted average method.
When appropriate, impairment to inventories are recorded to write down the cost of inventories to their net realizable value.
XT Energy Group, Inc. and Subsidiaries
Advances to suppliers are cash deposited
or advanced to outside vendors or services providers for future inventory purchases or future services. This amount is refundable
and bears no interest. For any advances to suppliers determined by management that such advances will not be in receipts of inventories
or refundable, the Company will recognize an allowance account to reserve such balances. Management reviews its advances to suppliers
on a regular basis to determine if the allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances
are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not
probable. The Company’s management continues to evaluate the reasonableness of the valuation allowance policy and update
it if necessary. For the three and six months ended January 31, 2020, $538,809 impairment of advances to suppliers was recognized.
For the three and six months ended January 31, 2019, no impairment of advances to suppliers was recognized.
The differences between the timing of the
Company’s revenue recognized (based on costs incurred) and customer billings (based on unconditional rights to receive the
consideration in the contractual terms) results in changes to the Company’s contract asset or contract liability positions.
Provisions for estimated losses of contract assets on uncompleted contracts are made in the period in which such losses are determined.
Prepaid expenses represent advance payments
made to vendors for services such as rent, internet, consulting, maintenance and certification.
Other receivables, net primarily include
advances to employees, receivables from sales of equipment, and other deposits. Management regularly reviews the aging of receivables
and changes in payment trends and records allowances when management believes collection of amounts due are at risk. Accounts considered
uncollectable are written off against allowances after exhaustive efforts at collection are made. Allowance for doubtful accounts
amounted to $1,363 and $0 for the three months ended January 31, 2020 and 2019, respectively. Allowance for doubtful accounts
amounted to $292,814 and $0 for the six months ended January 31, 2020 and 2019, respectively.
Other receivables – related parties
present advances to the management of the Company for business development and travel advances.
Property, plant and equipment are stated
at cost net of accumulated depreciation and impairment losses. Depreciation is provided over the estimated useful lives of the
assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows, taking
into account the assets’ estimated residual value:
The cost and related accumulated depreciation
of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the unaudited condensed
consolidated statements of operations and other comprehensive loss. Expenditures for maintenance and repairs are charged to earnings
as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized.
Construction-in-progress represents contractor
and labor costs, design fees and inspection fees in connection with the construction of the Company’s synthetic fuel raw
materials production line, factory plantation and fire safety equipment installation. No depreciation is provided for construction-in-progress
until it is completed and placed into service.
Intangible assets, net, are stated at cost,
less accumulated amortization. Amortization expense is recognized on the straight-line basis over the estimated useful lives of
the assets as follows:
All land in the PRC is owned by the government;
however, the government grants “land use rights.” The Company has obtained rights to use various parcels of land for
50 years through the acquisition of Hubei Jinli in June 2018.
Technology know-hows, including LSC Hand-Held
Diesel Pump, CB-39 Motor Oil Pump, 0-16 MPa series hydraulic cylinder, brake cylinder and hydraulic value, and certain special
operating and production licenses were acquired through the acquisition of Hubei Jinli and Tianjin Jiabaili in June 2018 with estimated
finite useful lives between 4.5 years to 10 years.
Certain PV panel certifications were contributed
by the Company’s noncontrolling interest shareholders as capital contribution in March 2018 with an estimated finite useful
lives of 10 years.
The Company also acquired a safety production
license and an accounting software with a finite useful life of 3 years in June 2018 and January 2019, respectively.
Goodwill represents the excess of the consideration
paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiaries at the date of acquisition.
Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may
have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written
off to its fair value and the loss is recognized in the unaudited condensed consolidated statements of operations and comprehensive
loss. Impairment losses on goodwill are not reversed.
The Company reviews the carrying value
of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more
frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has
the option to access qualitative factors to determine whether it is necessary to perform the two-step in accordance with ASC 350-20.
If the Company believes, as a result of the qualitative carrying amount, the two-step quantities impairment test described below
is required.
The first step compares the fair values
of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying
amount, goodwill is not considered to be impaired and the second step will not be required.
If the carrying amount of a reporting unit
exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s
goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the
allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess
of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill.
Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash
flow.
If impairment exists, goodwill is immediately
written off to its fair value and the loss is recognized in the unaudited condensed consolidated statements of operations and comprehensive
loss. Impairment losses on goodwill are not reversed. For the three and six months ended January 31, 2020 and 2019, no impairment
of goodwill was recognized.
XT Energy Group, Inc. and Subsidiaries
Long-lived assets, including plant and
equipment and intangible with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant
adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset
may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets
are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from
the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the
asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based
on a discounted cash flows approach or, when available and appropriate, to comparable market values.
For the three and six months ended January
31, 2020, an impairment of $4,353,609 of equipment was recognized. For the three and six months ended January 31, 2019, no impairment
was recognized for equipment.
For the three and six months ended January
31, 2020, an impairment of $645,895 were recorded for intangible assets. For the three and six months ended January 31, 2019, no
impairment was recognized for intangible assets.
Subscription receivable represents unpaid
capital contribution from its shareholders.
The Company applies the provisions of Accounting
Standards Codification (“ASC”) Subtopic 820-10, “Fair Value Measurements”, for fair value measurements
of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed
at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures
about fair value measurements.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded
at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions
that market participants would use when pricing the asset or liability.
ASC 820 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are as follows:
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
The following table sets forth by level
within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on
a recurring basis as of July 31, 2019:
|
Financial Assets
|
|
Carrying
Value as of
July 31,
2019
|
|
|
Fair Value Measurements at
July 31, 2019
Using Fair Value Hierarchy
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Short-term investment
|
|
$
|
435,787
|
|
|
$
|
435,787
|
|
|
$
|
|
|
|
$
|
|
|
The following is a reconciliation of the
beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis on level 3 measurements
for the six months ended January 31, 2020 and for the year ended July 31, 2019:
|
|
|
January 31,
2020
|
|
|
July 31,
2019
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
331,505
|
|
|
Change in estimated contingent liabilities
|
|
|
|
|
|
|
243,658
|
|
|
Release from level 3 measurement due to contingent payments has been finalized
|
|
|
|
|
|
|
(570,322
|
)
|
|
Exchange rate effect
|
|
|
|
|
|
|
(4,841
|
)
|
|
Ending balance
|
|
$
|
|
|
|
$
|
|
|
The Company believes the carrying amount
reported in the unaudited condensed consolidated balance sheet for cash, restricted cash, notes receivable, accounts receivable,
inventories, advance to suppliers, contract assets, prepaid expenses, other receivables, short-term loans, accounts payable, advances
from customers, other payables and accrued liabilities, tax payables and short-term investment payable approximate fair value because
of the short-term nature of such instruments. The carrying amount of long-term investment payable reported in the unaudited condensed
consolidated balance sheets at carrying value, which approximates fair value as the rate of amortization of investment payment
discount used were similar to interest rate charged by the bank in the PRC. As of January 31, 2020 and July 31, 2019, long-term
investment payable balance was nil and $279,764, net of discount of $25,999, respectively.
Leases
Effective August 1, 2019, the Company adopted
ASU 2016-02, “Leases” (Topic 842), and elected the practical expedients that does not require us to reassess: (1) whether
any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3)
initial direct costs for any expired or existing leases. For lease terms of twelve months or fewer, a lessee is permitted to make
an accounting policy election not to recognize lease assets and liabilities. The Company also adopted the practical expedient that
allows lessees to treat the lease and non-lease components of a lease as a single lease component. On August 1, 2019, the Company
recognized approximately $2.8 million right of use (“ROU”) assets and approximately $2.2 million lease liabilities
based on the present value of the future minimum rental payments of leases, using incremental borrowing rate of 4.75% and 4.90%
based on duration of lease terms.
Operating lease ROU assets and lease liabilities
are recognized at the adoption date of August 1, 2019 or the commencement date, whichever is earlier, based on the present value
of lease payments over the lease term. Since the implicit rate for the Company’s leases is not readily determinable, the
Company use its incremental borrowing rate based on the information available at the commencement date in determining the present
value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on
a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.
Lease terms used to calculate the present
value of lease payments generally do not include any options to extend, renew, or terminate the lease, as the Company does not
have reasonable certainty at lease inception that these options will be exercised. The Company generally considers the economic
life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. The Company has elected the
short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of twelve
months or less. Its leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease incentives.
Lease expense is recognized on a straight-line basis over the lease term.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
The Company reviews the impairment of its
ROU assets consistent with the approach applied for its other long-lived assets. The Company reviews the recoverability of its
long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable.
The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted
future pre-tax cash flows of the related operations. The Company has elected to include the carrying amount of operating lease
liabilities in any tested asset group and includes the associated operating lease payments in the undiscounted future pre-tax cash
flows.
Discontinued operations
In accordance with ASU No. 2014-08, Reporting
Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group
of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that
has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the
criteria in paragraph 205-20-45-1E to be classified as discontinued operations. When all of the criteria to be classified as discontinued
operations are met, including management having the authority to approve the action and committing to a plan to sell the entity,
the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total
assets and liabilities separate from the balances of the continuing operations. At the same time, the results of discontinued operations,
less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss)
of continuing operations in accordance with ASC 205-20-45. See Note 4 – Discontinued operations.
Revenue Recognition
On August 1, 2018, the Company adopted
Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC Topic 606) using the modified
retrospective method for contracts that were not completed as of July 31, 2018. This did not result in an adjustment to the retained
earnings upon adoption of this new guidance as the Company’s revenue was recognized based on the amount of consideration
expected to receive in exchange for satisfying the performance obligations.
The core principle underlying the revenue
recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount
that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to
identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time,
based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized over time
for the Company’s sale and installation of power generation systems and are recognized at a point in time for the Company’s
sale of products.
The ASU requires the use of a new five-step
model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with
the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction
price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the
performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result
in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition
policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new
guidance and confirmed that there were no differences in the pattern of revenue recognition.
Sale and installation of power generation
systems
Sales of power generation systems in conjunction
of system installation are generally recognized based on the Company’s efforts or inputs to the satisfaction of a performance
obligation using an input measure method, which was essentially the same as the percentage of completion method prior to August
1, 2018 for its installation project. Therefore, take into account the costs, estimated earnings and revenue to date on contracts
not yet completed. Revenue recognized is that percentage of the total contract price that costs expended to date bear to anticipated
final total costs, based on current estimates of costs to complete. Contract costs include all direct material and labor costs
and those indirect costs related to contract performance, such as indirect labor and supplies. Adjustments to the original estimates
of the total contract revenue, total contract costs, or the extent of progress toward completion are often required as work progresses.
Such changes and refinements in estimation are reflected in reported results of operations as they occur; if material, the effects
of changes in estimates are disclosed in the notes to the unaudited condensed consolidated financial statements.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
The key assumptions used in the estimate
of costs to complete relate to the unit material cost, the quantity of materials to be used, the installation cost and those indirect
costs related to contract performance. The estimate of unit material cost is reviewed and updated on a quarterly basis, based on
the updated information available in the supply markets. The estimate of material quantity to be used for completion and the installation
cost is also reviewed and updated on a quarterly basis, based on the updated information on the progress of project execution.
If the supply market conditions or the progress of project execution were different, it is likely that materially different amounts
of contract costs would be used in the input method of accounting. Thus the uncertainty associated with those estimates may impact
the Company’s unaudited condensed consolidated financial statements. Selling, general, and administrative costs are charged
to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized
in the unaudited condensed consolidated financial statements. Claims for additional contract costs are recognized upon a signed
change order from the customer.
If the sales of equipment is combined within
the contract of the installation of power generation system with the Company performing significant service of integrating the
equipment into the power generation system, the installation revenues and sales of equipment and system component are combined
and considered as one performance obligation. The promises to transfer the equipment and system component and installation are
not separately identifiable, which is evidencing by the fact that the Company provides a significant service of integrating the
goods and services into a power generation system for which the customer has contracted. The Company currently does not have any
modification of contract and the contract currently does not have any variable consideration.
