CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 1. ORGANIZATION
China Xuefeng Environmental Engineering Inc. (the "Company"), formerly known as NYC Moda Inc., was incorporated under the laws of the State of Nevada on March 30, 2011. Since its i
nception until the closing of the Exchange Agreement, the Company was a development-stage company.
On November 27, 2012, the Company completed a reverse acquisition transaction through a share exchange with the stockholders of Inclusion Business Limited
("Inclusion"), whereby the Company acquired 100% of the outstanding shares of Inclusion in exchange for 7,895,000 shares of its common stock, representing 76.65% of the issued and outstanding shares of common stock. As a result of the reverse acquisition, Inclusion became the Company's wholly-owned subsidiary and the former Inclusion Stockholders became our controlling stockholders. The share exchange transaction was treated as a reverse acquisition, with Inclusion as the acquirer and the Company as the a
cquired party for accounting purposes.
In November, 2012, the Company filed a certificate of amendment to its articles of incorporation to change its name from "NYC Moda, Inc." to "China Xuefeng Environmental Engineering Inc." (the "Name Change") and to initiate a 4-for-1 forward stock split (the "Forward Split") of its outstanding shares of common stock.
The Name Change and the Forward Split were effective in December, 2012
. Upon the effectiveness of the Forward Split, the number of outstanding shares o
f the Company's common stock increased from 10,300,000 to 41,200,000 shares. In March, 2013, the Company sold 14,000,000 shares of common stock to 12 unrelated individuals in a private offering, generating $7,000,000 in net proceeds.
As a result of the tr
ansaction with Inclusion, the Company owns all of the issued and outstanding common stock of Lotus International Holdings Limited ("Lotus"), a wholly-owned subsidiary of Inclusion, which in turn owns all of the issued and outstanding capital stock of Baichuang Information Consulting (Shenzhen) Co. Ltd ("Baichuang Consulting"). In addition, the Company effectively and substantially controls Jiangsu Xuefeng Environmental Protection Science and Technology Co., Ltd. ("Jiangsu Xuefeng") through a series of capti
ve agreements with Baichuang Consulting.
The Company conducts its operations through its controlled consolidated variable interest entity ("VIE"), Jiangsu Xuefeng. Jiangsu Xuefeng, incorporated under the laws of the People's Republic of China ("PRC") in December, 2007, is primarily engaged in the sale, lease and installation of garbage recycling equipment and provides improvement and upgrading services of garbage recycling processing technology and equipment.
In
October 2012, Baichuang Consulting (the "WFOE"), a wholly-owned subsidiary of Lotus, entered into a series of contractual arrangements (the "VIE
A
greements"). The VIE
Agreements include (i) an Exclusive Technical Service and Business Consulting Agreement; (ii) a Proxy Agreement, (iii) Share Pledge Agreement and, (iv) Call Option Agreement with the stockholders of Jiangsu Xuefeng
Exclusive Technical Service and Business Consulting Agreement
: Pursuant to the Exclusive Technical Service and Business Consulting Agreement, the WFOE provides technical
support, consulting, training, marketing and operational consulting services to Jiangsu Xuefeng. In consideration for such services, Jiangsu Xuefeng has agreed to pay an annual service fee to the WFOE of 95% of Jiangsu Xuefeng's annual net income and an ad
ditional payment of approximately US$15
,
910 (RMB100,000) each month. The Agreement has an unlimited term and only can be terminated upon written notice agreed to by both parties.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 1. ORGANIZATION (CONTINUED)
Proxy Agreement
: Pursuant to the Proxy Agreement, the stockholders of Jiangsu Xuefeng agreed to irrevocably entrust the WFOE to designate a qualified person acceptable under PRC law and foreign investment policies, to oversee all of the equity interests in Jiangsu Xuefeng held by the stockholders of Jiangsu Xuefeng. The Agreement has an unlimited term and only can be terminated upon written notice agreed to by both parties.
Call Option Agreement
: Pursuant to the Call Option agreement, the WFOE has an exclusive option to purchase, or to designate a purchaser, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in Jiangsu Xuefeng held by each of the stockholders. To the extent permitted by PRC laws, the purchase price for the entire equity interest is approximately US$0.16 (RMB1.00) or the minimum amount required by PRC law or government practice. This Agreement remains effective until all the call options under the Agreement have been exercised by Baichuang Consulting or its designated entities or natural persons.