There was no sale and installation of power
generation systems revenue for the three months ended January 31, 2020 and 2019. The Company’s sale and installation of power
generation systems revenue for the six months ended January 31, 2020 and 2019 were nil and $389,482, respectively.
Sales of products
Sales of products includes sales of PV
panels, air compression equipment and other components, heat pumps, high-grate synthetic fuel, hydraulic parts and electronic components,
wine and herbal wine. When these products are not being integrated into a service contract and being sold individually, the Company
continues to derive its revenues from sales contracts with its customers with revenues being recognized upon delivery of products.
Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the customer is fixed
upon acceptance of the sales contract and there is no separate sales rebate, discount, or other incentive. Such revenues are
recognized at a point in time after all performance obligations are satisfied and based on when control of goods transfer to a
customer, which is generally similar to when its delivery has occurred prior to August 1, 2018.
The Company’s disaggregate Revenues
- sale of products information for the three and six months ended January 31, 2020 and 2019 are summarized as follows:
|
|
|
For the
Three Months Ended
January 31, 2020
|
|
|
For the
Three Months Ended
January 31, 2019
|
|
|
For the
Six Months Ended
January 31, 2020
|
|
|
For the
Six Months Ended
January 31, 2019
|
|
|
Revenues (sales returns) – sales of products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PV panels and others
|
|
$
|
143,496
|
|
|
$
|
11,311,830
|
|
|
$
|
1,848,293
|
|
|
$
|
20,413,524
|
|
|
Air compression equipment and other components
|
|
|
|
|
|
|
389,477
|
|
|
|
|
|
|
|
1,390,688
|
|
|
Heat pumps
|
|
|
1,016,082
|
|
|
|
3,338,872
|
|
|
|
1,074,068
|
|
|
|
7,582,436
|
|
|
High-grade synthetic fuel
|
|
|
73,798
|
|
|
|
4,183,312
|
|
|
|
113,774
|
|
|
|
8,280,064
|
|
|
Hydraulic parts and electronic components
|
|
|
1,738,291
|
|
|
|
2,188,559
|
|
|
|
3,102,368
|
|
|
|
3,344,294
|
|
|
Wine and herbal wine
|
|
|
(200,045
|
)
|
|
|
501,441
|
|
|
|
(126,240
|
)
|
|
|
501,441
|
|
|
Total revenue – sales of products
|
|
|
2,771,622
|
|
|
|
21,913,491
|
|
|
|
6,012,263
|
|
|
|
41,512,447
|
|
|
Revenues – sales of products from discontinued operations
|
|
|
200,045
|
|
|
|
(501,441
|
)
|
|
|
126,240
|
|
|
|
(501,441
|
)
|
|
Revenues – sales of products from continuing operations
|
|
$
|
2,971,667
|
|
|
$
|
21,412,050
|
|
|
$
|
6,138,503
|
|
|
$
|
41,011,006
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Gross versus Net Revenue Reporting
The Company’s trading segment, Xiangtian
Trade, engages in trading of general merchandise, primarily consisting of tealeaves. The determination of whether revenues should
be reported on a gross or net basis is based on its assessment of whether it is the principal or an agent in the transaction in
accordance with ASC 606-10-55 and depends on whether the promise to the customer is to provide the products or to facilitate a
sale by a third party. The nature of the promise depends on whether the Company controls the products prior to transferring it.
When the Company controls the product, the promise is to provide and deliver the products and revenue is presented gross. When
the Company does not control the products, the promise is to facilitate the sale and revenue is presented net.
To distinguish a promise to provide products
from a promise to facilitate the sale from a third party, the Company considers the guidance of control in ASC 606-10-55-37A and
the indicators in 606-10-55-39. We consider this guidance in conjunction with the terms in our arrangements with both suppliers
and customers.
In general, the Company does not have the
responsibility of fulfilling the promise to provide the products as the products can be returned to its suppliers if its customers
do not accept the products. Furthermore, the Company does not control the products as it has no obligation to (i) fulfill the resale
products delivery, and (ii) bear any inventory risk. In addition, when establishing the selling prices for delivery of the resale
products, the Company has such discretion of establishing price to ensure it would generate profit for the services of the products
delivery arrangements. The Company believes that all these factors indicate that the Company is acting as an agent in this transaction.
As a result, revenue from the trading segment is presented on a net basis.
Warranty
The Company generally provides limited
warranties for work performed under its contracts. At the time a sale is recognized, the Company records estimated future warranty
costs under ASC 460. Such estimated costs for warranties are estimated at completion and these warrants are not service warranties
separately sold by the Company. Generally, the estimated claim rates of warranty are based on actual warranty experience or Company’s
best estimate. There were no such reserves recorded for the three and six months ended January 31, 2020 and 2019. No right of return
exists on sales of inventory. As of January 31, 2020 and July 31, 2019, accrued warranty expense amounted to $65,149 and $65,182,
respectively, and classified in the caption “other payables and accrued liabilities” in the accompanying unaudited
condensed consolidated balance sheets.
Advertising Costs
Advertising costs are expensed as incurred
and included in selling and general and administrative expenses. Advertising costs amounted to $74,980 and $9,039 for the three
months ended January 31, 2020 and 2019, respectively. Advertising costs amounted to $100,488 and $41,011 for the six months ended
January 31, 2020 and 2019, respectively.
Employee Benefit
The full-time employees of the Company
are entitled to staff welfare benefits including medical care, housing fund, pension benefits, unemployment insurance and other
welfare, which are government mandated defined contribution plans. The Company is required to accrue for these benefits based on
certain percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant PRC
regulations, and make cash contributions to the state-sponsored plans out of the amounts accrued. Total expenses for the plans
were $82,890 and $92,377 for the three months ended January 31, 2020 and 2019, respectively. Total expenses for the plans were
$197,925 and $135,099 for the six months ended January 31, 2020 and 2019, respectively.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Research and development (“R&D”)
Research and development expenses include
salaries and other compensation-related expenses paid to the Company’s research and product development personnel while they
are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses amounted to $421,738
and $76,126 for the three months ended January 31, 2020 and 2019, respectively. R&D expenses amounted to $518,861 and $79,173
for the six months ended January 31, 2020 and 2019, respectively.
Value Added Taxes
The Company is subject to value added tax
(“VAT”). Revenue from sales of goods purchased from other entities is generally subject to VAT at the rate of 13% starting
in April 2019, 16% starting in April 2018 and 17% prior to April 2018 and prior for all of its products except Herbal Wine which
is at the rate of 3%. The Company is entitled to a refund for VAT already paid on goods purchased. The VAT balance is recorded
in other payables on the unaudited condensed consolidated balance sheets. Revenues are presented net of applicable VAT.
Income Taxes
The Company accounts for income taxes in
accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results for the fiscal year as adjusted for
items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted
by the balance sheet date.
Deferred taxes are accounted for using
the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets
and liabilities in the unaudited condensed consolidated financial statements and the corresponding tax basis used in the computation
of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred
tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary
differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset
is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related
to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Current income taxes are provided in accordance with the laws of the relevant
taxing authorities.
An uncertain tax position is recognized
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with
a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
is recorded. No penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the
period incurred. PRC tax returns filed in 2015 to 2019 are subject to examination by any applicable tax authorities.
Comprehensive Income (Loss)
The Company follows the provisions of the
Financial Accounting Standards Board (the “FASB”) ASC 220 “Reporting Comprehensive Income”. Comprehensive
income (loss) is defined to include all changes in equity except those resulting from investments by owners and distributions to
owners. The Company had other comprehensive income of $699,170 and $1,046,405 for the three months ended January 31, 2020
and 2019, respectively, from foreign currency translation adjustments. The Company had other comprehensive (loss) income of $(249,169)
and $665,419 for the six months ended January 31, 2020 and 2019, respectively, from foreign currency translation adjustments.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Foreign Currency Translation
The reporting currency of the Company is
the U.S. dollar. The functional currency of the Company is the RMB as substantially all of the Company’s PRC subsidiaries’
operations use this denomination. Foreign denominated monetary assets and liabilities are translated into their United States dollar
equivalents using foreign exchange rates which prevailed at the balance sheet date. Non-monetary assets and liabilities are translated
at the exchange rates prevailing at the transaction date. Revenues and expenses are translated at average rates of exchange during
the year. Gains or losses resulting from foreign currency transactions are included in results of operations.
For the purpose of presenting these financial
statements of subsidiaries in PRC, the Company’s assets and liabilities are expressed in U.S. dollars at the exchange rate
on the balance sheet date, which is 6.8876 and 6.8841 as of January 31, 2020 and July 31, 2019, respectively; stockholders’
equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange
rate during the period, which is 6.9886 and 6.8732 for the three months ended January 31, 2020 and 2019, respectively. Weighted
average exchange rate is 7.0221 and 6.8753 for the six months ended January 31, 2020 and 2019, respectively. The resulting translation
adjustments are reported under accumulated other comprehensive income (loss) in the stockholders’ equity section of the unaudited
condensed consolidated balance sheets.
For the purpose of presenting these financial
statements of the subsidiary in Hong Kong, the Company’s assets and liabilities are expressed in U.S. dollars at the exchange
rate on the balance sheet date, which is 7.7672 and 7.8275 as of January 31, 2020 and July 31, 2019, respectively; stockholders’
equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange
rate during the period, which is 7.8014 and 7.8304 for the three months ended January 31, 2020 and 2019, respectively. Weighted
average exchange rate is 7.8212 and 7.8361 for the six months ended January 31, 2020 and 2019, respectively. The resulting translation
adjustments are reported under accumulated other comprehensive loss in the stockholders’ equity section of the unaudited
condensed consolidated balance sheets.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed
by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding
during the period, excluding the effects of any potentially dilutive securities. Diluted loss 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. Loss per share
excludes all potential dilutive shares of common stock if their effect is anti-dilutive.
Statutory Reserves
Pursuant to the laws applicable to the
PRC, PRC entities 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 accumulated loss. For the six months ended January 31, 2020 and 2019, the Company has contributed
$0 and $372,824, respectively, to the statutory reserves.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Contingencies
From time to time, the Company is a party
to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when
they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are
expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation
individually or in the aggregate would have a material adverse impact on the Company’s unaudited condensed consolidated financial
position, results of operations and cash flows.
Recently issued accounting pronouncements
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350) which simplifies goodwill impairment testing by requiring that such periodic testing
be performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for
the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for the Company
for annual and interim reporting periods beginning August 1, 2020. The Company is currently evaluating the impact of this new standard
on its unaudited condensed consolidated financial statements and related disclosures, which is effective for fiscal years, including
interim periods, beginning after December 15, 2019.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement
– Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented
in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update
is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial
statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not
yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively
to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and
Jobs Act is recognized. The Company adopted this ASU on August 1, 2019 and determined the adoption of this ASU did not have a material
effect on the Company’s unaudited condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework —Changes to the Disclosure Requirements for Fair Value Measurement”
(“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value
Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers and the valuations process, modifies disclosures
for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional
disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual and interim reporting periods
beginning August 1, 2020. The Company is currently evaluating the impact of this new standard on its unaudited condensed consolidated
financial statements and related disclosures.
In May 2019, the FASB issued ASU 2019-05,
which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial
assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added
Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13
also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when
fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale
Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably
elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted
transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies
for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply
with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. ASU 2019-05
is effective for the Company for annual and interim reporting periods beginning August 1, 2020. The Company is currently evaluating
the impact of this new standard on its unaudited condensed consolidated financial statements and related disclosures.
In January 2020, the FASB issued ASU 2020-01
to clarify the interaction of the accounting for equity securities under ASC 321 and investments accounted for under the equity
method of accounting in ASC 323 and the accounting for certain forward contracts and purchased options accounted for under ASC
815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable
transactions that require it to either apply or discontinue the equity method of accounting when applying the measurement alternative
in ASC 321, immediately before applying or upon discontinuing the equity method of accounting. With respect to forward contracts
or purchased options to purchase securities, the amendments clarify that when applying the guidance in ASC 815-10-15-141(a), an
entity should not consider whether upon the settlement of the forward contract or exercise of the purchased option, individually
or with existing investments, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value
option in accordance with ASC 825. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020.
Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption of this standard
to have a material impact on its consolidated financial statements.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Other recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future
financial statements.
Note 3 – Business Combination
Acquisition of Wine Co. and Herbal Wine
Co.
On December 21, 2018, Xianning Xiangtian
completed its acquisition (the “Transaction”) of 90% of the equity interests in each of Wine Co. and Herbal Wine Co.,
each a limited liability company incorporated in the PRC, pursuant to an equity investment agreement dated December 14, 2018 (the
“Agreement”), by and between Xianning Xiangtian and the Rongentang Shareholders, who are unrelated to the Company or
Xianning Xiangtian. Wine Co. is engaged in the business of manufacturing and sales of compound wine products and Herbal Wine Co.
is engaged in the business of manufacturing and sales of herbal wine products.
Pursuant to the Agreement, Xianning Xiangtian
paid a total cash consideration of RMB67.5 million (approximately $9.7 million) (“Total Consideration”) to be contributed
into Wine Co. as registered capital. RMB60 million (approximately $8.7 million) of the Total Consideration was deposited into an
escrow account held by Xianning Wenquan Branch of Agricultural Bank of China as escrow agent on December 14, 2018. As of December
21, 2018, the Rongentang Shareholders completed the equity interest transfer registration with relevant PRC government authorities
and the fund in the escrow was released.
In addition, Rongentang Shareholders completed
the title transfer procedures with the PRC government authorities for all the real property and land use rights possessed by Rongentang
to Wine Co. (“Title Transfer”) from the owner of such real property and land use rights, Xianning Rongentang Wine Co.,
Ltd. (“Xianning Rongentang”), an entity controlled by the Rongentang Shareholders, in February 2019. Rongentang also
obtained a three-year royalty-free license from Xianning Rongentang, the owner of the trademark “Rongentang,” to use
such trademark, in January 2019. The Company paid the remaining RMB7.5 million (approximately $1.1 million) of the Total Consideration
to Wine Co. as registered capital in March 2019.
Rongentang Shareholders were responsible
for taxes and undisclosed liabilities of Rongentang prior to the closing, including but not limited to, the guarantee liability
of Wine Co. under certain loan agreement, pursuant to which a security interest in the real property possessed by Rongentang was
granted to secure the repayment of a loan of a party related to Rongentang Shareholders of up to RMB10 million (approximately $1.5
million) to a PRC commercial bank. RMB10 million (approximately $1.5 million) of the funds received by the Rongentang Shareholders
in connection with the Transaction was used to pay off this loan on January 18, 2019.
Upon closing of the Transaction, Rongentang
became majority owned subsidiaries of Xianning Xiangtian and the Company began in business of the production and sales of compound
wine and herbal wine products through Rongentang.
The Company’s acquisition of Wine
Co. and Herbal Wine Co. was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase
price of Wine Co. and Herbal Wine Co. based upon the fair value of the identifiable assets acquired and liabilities assumed on
the acquisition date. The Company estimated the fair values of the assets acquired and liabilities assumed at the acquisition date
in accordance with the business combination standard issued by the FASB with the valuation methodologies using level 3 inputs,
except for other current assets and current liabilities were valued using the cost approach. Management of the Company is responsible
for determining the fair value of assets acquired, liabilities assumed and intangible assets identified as of the acquisition date
and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the
acquisitions are not material and have been expensed as incurred in general and administrative expense.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
The following table summarizes the fair
value of the identifiable assets acquired and liabilities assumed on the acquisition date, which represents the net purchase price
allocation on the date of the acquisition of Wine Co. and Herbal Wine Co. based on a valuation performed by an independent valuation
firm engaged by the Company:
|
|
|
Fair Value
|
|
|
Cash
|
|
$
|
6,890
|
|
|
Accounts receivable, net
|
|
|
23,612
|
|
|
Inventories, net
|
|
|
1,035,186
|
|
|
Advances to suppliers
|
|
|
25,719
|
|
|
Other receivables
|
|
|
244,279
|
|
|
Plant and equipment, net
|
|
|
4,351,805
|
|
|
Intangible assets, net
|
|
|
2,999,442
|
|
|
Goodwill
|
|
|
1,976,878
|
|
|
Total assets
|
|
|
10,663,811
|
|
|
|
|
|
|
|
|
Advance from customers
|
|
|
13,904
|
|
|
Other payables and accrued liabilities
|
|
|
6,128,289
|
|
|
Other payables – related parties and director
|
|
|
3,653,843
|
|
|
Taxes payable
|
|
|
5,582
|
|
|
Total liabilities
|
|
|
9,801,618
|
|
|
Net assets acquired prior to capital contribution
|
|
$
|
862,193
|
|
|
Total consideration for capital injection
|
|
|
9,699,669
|
|
|
Additional capital contribution by noncontrolling shareholder
|
|
|
215,548
|
|
|
Net assets acquired after capital contribution
|
|
|
10,777,410
|
|
|
Percentage of interest acquired
|
|
|
90.0
|
%
|
|
Total net assets acquired
|
|
$
|
9,699,669
|
|
Approximately $1.9 million of goodwill
arising from the acquisition consists largely of synergies expected from the sales distribution networks of the Company to boost
its wine and herbal wine sales. None of the goodwill is expected to be deductible for income tax purposes.
For the three and six months ended January
31, 2019, the impact of the acquisition of Wine Co. and Herbal Wine Co. to the unaudited condensed consolidated statements of operations
and comprehensive income (loss) was not material.
On January 6, 2020, the Company entered
into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”), which we agreed to sell its 90% ownership
in Wine Co. and Herbal Wine Co. to the Buyers for approximately $9.6 million (RMB 67.5 million), of which, 54% ownership are sold
to Kairui Tong, the legal representative and general manager of Wine Co. and Herbal Wine Co, and 36% ownership are sold to Hao
Huang, an unrelated third party. Therefore, the result of operations was presented as discontinued operations for the three and
six months ended January 31, 2020 unaudited condensed consolidated financial statements. See Note 4 – Discontinued operations.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Investment payable
Investment payable consists of the following:
|
Name of Payee
|
|
Relationship
|
|
Nature
|
|
January 31, 2020
|
|
|
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guifen Wang
|
|
Former shareholder of Tianjin Jiabaili
|
|
Payment for acquisition of Tianjin Jiabaili
|
|
|
136,245
|
|
|
|
136,314
|
|
|
Total
|
|
|
|
|
|
|
136,245
|
|
|
|
136,314
|
|
|
Short-term
|
|
|
|
|
|
|
(136,245
|
)
|
|
|
(136,314
|
)
|
|
Long-term
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
The maturities schedule is as follows as
of January 31, 2020:
|
Repayment date
|
|
Amount
|
|
|
Due on demand (see Note 15 – Commitments and Contingencies)
|
|
$
|
136,245
|
|
|
Total
|
|
$
|
136,245
|
|
Investment payable – related parties
Investment payable – related parties
consist of the following:
|
Name of Related Party
|
|
Relationship
|
|
Nature
|
|
January 31, 2020
|
|
|
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wenhe Han (see Note 15 – Commitments and Contingencies)
|
|
Vice general manager of Tianjin Jiabaili
|
|
Payment for acquisition of Tianjin Jiabaili
|
|
$
|
113,479
|
|
|
$
|
113,537
|
|
|
Heping Zhang
|
|
General manager of Hubei Jinli
|
|
Payment for acquisition of Hubei Jinli
|
|
|
|
|
|
|
370,875
|
|
|
Total
|
|
|
|
|
|
|
113,479
|
|
|
|
484,412
|
|
|
Short-term
|
|
|
|
|
|
|
(113,479
|
)
|
|
|
(204,648
|
)
|
|
Long-term
|
|
|
|
|
|
$
|
|
|
|
$
|
279,764
|
|
The maturities schedule is as follows as
of January 31, 2020:
|
Repayment date
|
|
Amount
|
|
|
Due on demand
|
|
$
|
113,479
|
|
|
Total
|
|
$
|
113,479
|
|
Debt discount
Debt discount, net of accumulated amortization,
totaled $0 and $36,571 as of January 31, 2020 and July 31, 2019, respectively, are recognized as a reduction of investment payable.
Amortization expense related to the debt discount, included in interest expense, was $29,900 and $125,356 for the three months
ended January 31, 2020 and 2019, respectively. Amortization expense related to the debt discount, included in interest expense,
was $35,853 and $249,175 for the six months ended January 31, 2020 and 2019, respectively.
Note 4 – Discontinued Operations
On May 24, 2019, the Company’s Board,
discussed a plan to pursue the potential sale of all its ownership interest in Herbal Wine Co. and Wine Co. in order to shift the
business focus on its energy related business. The decision and action taken by the Company of disposing Herbal Wine Co. and Wine
Co. represent a major shift that will have a major effect on the Company’s operations and financial results, which trigger
discontinued operations accounting in accordance with ASC 205-20-45. On January 6, 2020, the Company entered into an equity transfer
agreement with Kairui Tong and Hao Huang (the “Buyers”), which we agreed to sell its 90% ownership in Wine Co. and Herbal
Wine Co. to the Buyers for approximately $9.6 million (RMB 67.5 million), of which, 54% ownership are sold to Kairui Tong, the
legal representative and general manager of Wine Co. and Herbal Wine Co, and 36% ownership are sold to Hao Huang, an unrelated
third party.
The fair value of discontinued operations,
determined as of January 6, 2020, includes estimated consideration expected to be received, less costs to sell. After consideration
of the determination of fair value of the discontinued operations, no impairment was indicated as of January 6, 2020 and July 31,
2019.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Reconciliation of the carrying amounts
of major classes of assets and liabilities from discontinued operations in the audited consolidated balance sheets, including Herbal
Wine Co. and Wine Co. as of July 31, 2019.