Share Pledge Agreement
: Pursuant to the Share Pledge agreement, each of the stockholders pledged their shares in Jiangsu Xuefeng to the WFOE, to secure their obligations under the Exclusive Technical Service and Business Consulting Agreement. In addition, the stockholders of Jiangsu Xuefeng agreed not to
transfer, sell, pledge, dispose of or create any encumbrance on their interests in Jiangsu Xuefeng that would affect the WFOE's interests. This Agreement remains effective until the obligations under the Exclusive Technical Service and Business Consulting
Agreement, Call Option Agreement and Proxy Agreement have been fulfilled or terminated.
On January 19, 2016, the VIE structure was terminated upon Baichuang Consulting exercising its option to purchase all of the registered equity of Jiangsu Xuefeng
.
Baichuang Consulting became the sole owner of Jiangsu Xuefeng.
On August 4, 2016, Baichuang Information Consulting Co., Ltd ("Baichuang Information") entered into an agreement with Mr. Li Yuan, the sole shareholder of Linyi County Xuefeng Renewable Resources Utilization Technology Co., Ltd ("Linyi Xuefeng"), to purchase his 100% ownership of Linyi Xuefeng. Mr. Li Yuan is the Chief Executive Officer and main shareholder of the Company. The purchase price was determined by the audited net assets of
Linyi Xuefeng as of May 31, 2016, initially with a payment of RMB10,000,000 ($1,500,000 US) in cash and the balance to be paid in common shares of China Xuefeng at 75% of the closing price on August 4, 2016. On October 7, 2016, a supplementary agreement was entered b
etween both parties to finalize the purchase based upon the audited net asset value of $ 23,462,612 on May 31, 2016. The supplementary agreement eliminated the cash payment making the entire purchase with stock of the Company. The price utilized was $3 per share and 7,820,871 shares were issued
to Mr. Li Yuan.
Linyi Xuefeng also signed a series of agreements with Jiangsu Liding Machinery Manufacturing Co., Ltd ("Jiangsu Liding") for the construction of the garbage recycling processing plant and production
facilities purchase. The majority shareholder of the Company, Mr. Li Yuan, is also the shareholder of Jiangsu Liding (see note 6). In 2016, the total purchase amount $7,714,280 from Jiangsu Liding, which was fully delivered in December 2015, was included in the fixed assets of the accompanying consolidated balance sheet as of May 31, 2018, 2017 and 2016. In 2017, the total purchase amount $8,599,726 from Jiangsu Liding, and paid in advanced with $6,879,781 was included in prepaid expenses of the accompanying consolidated balance sheet as of May 31, 2017. The total purchase in 2017 was fully delivered in July, 2017 and included in the fixed assets of the accompanying consolidated balance sheet as of May 31, 2018
.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 1. ORGANIZATION (CONTINUED)
Linyi Xuefeng was officially approved and incorporated under the laws of th
e People's Republic of China ("PRC") in June 2013. Mr. Yuan Li was the sole owner since inception. Linyi Xuefeng
constructed a garbage processing plant which commenced operations in February 2018. Previously Linyi Xufeng received non-operating revenue, which was a subsidy received from the government for the city pollution garbage processing plant construction.
On October 30, 2017, the Company completed a closing of private placement offering (the "Offering") of shares of the Company's common stock, par value $0.001 per share (the "Shares"), at a purchase price of RMB 13
.
275, or US$2.00 per share, based on the currency exchange rate of 6.6375 on October 27, 2017, for an aggregate purchase price of RMB 46,462,500, or approximately $7,000,000. Upon the closing, the Company issued a total of 3,500,000 shares of its common stock to the subscribers in the Offering.
As a result of the entry into the foregoing agreements, the Company has a corporate structure which is set forth as follows:
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING AND PRESENTATION
The unaudited interim consolidated financial statements of the Company as of August 31, 2018 and for the three months ended August 31, 2018 and 2017, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC which apply to interim financial statements. Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The interim consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company's Form 10-K filed with the SEC. The results of operations for the three months ended August 31, 2018 are not necessarily indicative of the results to be expected for future three months or for the year ending May 31, 2019.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF ACCOUNTING AND PRESENTATION (CONTINUED)
The acquisition of Linyi Xuefeng was treated as a combination of entities under common control as Mr. Li Yuan was the chief executive officer, a major shareholder and had voting control of both companies. An acquisition of an entity under common control is treated similar to a "pooling of interest." Accordingly, the financial statements of the Company have been restated and include the historical balances of Linyi Xuefeng as if the acquisition occurred on the first day of the earliest period presented.