Carrying amounts of major classes of
assets included as part of discontinued operations:
|
|
|
July 31,
2019
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
1,929,899
|
|
|
Accounts receivable, net
|
|
|
471,889
|
|
|
Inventories
|
|
|
1,785,176
|
|
|
Advances to suppliers
|
|
|
181,101
|
|
|
Other current assets
|
|
|
73,707
|
|
|
Total current assets of discontinued operations
|
|
|
4,441,772
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
4,588,449
|
|
|
Intangible assets, net
|
|
|
2,950,343
|
|
|
Goodwill
|
|
|
1,998,387
|
|
|
Total other assets of discontinued operations
|
|
|
9,537,179
|
|
|
|
|
|
|
|
|
Total assets of the disposal group classified as discontinued operations
|
|
$
|
13,978,951
|
|
|
Carrying amounts of major classes of liabilities included as part of discontinued operations:
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts payable
|
|
$
|
25,266
|
|
|
Advance from customers
|
|
|
1,124,608
|
|
|
Other payables and accrued liabilities
|
|
|
42,778
|
|
|
Income taxes payable
|
|
|
306,360
|
|
|
Total current liabilities of discontinued operations
|
|
|
1,499,012
|
|
|
|
|
|
|
|
|
Total liabilities of the disposal group classified as discontinued operations
|
|
$
|
1,499,012
|
|
Reconciliation of the amounts of major
classes of income and losses from discontinued operations in the unaudited condensed consolidated statements of operations and
comprehensive loss, including Herbal Wine Co. and Wine Co. for the three and six months ended January 31, 2020 and 2019.
|
|
|
For the
Three Months Ended
January 31,
|
|
|
For the
Three Months Ended
January 31,
|
|
|
For the
Six Months Ended
January 31,
|
|
|
For the
Six Months Ended
January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenue (sales returns):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue-products
|
|
$
|
(200,045
|
)
|
|
$
|
501,441
|
|
|
$
|
(126,240
|
)
|
|
$
|
501,441
|
|
|
Total revenue
|
|
|
(200,045
|
)
|
|
|
501,441
|
|
|
|
(126,240
|
)
|
|
|
501,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (sales returns)-products
|
|
|
(16,178
|
)
|
|
|
55,416
|
|
|
|
(2,269
|
)
|
|
|
55,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(183,867
|
)
|
|
|
446,025
|
|
|
|
(123,971
|
)
|
|
|
446,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
5,892
|
|
|
|
2,212
|
|
|
|
13,182
|
|
|
|
2,212
|
|
|
General and administrative
expenses
|
|
|
175,597
|
|
|
|
76,908
|
|
|
|
458,689
|
|
|
|
76,908
|
|
|
Total operating
expenses
|
|
|
181,489
|
|
|
|
79,120
|
|
|
|
471,871
|
|
|
|
79,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from operations
|
|
|
(365,356
|
)
|
|
|
366,905
|
|
|
|
(595,842
|
)
|
|
|
366,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
(21,726
|
)
|
|
|
(6,069
|
)
|
|
|
(21,873
|
)
|
|
|
(6,069
|
)
|
|
Interest income
|
|
|
497
|
|
|
|
650
|
|
|
|
1,809
|
|
|
|
650
|
|
|
Total other loss,
net
|
|
|
(21,229
|
)
|
|
|
(5,419
|
)
|
|
|
(20,064
|
)
|
|
|
(5,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income taxes
|
|
|
(386,585
|
)
|
|
|
361,486
|
|
|
|
(615,906
|
)
|
|
|
361,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
42,872
|
|
|
|
(90,682
|
)
|
|
|
97,431
|
|
|
|
(90,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from discontinued operations
|
|
|
(343,713
|
)
|
|
|
270,804
|
|
|
|
(518,475
|
)
|
|
|
270,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net
(loss) income attributable to non-controlling interest from discontinued operations
|
|
|
(34,372
|
)
|
|
|
27,081
|
|
|
|
(51,848
|
)
|
|
|
27,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income from discontinued operations attributable to XT Energy Group, Inc.
|
|
$
|
(309,341
|
)
|
|
$
|
243,723
|
|
|
$
|
(466,627
|
)
|
|
$
|
243,723
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
As of January 6, 2020, the net assets of
discontinued operations in the consolidated balance sheets, including Herbal Wine Co. and Wine Co. and reconciliation of loss on
sale of discontinued operations are as follows:
|
|
|
January 6,
2020
|
|
|
CURRENT ASSETS:
|
|
|
|
|
Cash
|
|
$
|
389,569
|
|
|
Accounts receivable, net
|
|
|
318,895
|
|
|
Inventories
|
|
|
2,048,320
|
|
|
Advances to suppliers
|
|
|
21,674
|
|
|
Other current assets
|
|
|
594,880
|
|
|
Total current assets
|
|
|
3,373,338
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
4,421,786
|
|
|
Intangible assets, net
|
|
|
2,858,308
|
|
|
Goodwill
|
|
|
1,972,004
|
|
|
Total other assets
|
|
|
9,252,098
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,625,436
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,718
|
|
|
Advance from customers
|
|
|
1,108,430
|
|
|
Other payables and accrued liabilities
|
|
|
24,025
|
|
|
Income taxes payable
|
|
|
224,584
|
|
|
Total current liabilities
|
|
|
1,366,757
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,366,757
|
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
11,258,679
|
|
|
Noncontrolling interests
|
|
|
(1,149,908
|
)
|
|
Total consideration
|
|
|
(9,675,755
|
)
|
|
Exchange rate effect
|
|
|
21,051
|
|
|
Total loss on sale of discontinued operations
|
|
$
|
454,067
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Note 5 – Accounts receivable,
net
Accounts receivable, net, consist of the
following:
|
|
|
January 31, 2020
|
|
|
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
3,699,624
|
|
|
$
|
6,096,212
|
|
|
Less: allowance for doubtful accounts
|
|
|
(2,065,179
|
)
|
|
|
(1,695,469
|
)
|
|
Accounts receivable, net
|
|
|
1,634,445
|
|
|
|
4,400,743
|
|
|
Less: accounts receivable – discontinued operations
|
|
|
|
|
|
|
(471,889
|
)
|
|
Accounts receivable, net – continuing operations
|
|
$
|
1,634,445
|
|
|
$
|
3,928,854
|
|
Movement of allowance for doubtful accounts
is as follows:
|
|
|
Six Months Ended
January 31, 2020
|
|
|
Year Ended
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,695,469
|
|
|
$
|
1,374,155
|
|
|
Provision for doubtful accounts
|
|
|
395,082
|
|
|
|
422,684
|
|
|
Wrote off
|
|
|
|
|
|
|
(118,684
|
)
|
|
Allowance acquired from acquisition
|
|
|
|
|
|
|
32,478
|
|
|
Exchange rate effect
|
|
|
(25,372
|
)
|
|
|
(15,164
|
)
|
|
Ending balance
|
|
|
2,065,179
|
|
|
|
1,695,469
|
|
|
Less: balance – discontinued operations
|
|
|
|
|
|
|
(32,242
|
)
|
|
Ending balance – continuing operations
|
|
$
|
2,065,179
|
|
|
$
|
1,663,227
|
|
Note 6 – Inventories, net
Inventories, net, consist of the following:
|
|
|
January 31, 2020
|
|
|
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Raw materials and parts
|
|
$
|
1,199,696
|
|
|
$
|
1,607,472
|
|
|
Work in progress
|
|
|
222,236
|
|
|
|
258,634
|
|
|
Semi-finished goods
|
|
|
|
|
|
|
392,772
|
|
|
Finished goods
|
|
|
6,480,784
|
|
|
|
6,420,298
|
|
|
Total
|
|
|
7,902,716
|
|
|
|
8,679,176
|
|
|
Less: allowance for inventory reserve
|
|
|
(1,753,375
|
)
|
|
|
(54,421
|
)
|
|
Inventories, net
|
|
|
6,149,341
|
|
|
|
8,624,755
|
|
|
Less: inventories – discontinued operations
|
|
|
|
|
|
|
(1,785,176
|
)
|
|
Inventories, net – continuing operations
|
|
$
|
6,149,341
|
|
|
$
|
6,839,579
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
For the three months ended January 31,
2020 and 2019, a provision for inventory reserve of $231,890 and $0, respectively, were recorded, and reflected as cost of sales
on the accompanying statement of operations and comprehensive (loss) income.
For the six months ended January 31, 2020
and 2019, a provision for inventory reserve of $1,666,439 and $0, respectively, were recorded, and reflected as cost of sales on
the accompanying statement of operations and comprehensive (loss) income.
Note 7 – Property, plant and equipment,
net
Property, plant and equipment consist of
the following:
|
|
|
January 31, 2020
|
|
|
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Plant and buildings
|
|
$
|
7,816,380
|
|
|
$
|
11,773,196
|
|
|
Machinery equipment
|
|
|
3,526,983
|
|
|
|
9,040,901
|
|
|
Computer and office equipment
|
|
|
932,863
|
|
|
|
668,741
|
|
|
Vehicles
|
|
|
338,864
|
|
|
|
468,486
|
|
|
Plant improvement
|
|
|
1,494,272
|
|
|
|
1,146,692
|
|
|
Construction in progress
|
|
|
787,165
|
|
|
|
1,650,429
|
|
|
Subtotal
|
|
|
14,896,527
|
|
|
|
24,748,445
|
|
|
Less: accumulated depreciation
|
|
|
(3,089,351
|
)
|
|
|
(5,098,140
|
)
|
|
Property, plant and equipment, net
|
|
|
11,807,176
|
|
|
|
19,650,305
|
|
|
Less: property, plant and equipment – discontinued operations
|
|
|
|
|
|
|
(4,588,449
|
)
|
|
Property, plant and equipment, net – continuing operations
|
|
$
|
11,807,176
|
|
|
$
|
15,061,856
|
|
Depreciation expenses from continuing operations
for the three months ended January 31, 2020 and 2019 were $302,313 and $285,201, respectively. For the three months ended January
31, 2020 and 2019, depreciation from continuing operations included in cost of sales were $114,422 and $175,729 respectively. For
the three months ended January 31, 2020 and 2019, depreciation from continuing operations included in selling, general and administrative
expenses was $187,891 and $109,472, respectively.
Depreciation expenses from continuing operations
for the six months ended January 31, 2020 and 2019 were $584,523 and $501,307, respectively. For the six months ended January 31,
2020 and 2019, depreciation from continuing operations included in cost of sales were $265,343 and $292,618 respectively. For the
six months ended January 31, 2020 and 2019, depreciation from continuing operations included in selling, general and administrative
expenses was $319,180 and $208,689, respectively.
Depreciation expenses from discontinued
operations for the three months ended January 31, 2020 and 2019 were $44,760 and $39,820, respectively. For the three months ended
January 31, 2020 and 2019, depreciation from discontinued operations included in cost of sales were $44,760 and $34,935, respectively.
For the three months ended January 31, 2020 and 2019, depreciation expenses from discontinued operations included in general and
administrative expenses was $0 and $4,885, respectively.
Depreciation expenses from discontinued
operations for the six months ended January 31, 2020 and 2019 was $110,194 and $39,820, respectively. For the six months ended
January 31, 2020 and 2019, depreciation from discontinued operations included in cost of sales were $90,931 and $34,935, respectively.
For the six months ended January 31, 2020, depreciation expenses from discontinued operations included in general and administrative
expenses was $19,263 and $4,885, respectively.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Construction-in-progress consist of the
following as of January 31, 2020:
|
Construction-in-progress description
|
|
Value
|
|
|
Estimated
Completion Date
|
|
Estimated Additional Cost to Complete
|
|
|
Synthetic fuel raw materials production line
|
|
$
|
535,192
|
|
|
April
2020*
|
|
$
|
2,178
|
|
|
Automobile exhaust cleaner construction project
|
|
|
244,643
|
|
|
February 2020*
|
|
|
|
|
|
Fire safety equipment installation
|
|
|
7,330
|
|
|
March 2020*
|
|
|
|
|
|
Total construction-in-progress – continuing operations
|
|
$
|
787,165
|
|
|
|
|
$
|
2,178
|
|
|
|
*
|
Completed in February 2020 to April 2020.
|
Note 8 – Intangible assets, net
Intangible assets, net, consist of the
following:
|
|
|
January 31,
2020
|
|
|
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
4,537,139
|
|
|
$
|
7,227,670
|
|
|
Technology know-hows
|
|
|
1,841,359
|
|
|
|
1,812,147
|
|
|
Patents, licenses and certifications
|
|
|
1,248,621
|
|
|
|
2,408,430
|
|
|
Software
|
|
|
2,065
|
|
|
|
7,451
|
|
|
Less: accumulated amortization
|
|
|
(754,280
|
)
|
|
|
(715,376
|
)
|
|
Intangible assets, net
|
|
|
6,874,904
|
|
|
|
10,740,322
|
|
|
Less: intangible assets – discontinued operations
|
|
|
|
|
|
|
(2,950,343
|
)
|
|
Intangible assets, net – continuing operations
|
|
$
|
6,874,904
|
|
|
$
|
7,789,979
|
|
Amortization expenses from continuing operations
for the three months ended January 31, 2020 and 2019 amounted to $139,556 and $209,000, respectively. Amortization expenses from
continuing operations for the six months ended January 31, 2020 and 2019 amounted to $277,326 and $373,948, respectively.
Amortization expenses from discontinued
operations for the six months ended January 31, 2020 and 2019 amounted to $21,242 and $21,954, respectively. Amortization expenses
from discontinued operations for the six months ended January 31, 2020 and 2019 amounted to $52,737 and $21,954, respectively.
Based on the finite-lived intangible assets
as of January 31, 2020, the expected amortization expenses from continuing operations are estimated as follows:
|
Twelve Months Ending January 31,
|
|
Estimated
Amortization Expense
|
|
|
|
|
|
|
|
2020
|
|
$
|
480,427
|
|
|
2021
|
|
|
479,394
|
|
|
2022
|
|
|
479,394
|
|
|
2023
|
|
|
479,394
|
|
|
2024
|
|
|
476,883
|
|
|
Thereafter
|
|
|
4,479,412
|
|
|
Total
|
|
|
6,874,904
|
|
|
Less: intangible assets – discontinued operations
|
|
|
|
|
|
Total intangible assets, net – continuing operations
|
|
$
|
6,874,904
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Note 9 – Goodwill
The changes in the carrying amount of goodwill
by reportable segment are as follows:
|
|
|
Hubei Jinli
|
|
|
Tianjin Jiabaili
|
|
|
Wine Co.
and Herbal
Wine Co.
|
|
|
Total
|
|
|
Balance as of July 31, 2018
|
|
$
|
3,793,245
|
|
|
$
|
339,898
|
|
|
$
|
-
|
|
|
$
|
4,133,143
|
|
|
Goodwill acquired through acquisitions
|
|
|
|
|
|
|
|
|
|
|
1,976,878
|
|
|
|
1,976,878
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
(339,221
|
)
|
|
|
|
|
|
|
(339,221
|
)
|
|
Foreign currency translation adjustment
|
|
|
(35,100
|
)
|
|
|
(677
|
)
|
|
|
21,509
|
|
|
|
(14,268
|
)
|
|
Balance as of July 31, 2019
|
|
|
3,758,145
|
|
|
|
|
|
|
|
1,998,387
|
|
|
|
5,756,532
|
|
|
Disposal
|
|
|
|
|
|
|
|
|
|
|
(1,998,387
|
)
|
|
|
(1,998,387
|
)
|
|
Foreign currency translation adjustment
|
|
|
(1,909
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,909
|
)
|
|
Balance as of January 31, 2020
|
|
|
3,756,236
|
|
|
|
|
|
|
|
|
|
|
|
3,756,236
|
|
|
Less: goodwill – discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill – continuing operations
|
|
$
|
3,756,236
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,756,236
|
|
Note 10 – Leases
The Company determines if a contract contains
a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases
for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the
evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal
option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in
an economic penalty. All of the Company’s real estate leases are classified as operating leases.
The Company has several production plant
and equipment lease agreements, and factory and dormitory lease agreements with lease terms ranging from two to seven years. Upon
adoption of ASU 2016-02, the Company recognized approximately $2.8 million right of use (“ROU”) assets and approximately
$2.2 million lease liabilities based on the present value of the future minimum rental payments of leases, using incremental borrowing
rate of 4.75% and 4.90% based on duration of lease terms. The weighted average remaining lease term is 2.82 years.
The Company’s lease agreements do
not contain any material residual value guarantees or material restrictive covenants. The leases generally do not contain options
to extend at the time of expiration.
For the three months ended January 31,
2020 and 2019, rent expense amounted to approximately $352,000 and $303,587, respectively. For the six months ended January 31,
2020 and 2019, rent expense amounted to approximately $679,000 and $461,605, respectively.
The maturity of the Company’s lease
obligations for the next five years and thereafter is presented below:
|
Twelve Months Ending January 31,
|
|
|
Operating Lease Amount
|
|
|
|
|
|
|
|
|
2021
|
|
|
$
|
926,297
|
|
|
2022
|
|
|
|
459,531
|
|
|
2023
|
|
|
|
408,572
|
|
|
2024
|
|
|
|
436
|
|
|
2025
|
|
|
|
436
|
|
|
Thereafter
|
|
|
|
435
|
|
|
Total lease payments
|
|
|
|
1,795,707
|
|
|
Less: Interest
|
|
|
|
(108,397
|
)
|
|
Present value of lease liabilities
|
|
|
$
|
1,687,310
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Note 11 – Related party balances
and transactions
Leases with related parties
Sanhe Xiangtian leases its principal office,
factory and dormitory from LuckSky Holding (Group) Co. Ltd. (“LuckSky Group”) in Sanhe City, Hebei Province, PRC. LuckSky
Group is owned by Zhou Deng Rong, the Company’s former Chief Executive Officer, and Zhou Jian, the Company’s Chairman. The space
in the office, factory and dormitory being leased are 1,296, 5,160 and 1,200 square meters, respectively. The office and factory
space are leased for a rent of $99,293 (RMB 697,248) per year and the dormitory is leased for a rent of $18,456 (RMB 129,600) per
year. The leases expire on July 31, 2024 and are subject to renewal with two-month advance written notice. This lease was terminated
in April 2019. For the three months ended January 31, 2020 and 2019, rent expense for the lease with Lucksky Group was $0 and $30,078,
respectively. For the six months ended January 31, 2020 and 2019, rent expense for the lease with Lucksky Group was $0 and $60,132,
respectively.
In June 2018, Sanhe Xiangtian leased another
office in Sanhe City from Sanhe Dong Yi Glass Machine Company Ltd (“Sanhe Dong Yi”) which is owned by Zhou Deng Rong
with the lease term expired on June 14, 2019 for a rent of approximately $7,000 (RMB 48,000) per year. Sanhe Xiangtian renewed
such lease under the same terms from June 15, 2019 to June 14, 2020. For the three months ended January 31, 2020 and 2019, rent
expense for this lease with Sanhe Dong Yi was $1,709 and $1,746 respectively. For the six months ended January 31, 2020 and 2019,
rent expense for this lease with Sanhe Dong Yi was $3,418 and $3,491 respectively.
Related party balances
|
|
a.
|
Other receivables – related parties:
|
|
Name of Related Party
|
|
Relationship
|
|
Nature
|
|
January 31,
2020
|
|
|
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lei Su
|
|
Legal representative of Tianjin Jiabaili
|
|
Employee advances
|
|
$
|
|
|
|
$
|
2,905
|
|
|
Tianyu Ma
|
|
General manager of Tianjin Jiabaili
|
|
Employee advances
|
|
|
10,389
|
|
|
|
|
|
|
Kai Li
|
|
Legal representative of Sanhe
|
|
Loan receivable
|
|
|
654,641
|
*
|
|
|
|
|
|
Deng Hua Zhou
|
|
Chief Executive Officer
|
|
Employee advances
|
|
|
3,630
|
|
|
|
3,632
|
|
|
Total
|
|
|
|
|
|
$
|
668,660
|
|
|
$
|
6,537
|
|
|
|
*
|
The loan is due on January 13, 2021 with an annual interest
rate of 4.75%.
|
|
|
b.
|
Accounts payable – related parties:
|
|
Name of Related Party
|
|
Relationship
|
|
Nature
|
|
January 31,
2020
|
|
|
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xianning Baizhuang Tea Industry Co., Ltd.
|
|
Bin Zhou is the CEO of the company
|
|
Purchase of materials
|
|
$
|
|
|
|
$
|
9,554
|
|
|
Total
|
|
|
|
|
|
$
|
|
|
|
$
|
9,554
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
|
|
c.
|
Other payables – related parties and director:
|
|
Name of Related Party
|
|
Relationship
|
|
Nature
|
|
January 31,
2020
|
|
|
July 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luck Sky International Investment Holdings Ltd.
|
|
Owned by Zhou Deng Rong, former Chief Executive Officer and director
|
|
Payment for U.S. professional fee
|
|
$
|
656,941
|
|
|
$
|
593,941
|
|
|
Lucksky Group
|
|
Owned by Zhou Deng Rong, former Chief Executive Officer and director, and Zhou Jian, Chairman
|
|
Lease payable
|
|
|
660,268
|
|
|
|
600,549
|
|
|
Sanhe Dong Yi
|
|
Owned by Zhou Deng Rong, former Chief Executive Officer and director
|
|
Lease payable
|
|
|
4,356
|
|
|
|
872
|
|
|
Hubei Henghao Real Estate Development Co., Ltd.
|
|
Bin Zhou, son of Zhou Deng Hua, is the executive director and general manager
|
|
Interest payable
|
|
|
488,207
|
|
|
|
488,455
|
|
|
Zhou Deng Rong
|
|
Former Chief Executive Officer and director
|
|
Payment for U.S. professional fee
|
|
|
2,748,260
|
|
|
|
2,748,259
|
|
|
Jian Zhou
|
|
Chairman
|
|
Advances for operational purpose
|
|
|
2,905,760
|
|
|
|
1,900,164
|
|
|
Zhimin Feng
|
|
Legal representative of Jingshan Sanhe
|
|
Advances for operational purpose
|
|
|
3,220
|
|
|
|
3,222
|
|
|
Heping Zhang
|
|
General Manager of Hubei Jinli
|
|
Payment for acquisition of Hubei Jinli
|
|
|
44,258
|
|
|
|
39,923
|
|
|
Total
|
|
|
|
|
|
$
|
7,511,270
|
|
|
$
|
6,375,385
|
|
|
|
d.
|
Investment payables – related parties (See Note 3)
|
Note 12 – Significant customer,
former related party
Prior to April 10, 2014, Zhou Deng Rong,
the Company’s former Chief Executive Officer and director, owned 70% equity interest, and Zhou Jian, the Company’s Chairman, owned
the remaining 30% equity interest of Xianning Lucksky Aerodynamic Electricity (“Xianning Lucksky”). Through April 10,
2014, Xianning Lucksky’s primary asset was a land use right for approximately 70 acres of land located in Xianning, Hubei Province,
PRC. On April 8, 2014, Zhou Deng Rong sold his 70% equity interest in Xianning Lucksky to an individual, and Zhou Jian sold his
30% equity interest in Xianning Lucksky to another individual. The two individuals are unrelated to Zhou Deng Rong or Jian Zhou,
or any member of management of the Company, or any of its consolidated subsidiaries or VIE. As such, as of April 8, 2014, the Company,
or any of its shareholders, had no relationship to Xianning Lucksky.
During the three and six months ended January
31, 2020 and 2019, the Company entered into a series of sales contracts with Xianning Lucksky. These contracts represented approximately
$9,000 and $813,315 of the Company’s revenue from continuing operations for the three months ended January 31, 2020 and 2019, respectively.
These contracts represented approximately $11,000 and $1,824,694 of the Company’s revenue from continuing operations for the six
months ended January 31, 2020 and 2019, respectively.
On July 27, 2016, Xianning Xiangtian entered
into a rental agreement with Xianning Lucksky to lease 4,628 square meters’ space in a factory in Xianning, Hubei Province, PRC.
The space is leased for a rent of $83,132 (RMB 555,360) per year. The lease was scheduled to expire on July 31, 2018 but the Company
terminated the lease early in February 2018 when the Company through Xiangtian Zhongdian signed another lease agreement which expired
on February 5, 2019 with a rent of approximately $25,000 (RMB 168,922) per year. Xiangtian Zhongdian renewed such lease under the
same terms from February 6, 2019 to February 5, 2021. Rent expense related to these leases were $6,357 and $6,250 for three months
ended January 31, 2020 and 2019, respectively. Rent expense related to these leases were $12,028 and $12,500 for six months ended
January 31, 2020 and 2019, respectively.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
On February 1, 2018, Xianning Xiangtian
entered into a lease with Xianning Lucksky for 4,628 square meters in the factory in Xianning, Hubei province. The factory space
is leased for a rent of approximately $25,000 (RMB 168,922) per year from February 1, 2018 to July 31, 2020 and is subject to renewal
with a one-month advance written notice. Rent expense for this lease amounted to $6,042 and $6,250 for the three months ended January
31, 2020 and 2019, respectively. Rent expense for this lease amounted to $12,028 and $12,500 for the six months ended January 31,
2020 and 2019, respectively.