All consolidated financial statements and notes to the consolidated financial statements are presented in United States dollars ("US Dollar" or "U
.
S.
$" or "$").
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Almost all Company assets are located in the
PRC. The functional currency for the majority of the Company's operations is the
Renminbi ("RMB"). The Company uses the United States dollar ("US Dollar" or "U
.
S.
$" or "$") for financial reporting purposes.
The financial statements of the Company have been translated into US dollars in accordance with FASB ASC 830,
"Foreign Currency Matters."
All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of income amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from the
translation of the Company's financial statements are recorded as other comprehensive income (loss).
The exchange rates used to translate amounts in RMB into US dollars for the purposes of preparing the financial statements are as follows:
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August 31,
2018
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May 31,
2018
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August 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for stockholders' equity, as of periods end
|
|
|
0.1464
|
|
|
|
0.1560
|
|
|
|
0.1517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the statements of income, statements of changes in stockholders' equity and statements of cash flows
|
|
|
0
.1500
|
|
|
|
0.1532
|
|
|
|
0.1481
|
|
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION (CONTINUED)
For the three months ended August 31, 2018 and 2017, foreign currency translation adjustments of $(4,439,514)
and $1,910,583
,
respectively,
have been reported as other comprehensive (loss) income. Other comprehensive (loss) income of the Company consists entirely of foreign currency translation adjustments. Pursuant to ASC 740-30-25-17,
"Exceptions to Comprehensive Recognition of Deferred Income Taxes,"
the Company does not recognize deferred U.S. taxes related to the undistributed earnings of its foreign subsidiaries and, accordingly, recognizes no income tax expense or benefit from foreign currency translation adjustments.
Although government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US dollars at that rate or any other rate.
The value of the RMB against the US dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions. Any significant revaluation of the RMB may materially affect the Company's financial condition in terms of US dollar reporting.
REVENUE RECOGNITION
Revenues are primarily derived from the operation of a garbage processing plant, selling and leasing garbage processing equipment, providing garbage
recycling processing system technology support, renovation and upgrade services and patent licensing to customers. The Company's revenue recognition policies comply with FASB ASC 605
"Revenue Recognition."
In general, the Company recognizes revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, the products or services have been delivered or performed and collectability of the resulting receivable is reasonably assured.
Improvement and upgrading service is a one-t
ime service provided to upgrade customer's existing equipment before they opt to license and use our patented technology. The fee for the service would be paid within thirty (30) days upon execution of the contract.
Inspection would be conducted by the customers according to industry standards within three days upon completion of the improvement and upgrading service. Performance testing would then be conducted on the upgraded equipment, which typically can be done within a month. A final inspection assessment report would be provided to the customers within five days upon completion of the testing and Customers would provide the Company with a signed acceptance form if they are satisfied. The Company will recognize the revenue for the improvement and upgrading service once the performance testing is passed and the final evaluation report is provided by the customer.
Patent licensing is limited to five (5) years with payments due annually in advance and recognized as revenue monthly. We are responsible to provide repairing service when necessary, but customers would bear any out of pocket expense relating to the repairing service.
We believe that lease receivables have four potential risks: operation risk, credit risk, accident risk and natural disasters risk.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
First, there is no guarantee that the licensee of our patent will have sufficient capital resources to perform the licensing agreement and pay the licensing fee on time or at all. The length of the agreement is up to five (5) years and therefore the Company may not able to collect fees for the entire agreement. Second, there is a potential credit risk for which the licensee may unilaterally terminate the agreement and thus affect the payout of the licensing agreement. Third, an accident involving the equipment caused by employees of the licensee may have material adverse effect on the operation of the licensee. This unforeseeable risk could impact the licen
see's ability to perform throughout the length of the agreement. Lastly, unforeseeable natural disasters could have a material adverse effect on the production and operation of the Company's licensees. If their operation is impacted by events such as fire,
flood or earthquakes, they may need to cease their operation and therefore may be unable to perform their obligations under the agreement.
Linyi Xuefeng's revenues are primarily derived from selling organic manure, hollow brick, wood plastic tray and ferrous metal. It's income also relates to government for city pollution garbage processing system constructions. Government subsidies are recognized as earned when grant expenses are incurred up to the maximum amount allowed for each grant award.