On July 27, 2018, Xianning Xiangtian entered
into a lease with Xianning Lucksky for a space of 3,128 square meters in the factory in Xianning, Hubei province. The factory space
is leased for a rent of approximately $17,000 (RMB 114,172) per year from August 1, 2018 to July 31, 2020 and is subject to renewal
with a one-month advance written notice. Rent expense for this lease amounted to $4,083 and $4,250 for the three months ended January
31, 2020 and 2019, respectively. Rent expense for this lease amounted to $8,129 and $8,500 for the six months ended January 31,
2020 and 2019, respectively.
Note 13 – Employee benefits government
plan
The Company participates in a government-mandated
multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided
to employees. PRC labor regulations require the Company to pay to the local labor bureau a monthly contribution calculated at a
stated contribution rate based on the basic monthly 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. As of January
31, 2020 and July 31, 2019, the outstanding amount due to the local labor bureau was $212,465 and $199,500, respectively, and is
included in Other Payables and Accrued Liabilities on the accompanying unaudited condensed consolidated balance sheets.
Note 14 – Income taxes
Income tax
United States
Under the provisions of the “Tax
Cuts and Jobs Act” (the “Act”), the U.S. corporate tax rate is enacted at 21%.
British Virgin Islands
Xiangtian BVI is incorporated in the British
Virgin Islands and is not subject to tax on income or capital gains under current British Virgin Islands law. In addition, upon
payments of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be imposed.
Hong Kong
Xiangtian HK is incorporated in Hong Kong
and is subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance
with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company did not make any provisions for Hong
Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax law,
Xiangtian HK is exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance
of dividends.
PRC
The Company’s PRC subsidiaries and
VIEs and their controlled entities are governed by the income tax laws of the PRC and the income tax provision in respect to operations
in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations
and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC, Chinese enterprises are subject to income tax
at a rate of 25% after appropriate tax adjustments.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Significant components of the income tax
(benefit) expense consisted of the following for the three and six months ended January 31:
|
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Current
|
|
$
|
(305,550
|
)
|
|
$
|
1,032,405
|
|
|
$
|
(313,913
|
)
|
|
$
|
1,575,918
|
|
|
Deferred
|
|
|
|
|
|
|
17,369
|
|
|
|
|
|
|
|
|
|
|
(Income tax benefit) provision for income tax
|
|
|
(305,550
|
)
|
|
|
1,049,774
|
|
|
|
(313,913
|
)
|
|
|
1,575,918
|
|
|
Less: (Income tax benefit) provision for income tax – discontinued operations
|
|
|
(42,872
|
)
|
|
|
90,682
|
|
|
|
(97,431
|
)
|
|
|
90,682
|
|
|
(Income tax benefit) provision for income tax – continuing operations
|
|
$
|
(262,678
|
)
|
|
$
|
959,092
|
|
|
$
|
(216,482
|
)
|
|
$
|
1,485,236
|
|
Significant components of the continuing
operations of the Company’s deferred tax assets as of January 31, 2020 and July 31, 2019 are approximately as follows:
|
|
|
January 31,
2020
|
|
|
July
31,
2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
2,816,300
|
|
|
$
|
1,967,400
|
|
|
Accounts receivable allowance
|
|
|
516,300
|
|
|
|
415,800
|
|
|
Inventory allowance
|
|
|
438,300
|
|
|
|
13,600
|
|
|
Deposit for investment allowance
|
|
|
79,500
|
|
|
|
79,500
|
|
|
Accrued liabilities
|
|
|
72,000
|
|
|
|
72,000
|
|
|
Warranty and other
|
|
|
16,300
|
|
|
|
16,300
|
|
|
Deferred tax assets before valuation allowance
|
|
|
3,938,700
|
|
|
|
2,564,600
|
|
|
Less: valuation allowance
|
|
|
(3,938,700
|
)
|
|
|
(2,564,600
|
)
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
As of January 31, 2020, the Company had
U.S. federal Net Operating Losses (“NOLs”) of approximately $5,667,000 that expire beginning in 2029 to 2038 with deferred
tax assets of approximately $1,190,000. As of January 31, 2020, the Company had approximately $30,000 of NOLs related to its Hong
Kong holding companies that can be carried forward indefinitely with deferred tax assets of approximately $5,000. As of January
31, 2020, the Company had approximately $6,485,000 of NOLs related to its PRC subsidiaries and VIEs that expire in years 2020 through
2023 with deferred tax assets of approximately $1,621,000. In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon future generation for taxable income during the periods in which temporary differences
representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. After consideration of all the information
available, management believes that significant uncertainty exists with respect to future realization of the deferred tax assets
and has therefore established a full valuation allowance as of January 31, 2020.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Significant components of the discontinued
operations of the Company’s deferred tax assets as of January 31, 2020 and July 31, 2019 are approximately as follows:
|
|
|
January 31,
2020
|
|
|
July
31,
2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Accounts receivable allowance
|
|
$
|
|
|
|
$
|
8,100
|
|
|
Less: valuation allowance
|
|
|
|
|
|
|
(8,100
|
)
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
The Company evaluated the provisions of
ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC
740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the company
has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax
return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.”
A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized
tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position
that was not recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs related to
the unrecognized tax benefits are required to be calculated and would be classified as “Other Income (Expense)” in
the statement of operations. Penalties would be recognized as a component of “General and Administrative Expenses”
in the statement of operations. The Company stayed current with its July 31, 2019 tax return filing with the extended due date
of May 15, 2020, a six month extension from November 15, 2019. No interest or penalty on unpaid tax was recorded during both the
three and six months ended January 31, 2020 and 2019. As of January 31, 2020 and July 31, 2019, no liability for unrecognized tax
benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the
next quarter.
Note 15 – Commitments and contingencies
Contingencies
Contract dispute – Sanhe Xiangtian
vs. Shandong Taidai
Sanhe Xiangtian is involved in a litigation
with Shandong Taidai Photovoltaic Technology Co., Ltd. (“Shandong Taidai”) for contractual dispute. Sanhe Xiangtian
filed a complaint on January 24, 2018 with the Sanhe People’s Court and claimed damages of RMB 1,000,000 (approximately $149,245)
caused by Shandong Taidai as it provided the unqualified construction project. On June 5, 2019, the court ruled that Shandong Taidai
is required to pay for the damages of Sanhe Xiangtian in the amount RMB 15,826,000 (approximately $2.3 million) and other associated
fees of RMB 23,000 (approximately $3,000). As of the date of this report, the Company has not received any appeal notice from Shandong
Taidai. The Company does not believe the litigation will have significant impact on its unaudited condensed consolidated financial
statements as the Company will record the gain contingency upon receiving the settlement payments.
Shandong Taidai filed a lawsuit against
Sanhe Xiangtian with Dongying City Intermediate People’s Court of Shandong Province on November 29, 2018 regarding the same
project and claimed unpaid work of RMB 4,089,150 (approximately $610,284) and liquidated damages of RMB 2,025,139 (approximately
$302,242). On December 19, 2018, Sanhe Xiangtian submitted an application objecting to the jurisdiction of Dongying City Intermediate
People’s Court of but the application was rejected. On December 23, 2019, the Dongying City Intermediate People’s Court
ruled in the favor of Shandong Taida of RMB 4,089,150 (approximately $610,284) and liquidated damages and legal fees of RMB 848,655
(approximately $126,657). On January 23, 2019, Sanhe Xiangtian appealed the ruling in the jurisdiction of Dongying City Intermediate
People’s Court. The Company does not believe the litigation will have a material impact on its current operations and financial
statements as the accounts payable amount has been properly accrued.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Acquisition payment dispute –
Sanhe Xiangtian vs. Wehhan Han and Guifen Wang
On March 19, 2019, Wenhe Han and Guifen
Wang, former shareholders of Tianjin Jiabaili (collectively known as the “Plaintiffs”), filed a lawsuit against Xianning
Xiangtian in People’s Court of Jizhou District, Tianjin City for a dispute over the equity transfer of Tianjin Jiabaili between
Plaintiffs and Xianning Xiangtian. The Plaintiffs claimed damage amounting to RMB 2,000,000 (approximately $0.3 million) for breach
of contract and demanded immediate payment on the unpaid equity transfer balance of RMB 1,720,000 (approximately $0.3 million).
A hearing was held on April 23, 2019 and the court approved the request of the Plaintiffs to freeze Xianning Xiangtian’s
assets worth of RMB 3,720,000 (approximately $0.6 million) before a judgement is rendered. As of the date of this report, the freeze
order has not been enforced and the Company has not received the list of assets subject to this order. Management currently cannot
estimate the outcome of the litigation.
On April 15, 2019, Xianning Xiangtian filed
a lawsuit against Wenhan Han and Guifen Wang, former shareholders of Tianjin Jiabaili, for the same dispute over the equity transfer
of Tianjin Jiabaili in the People’s Court of Jizhou District, Tianjin City. Xianning Xiangtian claimed damage amounting to
RMB 2,000,000 (approximately $0.3 million) and demanded immediate refund of RMB 5,080,000 (approximately $0.8 million) plus six
percent (6%) annual interest starting from April 15, 2019 due to misrepresentation of the production facility of Tianjin Jiabaili
from the former shareholders of Tianjin Jiabiali. A hearing was held June 11, 2019 and the court approved the request of the Company
to freeze Wenhan Han and Guifen Wang’s personal assets worth of RMB 7,080,000 (approximately $1.0 million). On October 8,
2019, the People’s Court of Jizhou District, Tianjin City reached a verdict and rejected the Xianning Xiangtian’s claim.
Xianning Xiangtian filed an appeal and the case is under review by the People’s Court of Jizhou District, Tianjin City. Management
currently cannot estimate the outcome of the litigation.
Other legal matters
From time to time, the Company is a party
to various legal actions arising in the ordinary course of business. The majority of these claims and proceedings related to or
arise from, being guarantor of a third party and employment contract dispute. The Company accrues costs related to these matters
when they become probable and as a result the amount of loss can be reasonably estimated. In determining whether a loss from a
claim is probable, and if it is possible to estimate the potential litigation losses, in those situations, the Company discloses
an estimate of the probable losses or a range of possible losses, if such estimates can be made.
As of January 31, 2020, the type of complaints
and disputes and their potential claims that the Company does not accrue costs for potential litigation losses as the probability
of repaying these claims are remote. These potential claims are summarized as follows:
Labor dispute – Qiao Lijuan vs.
Tianjin JiaBaiLi
Regarding the labor dispute lawsuit between
Qiao Lijuan and Tianjin JiaBaiLi Petroleum Products Co., Ltd. (Hereinafter referred to as “JiaBaiLi”), on July 23,
2019, Qiao Lijuan sued JiaBaiLi (Defendant A) and the 1st Sales Company of JiaBaiLi (Defendant B) before Jizhou Court claiming
Defendant B to pay RMB 7,000 (approximately $1,000) for salary, Defendant A to bear the joint and several liability and both Defendant
A and B to bear the litigation fees. On October 23, 2019, Jizhou Court reached a verdict that Defendant A must pay Qiao Lijuan
salary of RMB 11,000 (approximately $1,600). The Company does not believe the litigation will have a material impact on its current
operations and financial statements.
Negotiable instruments dispute –
Kelin Environmental Protection Equipment, Inc.