Sales-Type Leases
The Company entered into
three
sales-type lease arrangements during the three months ended August 31, 2015, with two customers
for
financing of
their purchase of
gar
b
age processing equipment.
The arrangements
with the customers have
a
fixed term of three years. Revenue from the sale
of the equipment
is recognized at the inception of the lease.
The payments have been present valued with an a
nnual interest rate of 5.25%.
In connection with these arrangements, the Company recognized no revenue for the three months ended August 31, 2018 and 2017.
Future minimum
collections for the year ending May 31 are as follows:
Year Ending
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May 31,
|
Amount
|
|
|
|
|
2019
|
|
$
|
366,025
|
|
|
|
|
|
|
|
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$
|
366,025
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|
Operating Leases
The Company entered into multiplelease arrangements with customers for garbage processing equipment. The arrangements with a fixed term of five years with payments due quarterly with deposit payments equivalent to one year leasing fee. Revenue from the leasing of the equipment is recognized monthly. At the end of each of the five year lease terms, it will be determined whether the lease will be extended, leased to a new customer or returned to the Company. Future minimum payments for the years ending May 31 are as follows:
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Operating Leases
(Continued)
Year Ending
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|
|
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May 31,
|
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Amount
|
|
|
|
|
|
2019
|
|
$
|
3,599,936
|
|
2020
|
|
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4,799,915
|
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2021
|
|
|
3,789,933
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2022
|
|
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1,619,971
|
|
2023
|
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249,996
|
|
|
|
|
|
|
|
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$
|
14,059,751
|
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Multiple-Element Arrangements
In October 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-13,
"Multiple Deliverable Revenue Arrangements
.
"
ASU No. 2009-13 amended the guidance on arrangements with multiple deliverables under ASC 605-25,
"Revenue Recognition—Multiple-Element Arrangements."
To qualify as a separate unit of accounting under ASC 605-25, the delivered item must have value to the customer on a standalone basis. The significant deliverables under the Compan
y's multiple-element arrangements are improvement and upgrade services and patent licensing.
Improvement and Upgrade Service
The improvement and upgrade service is a one-time service. By the end of improvement and upgrading services, there is persuasive evidence that an arrangement exists since the Company has a signed contract with a customer; delivery has occurred and a customer has completed inspection and accepted the improvement and upgrading services then delivered; the fee is fixed and become due within 30 days upon the signing of the contract; and collectability is probable. An inspection is conducted by the customer according to industry standards within three days of the completion of the improvement and upgrade. An acceptance form is provided by the customer if the inspection is satisfactory. Performance testing is conducted on the upgraded equipment within one month. A final evaluation report is provided within five days of the completion of the performance testing. The fee for improvement and upgrade services is fixed and becomes due within 30 days, upon the signing of the contract. The fees for the improvement and upgrading services are not subject to refund, forfeiture or any other concession if patent licensing is not completed.
The Company has met the agreed upon specifications and has not been required to make any refunds for its services. No warranty is provided by the Company.
The customer is responsible for repair services when necessary. The out of pocket expenses for the repair services will be charged separately to the customer by the Company.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Multiple-Element Arrangements
(Continued)
Patent Licensing
Patent licensing is li
mited to 5 years with payments due annually in advance. The patent technology of "harmless and comprehensive garbage processing equipment" provided by the Company to its customers has high garbage processing capacity and stable operation capacity. It is
the first modern system equipment in China to use DCS (Distributed Control System) centralized control, by which mechanical automation will be realized for the comprehensive treatment of life garbage. Its core technology is to organically integrate the anaerobic digestion and aerobic fermentation garbage process, degrade and transform the organic matter of domestic waste, effectively sort out the garbage and recycle all kinds of materials, to eventually realize the true waste resource utilization and harmless utilization, with a utilization rate approaching 100%. The resource recovery products, biogas, not only can be used for meeting the needs of the plant itself, but also can be sold as a separate product, which greatly improves the efficiency of garbage
processing of the customer's equipment, decreases production cost, and increases the recovery return of garbage processing.
The Company's customer who pays for an upgrade and improvement fee is not required to enter into a licensing agreement to continue
to use the patented technology. If the customer does not require the garbage processing equipment to reach the level of the patented technology which can process 500 tons to 1,000 tons of garbage per day, then the customer does not need to enter into the patent licensing agreement.
Multiple Elements
The Company determined that its improvement and upgrade service
s are
individually a separate unit of accounting. In determining whether the improvement and upgrade services has standalone value, the Company considered factors including the availability of similar services from other vendors, its fee structure based on inclusion and exclusion of the service, and its marketing and delivery of the service
s
. The Company uses the vendor-specific objective evidence to determine the selling price for its improvement and upgrade services when sold in multiple-element arrangements. Although not yet being sold separately, the price established by the management has the relevant authority.
The Company also determined that the patent licensing has standalone value because the patent can be licensed separately. The Company uses the vendor-specific objective evidence to determine the price for patent licensing when sold in multiple-element arrangements. Although not yet being licensed separately, the price established by the management has the relevant authority. The Company establishes the price of upgrading and improvement service and the price of patent licensing is determined based on the following method:
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Multiple-Element Arrangements (Continued)
Since equipment improvement and upgrade services and patent leasing services
are derived from the Company's patented
technology, which the Company has the exclusive right to while others must obtain licensing rights to use the technology, the Company has a strong bargaining power in the market to undertake the promotion of its brand and corporate image. Furthermore, the Company uses a profit cost pricing method to determine the price of its product. The Company calculates the price by adding its target profit, or a 90% gross profit margin, to the base product cost to derive the final sale price of its services.
The Company allocates the arrangement consideration based on their relative selling prices. Revenues for the improvement and upgrade services are recognized when completed, the performance testing is passed and the final evaluation report is provided by the customer, which generally is within 30 days, assuming all other revenue recognition criteria are met. Revenues for patent licensing are recognized monthly over the licensing period.
The Company believes the effect of changes in the selling price for improvement and upgrade services and patent licensing will not have significant effect on the allocation of the arrangement.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB ASC 820,
"Fair Value Measurement,"
defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.
Level 1 Inputs –
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Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
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Level 2 Inputs –
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Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
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Level 3 Inputs –
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Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair value measurements.
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ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. As of August 31, 2018 and May 31, 2018
, none of the Company's assets and liabilities were required to be reported at fair value on a recurring basis. Carrying values of non-derivative financial instruments, includin
g cash, accounts receivable, prepaid VAT, accounts payable and accrued expenses, and deferred revenue approximate their fair values due to the short term nature of these financial instruments. There were no changes in methods or assumptions during the periods presented.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents
FIXED ASSETS AND LEASE EQUIPMENT
Fixed assets are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire the asset, and any expenditures that substantially increase the asset's value or extends the useful li
fe of an existing asset. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that significantly extend the original useful life or improve productivity are capitalized and depreciated over the periods benefited. Maintenance and repairs are generally expensed as incurred. The estimated useful lives for fixed asset categories are as follows:
Computers and equipment
|
3 years
|
Motor
vehicles
|
4 years
|
Furniture and fixtures
|
5 years
|
Lease equipment
|
15 years
|
Machinery
|
10 years
|
Building and improvements
|
20 years
|
IMPAIRMENT OF LONG-LIVED ASSETS
The Company applies FASB ASC 360,
"Property, Plant and Equipment,"
which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company may recognize the impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to those assets. No impairment of long-lived assets was recognized for the periods presented.
DEFERRED REVENUE
Deferred revenue is advance payments received for patent licensing fees and received from the government for city pollution garbage processing system constructions. These payments received, but not yet earned, are recognized as deferred revenue in the consolidated balance sheets.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with FASB ASC 740,
"Income Taxes"
("ASC 740"), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequences
of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. During the year ended May 31, 2015, as permitted by the PRC tax law, the Company began recognizing revenue from patent licensing fees for income tax purposes, based on when it is earned rather than when it is collected, consistent with the financial statement recognition. As a result, there are no differences between the basis of assets and liabilities for financial statements and income tax purposes for deferred revenue and, as a result, deferred income taxes are no longer required to be recognized. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of August 31, 2018 and May 31, 2018
, the Company does not have a liability for any unrecognized tax benefits.
The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:
United States
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law making significant changes to the Internal Revenue Code.
Changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017
.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary info
rmation available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act.