Regarding the negotiable instruments dispute
of Kelin Environmental Protection Equipment, Inc. (hereinafter referred to as “Kelin”), as Kelin had not paid the draft
due and expired, it was pursued by the negotiable instruments holders. Xiangtian Zhongdian, as the one of the endorsers, are involved
in 14 lawsuits currently and the amount is RMB 4.0 million (approximately $0.6 million). Xiangtian Zhongdian may be jointly and
severally liable in the above cases, but it may recourse to the former endorsers for compensation of the unpaid negotiable instruments.
|
Dispute matter
|
|
Claim amount
|
|
|
1) Negotiable instruments
|
|
$
|
595,273
|
|
|
2) Labor
|
|
|
1,016
|
|
|
Total
|
|
$
|
596,289
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Shimen Government Inquiry
On June 10, 2019, Xianning Xiangtian received
an inquiry from Shimen County Market Supervision Bureau (the “Bureau”) with respect to a formal investigation it initiated
against Xianning Xiangtian on May 10, 2019. The Bureau stated it is investigating that Xianning Xiangtian was selling its
shares to the public in anticipation of a Nasdaq listing in the near future as part of a multi-level marketing scheme. On
June 14, 2019, Xianning Xiangtian issued a Letter of Statement in response to the inquiry and stated Xianning Xiangtian never
issued any shares to the unspecified public since its incorporation and that all of the Company’s shares are registered with the
Company’s Transfer Agent. Following Xianning Xiangtian’s delivery of its Letter of Statement, it has not received any further
inquiries from the Bureau. The Company believes that these allegations are false and without merit, and intends to vigorously defend
against them.
Variable interest entity structure
In the opinion of management, (i) the corporate
structure of the Company is in compliance with existing PRC laws and regulations; (ii) the New VIE Agreements are valid and binding,
and do not result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of Xiangtian
Shenzhen and the VIE are in compliance with existing PRC laws and regulations in all material respects.
However, there are substantial uncertainties
regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be
assured that PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion of its management. If
the current corporate structure of the Company or the New VIE Agreements is found to be in violation of any existing or future
PRC laws and regulations, the Company may be required to restructure its corporate structure and operations in the PRC to comply
with changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company’s
current corporate structure or the New VIE Agreements is remote based on current facts and circumstances.
Note 16 – Concentrations
Customer concentration risk
For the three months ended January 31,
2020, three customers accounted for 34.0%, 32.0% and 28.1% of the Company’s total revenues. For the three months ended January
31, 2019, two customers accounted for 47.4% and 17.1% of the Company’s total revenues.
For the six months ended January 31, 2020,
four customers accounted for 16.5%, 15.5%, 13.6% and 13.3% of the Company’s total revenues. For the six months ended January
31, 2019, two customers accounted for 45.4% and 17.6% of the Company’s total revenues.
As of January 31, 2020, two customers accounted
for 26.1% and 22.2% of the total balance of accounts receivable, respectively. As of July 31, 2019, four customers accounted for
20.8%, 17.7%, 17.3% and 12.9% of the total balance of accounts receivable, respectively.
Vendor concentration risk
For the three months ended January 31,
2020, one vendor accounted for 60.2% of the Company’s total purchases. For the three months ended January 31, 2019, two vendors
accounted for 35.4% and 11.9% of the Company’s total purchases.
For the six months ended January 31, 2020,
one vendor accounted for 19.0% of the Company’s total purchases. For the six months ended January 31, 2019, two vendors accounted
for 38.4% and 17.8% of the Company’s total purchases.
As of January 31, 2020, four vendors accounted
for 45.4%, 12.5%, 11.5% and 10.4% of the total balance of accounts payable, respectively. As of July 31, 2019, three vendors accounted
for 49.8%, 13.7% and 11.4% of the total balance of accounts payable, respectively.
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
Note 17 – Segment reporting
The Company evaluates performance and determines
resource allocations based on a number of factors, the primary measurement being income from operations of the Company’s
nine reportable divisions in the PRC: Sanhe Xiangtian, Xianning Xiangtian, Xiangtian Zhongdian, Jingshan Sanhe, Hubei Jinli, Tianjin
Jiabaili, Xiangtian Trade, Wine Co., and Herbal Wine Co. Tianjin Jiabaili did not have any operations as of January 31, 2020.
These reportable divisions are consistent
with the way the Company manages its business and each division operates under separate management groups and produces discrete
financial information. The accounting principles applied at the operating division level in determining income (loss) from operations
is generally the same as those applied at the unaudited condensed consolidated financial statement level.
The following represents results of division
operations for the three and six months ended January 31, 2020 and 2019:
|
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenues (sales returns):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanhe Xiangtian
|
|
$
|
|
|
|
$
|
976,074
|
|
|
$
|
1,523
|
|
|
$
|
2,896,951
|
|
|
Xianning Xiangtian
|
|
|
1,017,012
|
|
|
|
3,333,568
|
|
|
|
1,079,813
|
|
|
|
7,567,198
|
|
|
Jingshan Sanhe
|
|
|
70,503
|
|
|
|
3,753,465
|
|
|
|
110,111
|
|
|
|
7,329,793
|
|
|
Xiangtian Zhongdian
|
|
|
145,860
|
|
|
|
11,155,044
|
|
|
|
1,843,209
|
|
|
|
20,256,912
|
|
|
Hubei Jinli
|
|
|
1,738,292
|
|
|
|
2,188,559
|
|
|
|
3,102,369
|
|
|
|
3,344,294
|
|
|
Xiangtian Trade
|
|
|
|
|
|
|
5,340
|
|
|
|
1,478
|
|
|
|
5,340
|
|
|
Wine Co.
|
|
|
3,446
|
|
|
|
399,861
|
|
|
|
6,598
|
|
|
|
399,861
|
|
|
Herbal Wine Co.
|
|
|
(203,491
|
)
|
|
|
101,580
|
|
|
|
(132,838
|
)
|
|
|
101,580
|
|
|
Consolidated revenues
|
|
|
2,771,622
|
|
|
|
21,913,491
|
|
|
|
6,012,263
|
|
|
|
41,901,929
|
|
|
Less: revenues – discontinued operations
|
|
|
200,045
|
|
|
|
(501,441
|
)
|
|
|
126,240
|
|
|
|
(501,441
|
)
|
|
Revenues – continuing operations
|
|
$
|
2,971,667
|
|
|
$
|
21,412,050
|
|
|
$
|
6,138,503
|
|
|
$
|
41,400,488
|
|
|
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanhe Xiangtian
|
|
$
|
|
|
|
$
|
451,887
|
|
|
$
|
1,523
|
|
|
$
|
1,159,296
|
|
|
Xianning Xiangtian
|
|
|
136,755
|
|
|
|
509,427
|
|
|
|
(812,682
|
)
|
|
|
1,363,212
|
|
|
Jingshan Sanhe
|
|
|
(50,958
|
)
|
|
|
1,785,033
|
|
|
|
(46,820
|
)
|
|
|
2,972,524
|
|
|
Xiangtian Zhongdian
|
|
|
(198,183
|
)
|
|
|
1,126,826
|
|
|
|
(645,539
|
)
|
|
|
2,035,160
|
|
|
Hubei Jinli
|
|
|
838,747
|
|
|
|
1,497,608
|
|
|
|
1,622,902
|
|
|
|
2,036,104
|
|
|
Xiangtian Trade
|
|
|
(7
|
)
|
|
|
5,339
|
|
|
|
26
|
|
|
|
5,339
|
|
|
Wine Co.
|
|
|
(12,782
|
)
|
|
|
360,060
|
|
|
|
(12,390
|
)
|
|
|
360,060
|
|
|
Herbal Wine Co.
|
|
|
(171,085
|
)
|
|
|
85,965
|
|
|
|
(111,581
|
)
|
|
|
85,965
|
|
|
Consolidated gross profit (loss)
|
|
|
542,487
|
|
|
|
5,822,145
|
|
|
|
(4,561
|
)
|
|
|
10,017,660
|
|
|
Less: gross (loss) profit – discontinued operations
|
|
|
183,867
|
|
|
|
(446,025
|
)
|
|
|
123,971
|
|
|
|
(446,025
|
)
|
|
Gross profit – continuing operations
|
|
$
|
726,354
|
|
|
$
|
5,376,120
|
|
|
$
|
119,410
|
|
|
$
|
9,571,635
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
|
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanhe Xiangtian
|
|
$
|
(2,535,150
|
)
|
|
$
|
170,074
|
|
|
$
|
(3,556,072
|
)
|
|
$
|
839,836
|
|
|
Xianning Xiangtian
|
|
|
(453,871
|
)
|
|
|
(34,949
|
)
|
|
|
(1,759,509
|
)
|
|
|
587,119
|
|
|
Jingshan Sanhe
|
|
|
(745,646
|
)
|
|
|
1,567,940
|
|
|
|
(1,458,623
|
)
|
|
|
2,580,897
|
|
|
Xiangtian Zhongdian
|
|
|
(3,238,540
|
)
|
|
|
474,060
|
|
|
|
(4,057,562
|
)
|
|
|
1,275,812
|
|
|
Hubei Jinli
|
|
|
(570,130
|
)
|
|
|
1,076,580
|
|
|
|
(277,489
|
)
|
|
|
1,184,016
|
|
|
Tianjin Jiabaili
|
|
|
(20,897
|
)
|
|
|
(120,779)
|
|
|
|
(48,745
|
)
|
|
|
(297,691)
|
|
|
Xiangtian Trade
|
|
|
(17,425
|
)
|
|
|
4,395
|
|
|
|
(30,805
|
)
|
|
|
4,395
|
|
|
Wine Co.
|
|
|
(155,239
|
)
|
|
|
300,802
|
|
|
|
(395,833
|
)
|
|
|
300,802
|
|
|
Herbal Wine Co.
|
|
|
(210,119
|
)
|
|
|
66,103
|
|
|
|
(200,011
|
)
|
|
|
66,103
|
|
|
All four holding entities
|
|
|
(270,270
|
)
|
|
|
(607,531)
|
|
|
|
(586,023
|
)
|
|
|
(1,102,963)
|
|
|
Consolidated (loss) income from operations
|
|
|
(8,217,287
|
)
|
|
|
2,896,695
|
|
|
|
(12,370,672
|
)
|
|
|
5,438,326
|
|
|
Less: income (loss) from operations – discontinued operations
|
|
|
365,358
|
|
|
|
(366,905)
|
|
|
|
595,844
|
|
|
|
(366,905)
|
|
|
(Loss) income from operations – continuing operations
|
|
$
|
(7,851,929
|
)
|
|
$
|
2,529,790
|
|
|
$
|
(11,774,828
|
)
|
|
$
|
5,071,421
|
|
|
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Net income (loss) attributable to controlling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanhe Xiangtian
|
|
$
|
(2,592,108
|
)
|
|
$
|
195,701
|
|
|
$
|
(3,565,965
|
)
|
|
$
|
743,215
|
|
|
Xianning Xiangtian
|
|
|
(1,039,170
|
)
|
|
|
(187,857)
|
|
|
|
(2,347,634
|
)
|
|
|
21,559
|
|
|
Jingshan Sanhe
|
|
|
(515,357
|
)
|
|
|
1,082,533
|
|
|
|
(1,228,046
|
)
|
|
|
1,839,889
|
|
|
Xiangtian Zhongdian
|
|
|
(2,268,115
|
)
|
|
|
199,417
|
|
|
|
(2,835,182
|
)
|
|
|
671,781
|
|
|
Hubei Jinli
|
|
|
(466,647
|
)
|
|
|
806,315
|
|
|
|
(262,514
|
)
|
|
|
869,583
|
|
|
Tianjin Jiabaili
|
|
|
(20,973
|
)
|
|
|
(119,059)
|
|
|
|
(48,725
|
)
|
|
|
(299,191)
|
|
|
Xiangtian Trade
|
|
|
(19,864
|
)
|
|
|
3,267
|
|
|
|
(30,431
|
)
|
|
|
3,267
|
|
|
Wine Co.