The Company hasn't determined the reasonable estimate
in connection with the transition tax on the mandatory deemed repatriation of foreign earnings at December 31, 2017. Additional work is necessary to do a more detailed analysis of the Act as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in fiscal 2019 when the analysis is complete.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
PRC
Jiangsu Xuefeng and Baichuang Consulting are subject to an Enterprise Income Tax at 25% and file their own tax returns. Consolidated tax returns are not permitted in China.
BVI
Inclusion is incorporated in the BVI and is governed by their income tax laws. According to current BVI income tax law, the applicable income tax rate for the Company is 0%.
Hong Kong
Lotus is incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. For the three months ended August 31, 2018 and 2017, advertising expense was $134,998 and $133,294 respectively.
STATUTORY RESERVE FUND
Pursuant to corporate law in the PRC, the Company is required to transfer 10% of its net income, as determined under PRC ac
counting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the Company's registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years' l
osses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after such use is not less than 25% of the registered capital. For the three months ended August 31, 2018 and 2017, a statutory reserve of $0 and $109,670, respectively, was required to be allocated by the Company.
VALUE ADDED TAX ("VAT")
All China-based enterprises are subject to a VAT imposed by the PRC government on their domestic product sales. The output VAT is charged to customers who purchase goods from the Company and the input VAT is paid when the Company purchases goods from its vendors. Input VAT rates are 17% for the purchasing activities conducted by the Company. Output VAT rate is 17% for all products. The input VAT can be offset against the output VAT. The VAT payable will be presented on the balance sheets when input VAT is less than the output VAT. Recoverable balance will be presented on the balance sheets when input VAT is larger than the output VAT.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a
down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity's own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part
II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company believes that the adoption of this ASU will not have a material impact on its financial statements.
In September 2017, the FASB issued ASU 2017-13, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842). The main objective of this pronouncement is to clarify the effective date of the adoption of ASC Topic 606 and ASC Topic 842 and the definition of public business entity as stipulated in ASU 2014-09 and ASU 2016-02. ASU 2014-09 provides that a public business entity and certain other specified entities adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities are required to adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting pe
riods beginning after December 15, 2019. ASU 2016-12 requires that "a public business entity and certain other specified entities adopt ASC Topic 842 for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. All other entities are required to adopt ASC Topic 842 for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020". ASU 2017-13 clarifies that the SEC would not object to certain public business entities electing to use the non-public business entities effective dates for applying ASC 606 and ASC 842. ASU 2017-13, however, limits such election to certain public business entities that "otherwise would not meet the definition of a public business entity except for a requirement to include or inclusion of its financial statements or financial information in another entity's filings with the SEC". The Company expects that the adoption of this ASU will not have a material impact on its financial statemen
ts.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effect
s resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company expects that the adoption of this ASU will not have a material impact on its financial statements.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees. Under this ASU, share based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to Accounting Standards Codification ("ASC") 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects that the adoption of this ASU will not have a material impact on its financial statements.
The Company believes that other recent accounting pronouncement updates will not have a materi
al effect on the Company's consolidated financial statements.
NOTE 4. FIXED ASSETS
Fixed assets are summarized as follows:
|
|
August 31,
2018
|
|
|
May 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers and equipment
|
|
$
|
85,195
|
|
|
$
|
90,789
|
|
Vehicles
|
|
|
84,790
|
|
|
|
90,356
|
|
Production facilities
|
|
|
17,203,354
|
|
|
|
18,332,771
|
|
Furniture and fixtures
|
|
|
112,834
|
|
|
|
120,242
|
|
Building and improvement
|
|
|
15,443,090
|
|
|
|
16,456,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,929,263
|
|
|
|
35,091,103
|
|
Less: accumulated depreciation
|
|
|
(1,882,074
|
)
|
|
|
(1,361,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,047,189
|
|
|
$
|
33,729,725
|
|
For the three months ended August 31, 2018 and 2017, depreciation expense was $619,506 and $26,706 respectively.
Building and improvements and production facilities include approximately $33 million relating to construction of the garbage recycling processing plant and production facilities purchase (see note 1).
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 5. LEASE EQUIPMENT
Lease equipment is summarized as follows:
|
|
August 31,
2018
|
|
|
May 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Leasing equipment
|
|
$
|
29,043,876
|
|
|
$
|
30,950,637
|
|
Less: accumulated depreciation
|
|
|
(4,033,930
|
)
|
|
|
(3,782,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,009,946
|
|
|
$
|
27,167,719
|
|
For the three months ended August 31, 2018 and 2017, depreciation expense was $496,027 and $428,791 respectively.