|
|
|
(119,913
|
)
|
|
|
194,292
|
|
|
|
(284,640
|
)
|
|
|
194,292
|
|
|
Herbal Wine Co.
|
|
|
(189,428
|
)
|
|
|
49,431
|
|
|
|
(181,987
|
)
|
|
|
49,431
|
|
|
All four holding entities
|
|
|
(268,391
|
)
|
|
|
(606,541)
|
|
|
|
(582,575
|
)
|
|
|
(1,100,560)
|
|
|
Consolidated net (loss) income attributable to controlling interest
|
|
|
(7,499,966
|
)
|
|
|
1,617,499
|
|
|
|
(11,367,699
|
)
|
|
|
2,993,266
|
|
|
Less: net (loss) income attributable to controlling interest - discontinued operations
|
|
|
763,408
|
|
|
|
(243,723)
|
|
|
|
920,694
|
|
|
|
(243,723)
|
|
|
Net (loss) income attributable to controlling interest - continuing operations
|
|
$
|
(6,736,558
|
)
|
|
$
|
1,373,776
|
|
|
$
|
(10,447,005
|
)
|
|
$
|
2,749,543
|
|
|
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Depreciation and amortization expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanhe Xiangtian
|
|
$
|
31,286
|
|
|
$
|
44,359
|
|
|
$
|
62,352
|
|
|
$
|
87,422
|
|
|
Xianning Xiangtian
|
|
|
810
|
|
|
|
137
|
|
|
|
1,380
|
|
|
|
194
|
|
|
Jingshan Sanhe
|
|
|
86,857
|
|
|
|
14,519
|
|
|
|
168,745
|
|
|
|
23,224
|
|
|
Xiangtian Zhongdian
|
|
|
69,174
|
|
|
|
70,267
|
|
|
|
137,703
|
|
|
|
145,157
|
|
|
Hubei Jinli
|
|
|
248,179
|
|
|
|
291,952
|
|
|
|
480,595
|
|
|
|
513,737
|
|
|
Tianjin Jiabaili
|
|
|
5,267
|
|
|
|
51,013
|
|
|
|
10,485
|
|
|
|
105,521
|
|
|
Xiangtian Trade
|
|
|
296
|
|
|
|
|
|
|
|
589
|
|
|
|
|
|
|
Wine Co.
|
|
|
56,027
|
|
|
|
51,656
|
|
|
|
138,165
|
|
|
|
51,656
|
|
|
Herbal Wine Co.
|
|
|
9,976
|
|
|
|
10,118
|
|
|
|
24,766
|
|
|
|
10,118
|
|
|
Consolidated depreciation and amortization expenses
|
|
|
507,872
|
|
|
|
534,021
|
|
|
|
1,024,780
|
|
|
|
937,029
|
|
|
Less: depreciation and amortization expenses - discontinued operations
|
|
|
(66,003
|
)
|
|
|
(61,774)
|
|
|
|
(162,931
|
)
|
|
|
(61,774)
|
|
|
Depreciation and amortization expenses - continuing operations
|
|
$
|
441,869
|
|
|
$
|
472,247
|
|
|
$
|
861,849
|
|
|
$
|
875,255
|
|
XT Energy Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated
Financial Statements
|
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanhe Xiangtian
|
|
$
|
|
|
|
$
|
(207)
|
|
|
$
|
|
|
|
$
|
5,834
|
|
|
Xianning Xiangtian
|
|
|
|
|
|
|
170,389
|
|
|
|
35,853
|
|
|
|
583,494
|
|
|
Hubei Jinli
|
|
|
|
|
|
|
56,171
|
|
|
|
|
|
|
|
114,253
|
|
|
Consolidated interest expense
|
|
$
|
|
|
|
$
|
226,353
|
|
|
$
|
35,853
|
|
|
$
|
703,581
|
|
|
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanhe Xiangtian
|
|
$
|
|
|
|
$
|
18
|
|
|
$
|
|
|
|
$
|
47,049
|
|
|
Xianning Xiangtian
|
|
|
2,328
|
|
|
|
570
|
|
|
|
4,668
|
|
|
|
1,835
|
|
|
Jingshan Sanhe
|
|
|
359,256
|
|
|
|
625,253
|
|
|
|
1,373,760
|
|
|
|
890,576
|
|
|
Xiangtian Zhongdian
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
8,095
|
|
|
Hubei Jinli
|
|
|
389,348
|
|
|
|
239,638
|
|
|
|
397,100
|
|
|
|
384,281
|
|
|
Tianjin Jiabaili
|
|
|
|
|
|
|
6,297
|
|
|
|
|
|
|
|
18,657
|
|
|
Wine Co.
|
|
|
(3,549
|
)
|
|
|
73,644
|
|
|
|
|
|
|
|
73,644
|
|
|
Consolidated capital expenditures
|
|
|
747,383
|
|
|
|
945,475
|
|
|
|
1,775,528
|
|
|
|
1,424,137
|
|
|
Less: capital expenditures - discontinued operations
|
|
|
3,549
|
|
|
|
(73,644)
|
|
|
|
|
|
|
|
(73,644)
|
|
|
Capital expenditures - continuing operations
|
|
$
|
750,932
|
|
|
$
|
871,831
|
|
|
$
|
1,775,528
|
|
|
$
|
1,350,493
|
|
Total assets of each division as of January
31, 2020 and July 31, 2019 consisted of the following:
|
|
|
January 31,
2020
|
|
|
July 31,
2019
|
|
|
Total assets:
|
|
|
|
|
|
|
|
Sanhe Xiangtian
|
|
$
|
1,018,555
|
|
|
$
|
4,889,875
|
|
|
Xianning Xiangtian
|
|
|
15,293,107
|
|
|
|
7,969,624
|
|
|
Jingshan Sanhe
|
|
|
8,971,226
|
|
|
|
6,969,849
|
|
|
Xiangtian Zhongdian
|
|
|
3,311,971
|
|
|
|
7,731,512
|
|
|
Hubei Jinli
|
|
|
20,821,908
|
|
|
|
21,635,194
|
|
|
Tianjin Jiabaili
|
|
|
309,482
|
|
|
|
302,518
|
|
|
Xiangtian Trade
|
|
|
569,233
|
|
|
|
483,168
|
|
|
Wine Co.
|
|
|
-
|
|
|
|
11,005,886
|
|
|
Herbal Wine Co.
|
|
|
-
|
|
|
|
2,973,064
|
|
|
All four holding entities
|
|
|
636,660
|
|
|
|
416,098
|
|
|
Consolidated assets
|
|
|
50,932,142
|
|
|
|
64,376,788
|
|
|
Less: assets - discontinued operations
|
|
|
-
|
|
|
|
(13,978,950
|
)
|
|
Total assets - continuing operations
|
|
$
|
50,932,142
|
|
|
$
|
50,397,838
|
|
Note 18 – Subsequent events
In December 2019, a novel strain of coronavirus,
or COVID-19, surfaced and it has spread rapidly to many parts of China and other parts of the world, including the United States.
The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and
elsewhere. Substantially all of the Company’s revenue is concentrated in China. Consequently, the COVID-19 outbreak may materially
adversely affect the Company’s business operations, financial condition and operating results for 2020, including but not
limited to material negative impact on the Company’s total revenues, slower collection of accounts receivables, additional
allowance for doubtful accounts, slower usage of inventories and additional allowance for inventories obsolescence. Because of
the significant uncertainties surrounding the COVID-19 outbreak, the extent of the business disruption and the related financial
impact cannot be reasonably estimated at this time.
On April 14, 2020, the
Company’s Board of Directors (the “Board”), discussed a plan to pursue the potential sale of all its
ownership interest in Jingshan Sanhe and Hubei Jinli due to the coronavirus outbreak might affect the Company’s future
business operations and desired to scale back its variety of businesses. Therefore the result of operations will be presented
as discontinued operations for Jingshan Sanhe and Hubei Jinli as of April 30, 2020 and for the three and nine months ended
April 30, 2020 unaudited condensed consolidated financial statements and thereafter until the business will be disposed. As
of January 31, 2020, the carrying value of net (deficiencies) assets of Jingshan Shanhe and Hubei Jinli are approximately
$(4.6) million and $19.5 million, respectively.
The following unaudited pro forma results of
operations presents the Company’s financial results as if the disposal of Jingshan Sanhe and Hubei Jinli had been completed
on August 1, 2019. The unaudited pro forma results do not reflect operating efficiencies or potential cost savings which may result
from the consolidation of operations. Accordingly, the unaudited pro forma financial information is not necessarily indicative
of the results of operations that the Company would have recognized had we completed the transaction on August 1, 2019. Future
results may vary significantly from the results in this pro forma information because of future events and transactions, as well
as other factors.
|
|
|
For the Three Months Ended January 31,
|
|
|
For the Six Months Ended January 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenue
|
|
$
|
1,162,872
|
|
|
$
|
15,470,026
|
|
|
$
|
2,926,023
|
|
|
$
|
30,726,401
|
|
|
Cost of revenue
|
|
|
1,224,307
|
|
|
|
13,376,547
|
|
|
|
4,382,695
|
|
|
|
26,163,394
|
|
|
Gross profit (loss)
|
|
|
(61,435
|
)
|
|
|
2,093,479
|
|
|
|
(1,456,672
|
)
|
|
|
4,563,007
|
|
|
Total operating expenses
|
|
|
6,474,718
|
|
|
|
2,208,209
|
|
|
|
8,582,044
|
|
|
|
3,256,499
|
|
|
(Loss) income from operations
|
|
|
(6,536,153
|
)
|
|
|
(114,730
|
)
|
|
|
(10,038,716
|
)
|
|
|
1,306,508
|
|
|
Other expense, net
|
|
|
(127,807
|
)
|
|
|
(12,989
|
)
|
|
|
(120,823
|
)
|
|
|
(448,604
|
)
|
|
(Loss) income before income taxes
|
|
|
(6,663,960
|
)
|
|
|
(127,719
|
)
|
|
|
(10,159,539
|
)
|
|
|
857,904
|
|
|
Income tax expense
|
|
|
(62,643
|
)
|
|
|
(301,889
|
)
|
|
|
(11,984
|
)
|
|
|
(529,927
|
)
|
|
(Loss) income from continuing operations
|
|
|
(6,726,603
|
)
|
|
|
(429,608
|
)
|
|
|
(10,171,523
|
)
|
|
|
327,977
|
|
|
(Loss) income from discontinued operations
|
|
|
(797,780
|
)
|
|
|
270,804
|
|
|
|
(972,542
|
)
|
|
|
270,804
|
|
|
Net (loss) income
|
|
|
(7,524,383
|
)
|
|
|
(158,804
|
)
|
|
|
(11,144,065
|
)
|
|
|
598,781
|
|
|
Less: Net (loss) income attributable to noncontrolling interests from continuing operations
|
|
|
(972,049
|
)
|
|
|
85,464
|
|
|
|
(1,215,078
|
)
|
|
|
287,906
|
|
|
Less: Net (loss) income attributable to noncontrolling interests from discontinued operations
|
|
|
(34,372
|
)
|
|
|
27,081
|
|
|
|
(51,848
|
)
|
|
|
27,081
|
|
|
Net (loss) income attributable to XT Energy Group, Inc.
|
|
$
|
(6,517,962
|
)
|
|
$
|
(271,349
|
)
|
|
$
|
(9,877,139
|
)
|
|
$
|
283,794
|
|
|
(Loss) earnings per common share - basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
Discontinued operations
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
Weighted average number of common shares outstanding - basic and diluted
|
|
|
531,042,000
|
|
|
|
591,042,000
|
|
|
|
531,042,000
|
|
|
|
591,042,000
|
|