Before leasing the equipment to their client, the
Company will upgrade the equipment to meet the client's requirement. The Company record
s the equipment as equipment construction in process before it finishes the upgrading process. As of August 31, 2018, no equipment construction in process was included in lease equipment.
NOTE 6. INCOME TAXES
The Company is required to file income tax returns in both the United States and the PRC. Its operations in the United States have been insignificant and income taxes have not been accrued. In the PRC, the Company files tax returns for Jiangsu Xuefeng.
The provision for income taxes consists of the following for the three months ended August 31, 2018 and 2017:
|
|
For the Three Months Ended
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
374,836
|
|
|
$
|
411,679
|
|
Deferred
|
|
|
13,109
|
|
|
|
(93,112
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
387,945
|
|
|
$
|
318,567
|
|
As of August 31, 2018, the Company had unused operating loss carry-forwards of approximately $3,263,628 expiring in various years through 2023.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 6. INCOME TAXES (CONTINUED)
The expected tax rate for income in the PRC is 25%. The following table reconciles the effective income tax rates with the statutory rates for the three months ended August 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Statutory rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Government subsidy
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
The recognized government subsidy by Linyi Xuefeng
was tax exempt per notice form the PRC tax authorities and accordingly there is no tax provision to be recognized.
The Company is required to file income tax returns in both the PRC and the United States. PRC tax filings for the tax year ended December 31, 2017 was examined by the PRC tax authorities in May 2018. The tax filings were accepted and no adjustments were proposed by the PRC tax authorities.
In addition, because the Company did not generate any income in the United States or otherwise have any U.S. taxable income, the Company does not believe that it has any U.S. Federal income tax liabilities with respect to any transactions that the Company or any of its subsidiaries may have engaged in through May 31, 2018. However, there can be no assurance that the IRS will agree with this position, and therefore the Company ultimately could be liable for U.S. Federal income taxes, interest and penalties. The tax years ended May 31, 2017, 2016 and 2015 remain open to examination by the IRS.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company is currently leasing the patent rights on garbage recycling processing technology from
Li Yuan, one of the Company's stockholders
under an agreement expiring Aug 2022
. The Company is required to pay a fee of $12,
000
(RMB80,000) each month during the agreement term. The related prepaid patent leasing fees of $46,842 and $87,354 are included in prepaid expenses on the consolidated balance sheets as of August 31, 2018 and May 31, 2018, respectively.
The remaining payments for the patent rights are as follows:
Year Ending
|
|
|
|
May 31,
|
|
Amount
|
|
|
|
|
|
2019
|
|
$
|
105,394
|
|
2020
|
|
|
14
0,
525
|
|
2021
|
|
|
14
0,
525
|
|
2022
|
|
|
14
0,
525
|
|
2023
|
|
|
35
,
131
|
|
|
|
|
|
|
Total
|
|
$
|
562,100
|
|
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 7. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company obtained a demand loan from Li Yuan, a stockholder which is non-interest bearing. The total loan of approximately $757
,
145 represents $678
,
145 of expenses paid by the stockholder and payments of approximately $79,000 representing the registered capital and operating expenses of Baichuang Information Consulting (Shenzhen) Co., Ltd. The balance is reflected as loan from stockholder as of August 31, 2018
.
On June 25, 2013, Linyi Xuefeng and the shareholder, Mr. Li Yuan, entered into a loan agreement pursuant to which Mr. Li Yuan provides a loan facility to the Linyi Xuefeng, which are non-interest bearing with the maximum amount of the loan is RMB200,000,000 ($29,350,600). Any borrowings in excess of this amount may be negotiated between the parties. On December 17, 2015, a resolution of the board was signed by Mr. Li Yuan, who is the sole shareholder of Linyi Xuefeng, surrendered another loan to the Linyi Xuefeng of RMB140,000,000 (approximately $20,545,
00
) and treated as a capital contribution to the Linyi Xuefeng. The loans outstanding were $9,528,873 and $10,154,453 as of August 31, 2018 and May 31, 2018, respectively.
NOTE 8. LAND USE RIGHT
On September 6, 2013, the Company signed with Linyi Yanjiazhuang Beizhi Village government to obtain a land use right 66,667 square meters of land at total $5,870,120 (RMB40,000,000). In addition, the Company was required to subject a deed tax of $176,104 (RMB1,200,000 ). The purchase of the land was approved by local government on September 9, 2013. The Company fully paid the deed tax of $176,104 when the purchase agreement was signed. The Company paid $3,668,825 (RMB25,000,000) on September 25, 2013 and $2,201,295 (RMB15,000,000) on November 12, 2013 to local government for the land purchase. The land use right started on September 9, 2013 and ends on September 8, 2063.
The amortization for the land use right for the three months ended August 31, 2018 and 2017 was $30,899 and $30,509 respectively.
NOTE 9. SECURITY DEPOSIT PAYABLE
The company leased out highly efficient waste disposal equipment to customers and received a one year leasing fee as a deposit. The security de
posit payable was $4,684,160 and $4,991,680 as of August 31, 2018 and May 31, 2018, respectively.
NOTE 10. LEASES
The Company leases office space from an unrelated third party, which commenced on April 1, 2016 and expires on March 31, 2019. The lease requires the Company to prepay the semi-annual rental of $3,6
00
(RMB24,000). The lease provides for renewal options.
The Company also leases office space for Linyi Xuefeng under a three-year operating lease from an unrelated third party, which expired on May 31, 2016 and the lease was renewed until May 31, 2019. The lease required the Company to prepay the semi-annual rental.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 10. LEASES (CONTINUED)
Rent expense for the three months ended August 31, 2018 and 2017 was $3
,
690
,
and $3
,
643, respectively.
Future minimum payments for the years ending May 31 are as follows:
Year Ending
|
|
|
May 31,
|
Amount
|
|
|
|
|
2019
|
|
$
|
1
0,
140
|
|
|
|
|
|
|
|
|
$
|
1
0,
140
|
|
NOTE 11. CONTINGENCIES
On July 17, 2017, the Company received a notice from the Internal Revenue Service (the "IRS") with the amount due of $30,208 relatives to the late filing of the Company's tax returns. The Company is currently communicating with the IRS to appeal to the amount. As of the date of the report, the result is pending and the management is unable to assess the outcome of the communication. As disclosed in Note 6, the 2015, 2016 and 2017 tax years are open and subject to examination by the taxing authorities.
The Company hasn't determined the reasonable estimate in connection with the transition tax on the mandatory deemed repatriation of foreign earnings at December 31, 2017. Additional work is necessary to do a more detailed analysis of the Act as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in fiscal 2018 when the analysis is complete.
Yuan Li, the Chief Executive Officer of the Company, has been named in a lawsuit by an unrelated third party (the "Plaintiff") regarding a disputed loan plus interest due to the Plaintiff. The filing also alleges that the Company's two operating entities, Jiangsu Xuefeng and Linyi Xuefeng, are guarantors of the loan. The district court in China originally decided in favor of the plaintiff but the decision was subsequently overturned by the High Court of Jiangsu Province. The court's decision is currently under appeal. The Company has denied that it is a guarantor of the loan and believes that it does not have any liability to the Plaintiff.
NOTE 12.
VULNERABILITY DUE TO OPERATIONS IN THE PRC
The Company's operations may be adversely affected by significant political, economic and social uncertainties in the PRC. The different cultures, business preferences, corruption, diverse uncertain government regulations, tax systems and currency regulations are risks impacting the Company's
current operations. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly a
ltered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC's political, economic and social conditions. There is also no guarantee that the PRC government's pursuit of economic r
eforms will be consistent, effective or continue.
CHINA XUEFENG ENVIRONMENTAL ENGINEERING INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND 2017
(IN U.S. $) (UNAUDITED)
NOTE 13. CONCENTRATION OF CREDIT AND BUSINESS RISK
Cash and cash equivalents
Substantially all of the Company's bank accounts are in banks located in the PRC and are covered by protection sim
ilar to that provided by the
Federal Deposit Insurance Corporation ("FDIC")
on funds held in United States banks. The Insurance covers amount upto RMB500,000 (approximately U.S. $73,200 for all depository accounts at each bank. The amount in excess of insured limits at August 31, 2018 was approximately $19,539,000
.
Major customers
For the three months ended August 31, 2018 and 2017, three customers of the Company accounted for 45% of revenue and one customer of the Company accounted for 17% of revenue
,
respectively.
Four customers accounted for 99% of accounts receivable as of August 31, 2018 and May 31, 2018
.